NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2012
The accompanying unaudited financial statements of OriginOil, Inc. (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all normal recurring adjustments considered necessary for a fair presentation have been included. Operating results for the nine months ended September 30, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012. For further information refer to the financial statements and footnotes thereto included in the Company's Form 10-K for the year ended December 31, 2011.
Going Concern
The accompanying financial statements have been prepared on a going concern basis of accounting, which contemplates continuity of operations, realization of assets and liabilities and commitments in the normal course of business. The accompanying financial statements do not reflect any adjustments that might result if the Company is unable to continue as a going concern. The Company does not generate significant revenue, and has negative cash flows from operations, which raise substantial doubt about the Company’s ability to continue as a going concern. The ability of the Company to continue as a going concern and appropriateness of using the going concern basis is dependent upon, among other things, additional cash infusion. The Company has obtained funds from its shareholders in the nine months ended September 30, 2012, and has standing purchase orders from a principal customer. Management believes this funding will continue from its’ current investors and has also obtained funding from new investors. Management believes the existing shareholders and the prospective new investors will provide the additional cash needed to meet the Company’s obligations as they become due, and will allow the development of its core business operations.
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
This summary of significant accounting policies of the Company is presented to assist in understanding the Company’s financial statements. The financial statements and notes are representations of the Company’s management, which is responsible for their integrity and objectivity. These accounting policies conform to accounting principles generally accepted in the United States of America and have been consistently applied in the preparation of the financial statements.
Revenue Recognition
We recognize revenue upon delivery of equipment, provided that evidence of an arrangement exists, title, and risk of loss have passed to the customer, fees are fixed or determinable, and collection of the related receivable is reasonably assured. Title to the equipment is transferred to the customer once the last payment is received. We record revenue as it is received, and the equipment has been fully accepted by the customer. Returns are based upon each rent-to-own agreement, and revenue would be adjusted based on a pro-rata basis on the unused months of quarterly payments. Generally, we extend credit to our customers and do not require collateral. We do not ship a product until we have either a purchase agreement or rental agreement signed by the customer with a payment arrangement. This is a critical policy, because we want our accounting to show only sales which has a final payment arrangement.
We also recognize revenue for services associated with the equipment setup, provided it is part of the rent-to-own agreement.
Cash and Cash Equivalent
The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.
Loss per Share Calculations
Loss per Share dictates the calculation of basic earnings per share and diluted earnings per share. Basic earnings per share are computed by dividing income available to common shareholders by the weighted-average number of common shares available. Diluted earnings per share is computed similar to basic earnings per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. No shares for employee options or warrants were used in the calculation of the loss per share as they were all anti-dilutive. The Company’s diluted loss per share is the same as the basic loss per share for the nine months ended September 30, 2012, as the inclusion of any potential shares would have had an anti-dilutive effect due to the Company generating a loss.
ORIGINOIL, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2012
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
|
Stock-Based Compensation
Share based payments applies to transactions in which an entity exchanges its equity instruments for goods or services, and also applies to liabilities an entity may incur for goods or services that are to follow a fair value of those equity instruments. We are required to follow a fair value approach using an option-pricing model, such as the Black Scholes option valuation model, at the date of a stock option grant. The deferred compensation calculated under the fair value method was amortized over the respective vesting period of the stock option.
|
Fair Value of Financial Instruments
Fair Value of Financial Instruments, requires disclosure of the fair value information, whether or not recognized in the balance sheet, where it is practicable to estimate that value. As of September 30, 2012, the balances reported for cash, prepaid expenses, accounts payable, accrued expenses, and derivative liability approximate the fair value because of their short maturities.
We adopted ASC Topic 820 (originally issued as SFAS 157, “Fair Value Measurements”) as of January 1, 2008 for financial instruments measured as fair value on a recurring basis. ASC Topic 820 defines fair value, established a framework for measuring fair value in accordance with accounting principles generally accepted in the United States and expands disclosures about fair value measurements.
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC Topic 820 established a three-tier fair value hierarchy which prioritizes the inputs used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). These tiers include:
·
|
Level 1, defined as observable inputs such as quoted prices for identical instruments in active markets;
|
·
|
Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable such as quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active; and
|
·
|
Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions, such as valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.
|
We measure certain financial instruments at fair value on a recurring basis. Assets and liabilities measured at fair value on a recurring basis are as follows at September 30, 2012:
|
|
Total
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
$
|
20,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
20,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets measured at fair value
|
|
$
|
20,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
20,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Liability
|
|
$
|
123,957
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
123,957
|
|
Unsecured promissory notes, net of discounts
|
|
$
|
1,030,722
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
1,030,722
|
|
Total liabilities measured at fair value
|
|
$
|
1,154,679
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,154,679
|
|
Reclassification
Amortization of debt discount for the nine months ended September 30, 2012 and 2011, respectively, was reclassified as interest expense.
Recently Issued Accounting Pronouncements
Management reviewed accounting pronouncements issued during the three months ended September 30, 2012, and the no pronouncements were adopted during the period.
ORIGINOIL, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2012
As of June 30, 2012, the Company increased the total number of authorized shares of common stock to 250,000,000 shares and increased the total number of authorized shares of preferred stock to 25,000,000 shares.
During the nine months ended September 30, 2012, the Company issued 1,096,099 shares of common stock at fair value for services that ranged in prices from $0.98 to $1.75 with a fair value of $1,545,870; issued 12,001 shares of common stock for settlement of accounts payable in the amount of $21,000, and also issued an additional 12,000 shares with a fair value of $21,000 associated with the settlement of the debt; issued 1,241,929 shares of common stock in exchange for cancellation of the convertible debentures in the aggregate amount of $841,197, and also issued an additional 9,670 shares of common stock at a fair value of $6,286, associated with the conversion of a convertible debenture; issued 262,281 shares of common stock for stock through a cashless exercise of 493,943 stock purchase warrants; issued 6,551 shares of common stock at fair value of $9,892 for interest due on the convertible debentures; received proceeds for issuance of common stock and subscription payable in the amount of $799,993 to purchase 1,230,766 shares of common stock at a price of $0.65 together with one (1) year warrants to purchase an aggregate of 1,220,766 shares of common stock and three (3) year warrants to purchase an aggregate of 849,311 shares of common stock, plus five (5) year warrants to purchase an aggregate of 615,388 shares of common stock. In addition the Company issued unsecured promissory notes in the aggregate principal amount of $1,669,828 and issued at fair value 1,411,351 shares of common stock associated with the notes.
4.
|
STOCK OPTIONS AND WARRANTS
|
The Board of Directors adopted the OriginOil, Inc., 2009 Incentive Stock Option Plan (the “Plan”) for the purposes of granting stock options to its employees and others providing services to the Company, which reserves and sets aside for the granting of options for Five Hundred Thousand (500,000) shares of Common Stock. Options granted under the Plan may be either incentive options or nonqualified options and shall be administered by the Company's Board of Directors ("Board"). Each Option shall be exercisable to the nearest whole share, in installments or otherwise, as the respective option agreements may provide. Notwithstanding any other provision of the Plan or of any option agreement, each Option shall expire on the date specified in the option agreement, which date shall not be later than the tenth (10
th
) anniversary from the effective date of this option.
On May 25, 2012, the Board of Directors adopted the OriginOil, Inc., 2012 Incentive Stock Option Plan (the “Plan”) for the purposes of granting stock options to its employees and others providing services to the Company, which reserves and sets aside for the granting of options for One Million (1,000,000) shares of Common Stock. Options granted under the Plan may be either incentive options or nonqualified options and shall be administered by the Company's Board of Directors ("Board"). Each Option shall be exercisable to the nearest whole share, in installments or otherwise, as the respective option agreements may provide. Notwithstanding any other provision of the Plan or of any option agreement, each Option shall expire on the date specified in the option agreement, which date shall not be later than the tenth (10
th
) anniversary from the effective date of this option.
During the nine months ended September 30, 2012, the Company granted 4,000 stock options during the period. The stock options vest as follows: 1/48 every 30 days thereafter until the remaining stock options have vested. The stock options are exercisable for a period of five years from the date of grant at an exercise price of $1.70 per share.
|
|
Risk free interest rate
|
0.87%
|
Stock volatility factor
|
70.25%
|
Weighted average expected option life
|
5 years
|
Expected dividend yield
|
None
|
|
|
ORIGINOIL, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2012
4.
|
STOCK OPTIONS AND WARRANTS (Continued)
|
A summary of the Company’s stock option activity and related information follows:
|
|
9/30/2012
|
|
|
|
|
|
|
Weighted
|
|
|
|
Number
|
|
|
average
|
|
|
|
of
|
|
|
exercise
|
|
|
|
Options
|
|
|
price
|
|
Outstanding, beginning of period
|
|
|
351,130
|
|
|
$
|
6.14
|
|
Granted
|
|
|
4,000
|
|
|
|
1.70
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Forfeited/Expired
|
|
|
(269,836
|
)
|
|
|
6.40
|
|
Outstanding, end of period
|
|
|
85,294
|
|
|
$
|
5.12
|
|
Exercisable at the end of period
|
|
|
31,670
|
|
|
$
|
5.28
|
|
Weighted average fair value of
|
|
|
|
|
|
|
|
|
options granted during the period
|
|
|
|
|
|
$
|
1.70
|
|
|
|
|
|
|
|
|
|
|
The weighted average remaining contractual life of options outstanding issued under the 2009 Incentive Stock Option Plan as of September 30, 2012 was as follows:
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
Stock
|
|
|
Stock
|
|
|
Remaining
|
|
Exercisable
|
|
|
Options
|
|
|
Options
|
|
|
Contractual
|
|
Prices
|
|
|
Outstanding
|
|
|
Exercisable
|
|
|
Life (years)
|
|
$
|
6.90
|
|
|
|
209
|
|
|
|
84
|
|
|
|
0.75
|
|
$
|
9.60
|
|
|
|
6,250
|
|
|
|
2,853
|
|
|
|
0.75
|
|
$
|
7.20
|
|
|
|
1,667
|
|
|
|
844
|
|
|
|
2.98
|
|
$
|
4.50
|
|
|
|
33,334
|
|
|
|
15,451
|
|
|
|
3.15
|
|
$
|
6.00
|
|
|
|
16,500
|
|
|
|
6,306
|
|
|
|
3.23
|
|
$
|
4.20
|
|
|
|
13,334
|
|
|
|
3,197
|
|
|
|
3.79
|
|
$
|
5.15
|
|
|
|
10,000
|
|
|
|
2,185
|
|
|
|
3.88
|
|
$
|
1.70
|
|
|
|
4,000
|
|
|
|
750
|
|
|
|
4.01
|
|
|
|
|
|
|
85,294
|
|
|
|
31,670
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense recognized during the period is based on the value of the portion of stock-based payment awards that is ultimately expected to vest. Stock-based compensation expense recognized in the financial statements of operations during the nine months ended September 30, 2012, included compensation expense for the stock-based payment awards granted prior to, but not yet vested, as of September 30, 2012 based on the grant date fair value estimated, and compensation expense for the stock-based payment awards granted subsequent to September 30, 2012, based on the grant date fair value estimated. We account for forfeitures as they occur. The stock-based compensation expense recognized in the statement of operations during the nine months ended September 30, 2012 and 2011 is $199,404 and $291,012, respectively.
Warrants
A summary of the Company’s warrant activity and related information follows:
|
|
Risk free interest rate
|
0.73% - 2.5%
|
Stock volatility factor
|
63.04% - 257.10%
|
Weighted average expected option life
|
5 years
|
Expected dividend yield
|
None
|
ORIGINOIL, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2012
4.
|
STOCK OPTIONS AND WARRANTS (Continued)
|
|
|
9/30/2012
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
average
|
|
|
|
|
|
|
exercise
|
|
|
|
Options
|
|
|
price
|
|
Outstanding -beginning of period
|
|
|
836,188
|
|
|
$
|
4.20
|
|
Granted
|
|
|
540,000
|
|
|
|
1. 04
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
(100,002
|
)
|
|
|
7.50
|
|
Outstanding - end of period
|
|
|
1,276,186
|
|
|
$
|
4.29
|
|
At September 30, 2012, the weighted average remaining contractual life of warrants outstanding:
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
Exercisable
|
|
|
Warrants
|
|
|
Warrants
|
|
|
Contractual
|
|
Prices
|
|
|
Outstanding
|
|
|
Exercisable
|
|
|
Life (years)
|
|
$
|
9.30
|
|
|
|
223,338
|
|
|
|
223,338
|
|
|
|
1.75
|
|
$
|
10.20
|
|
|
|
28,335
|
|
|
|
28,335
|
|
|
|
1.88
|
|
$
|
9.00
|
|
|
|
9,168
|
|
|
|
9,168
|
|
|
|
2.06
|
|
$
|
8.70
|
|
|
|
3,334
|
|
|
|
3,334
|
|
|
|
2.12
|
|
$
|
8.40
|
|
|
|
667
|
|
|
|
667
|
|
|
|
2.33
|
|
$
|
8.70
|
|
|
|
5,000
|
|
|
|
5,000
|
|
|
|
2.66
|
|
$
|
5.70
|
|
|
|
7,334
|
|
|
|
7,334
|
|
|
|
2.84
|
|
$
|
4.50
|
|
|
|
3,334
|
|
|
|
3,334
|
|
|
|
2.95
|
|
$
|
4.20
|
|
|
|
8,334
|
|
|
|
8,334
|
|
|
|
2.98
|
|
$
|
4.20
|
|
|
|
33,334
|
|
|
|
33,334
|
|
|
|
2.99
|
|
$
|
3.60
|
|
|
|
8,334
|
|
|
|
8,334
|
|
|
|
3.08
|
|
$
|
4.50
|
|
|
|
33,334
|
|
|
|
33,334
|
|
|
|
3.15
|
|
$
|
4.20
|
|
|
|
13,335
|
|
|
|
13,335
|
|
|
|
3.16
|
|
$
|
6.00
|
|
|
|
133,334
|
|
|
|
133,334
|
|
|
|
3.23
|
|
$
|
6.00
|
|
|
|
33,334
|
|
|
|
33,334
|
|
|
|
3.24
|
|
$
|
6.30
|
|
|
|
8,334
|
|
|
|
8,334
|
|
|
|
3.47
|
|
$
|
5.70
|
|
|
|
4,001
|
|
|
|
4,001
|
|
|
|
3.50
|
|
$
|
6.90
|
|
|
|
33,334
|
|
|
|
33,334
|
|
|
|
3.71
|
|
$
|
6.90
|
|
|
|
33,334
|
|
|
|
33,334
|
|
|
|
3.96
|
|
$
|
1.90
|
|
|
|
80,000
|
|
|
|
80,000
|
|
|
|
4.01
|
|
$
|
6.90
|
|
|
|
33,334
|
|
|
|
33,334
|
|
|
|
4.21
|
|
$
|
1.47
|
|
|
|
260,000
|
|
|
|
260,000
|
|
|
|
4.57
|
|
$
|
0.65
|
|
|
|
280,000
|
|
|
|
280,000
|
|
|
|
4.86
|
|
|
|
|
|
|
1,276,186
|
|
|
|
1,276,186
|
|
|
|
|
|
During the nine months ended September 30, 2012, the Company granted 260,000 stock purchase warrants for services to purchase shares of common stock. The Company recognized warrant compensation for services in the statement of operations for the nine months ended September 30, 2012 and 2011, were $679,200 and $248,507, respectively.
During the nine months ended September 30, 2012, the Company granted to an investor 153,846 warrants to purchase an aggregate of 153,846 shares of common stock associated with a promissory note in the amount of $100,000. Also, during the period ended September 30, 2012 through a private placement, the Company issued 2,685,465 common stock purchase warrants with the purchase of 1,230,766 shares of common stock for proceeds received and a subscription payable of $799,993. During the nine months ended September 30, 2012, 493,943 purchase warrants were exercised through a cashless exercise to purchase 262,281 shares of common stock, and 317,435 purchase warrants were forfeited or cancelled. The number of outstanding stock purchase warrants to purchase shares of common stock as of September 30, 2012, was 1,276,186 for services, and 3,295,802 for investor stock purchase warrants for a total of 4,571,988.
ORIGINOIL, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2012
On July 7, 2011, the Company entered into a securities purchase agreement with certain institutional investors, which closed on July 11, 2011, providing for the issuance of original issue discount convertible debentures and warrants for an aggregate purchase price of $1,000,000. The debentures had an aggregate principal amount of $1,176,500, and became due and payable on July 11, 2012. The debentures were convertible at any time at the option of the investors into shares of common stock at a conversion price of $1.75 per share, after giving effect to full-ratchet anti-dilution adjustment, a 1 for 30 reverse stock split and subject to further adjustment as set forth therein. The debentures bore interest at the rate of 5% per annum increasing to 18% in the event of default. Interest is payable quarterly in cash and/or, if certain equity conditions have been met, in shares of our common stock at an interest conversion rate equal to the lesser of $1.75 or 90% of the daily volume weighted average price of our common stock in the 20 trading days prior to the date the quarterly interest payment is due (or the date of delivery of the interest conversion shares if such shares are delivered after the date the quarterly interest payment is due). The warrants outstanding as of September 30, 2012 are exercisable for an aggregate of 215,692 shares of common stock at the option of the holder for a period of five years at an exercise price of $0.65 per share, after giving effect to full-ratchet anti-dilution adjustment, a 1 for 30 reverse stock split and subject to further adjustment as set forth therein. The warrants may be exercised on a cashless basis if after the six month anniversary of the closing date there is no effective registration statement registering the shares underlying the warrants.
On May 18, 2012, the debentures’ remaining principal amount of $841,197 was converted into 1,241,929 shares of common stock, with payments of interest in both cash and common stock consisting of $5,262 and issuance of 6,551 of common stock at a fair value of $9,892.
ASC Topic 815 provides guidance applicable to the convertible debentures issued by the Company in instances where the number into which a debenture can be converted is not fixed. For example, when a convertible debenture converts at a discount to market based on the stock price on the date of conversion, ASC Topic 815 requires that the embedded conversion option of the convertible debentures be bifurcated from the host contract and recorded at their fair value. In accounting for derivatives under accounting standards, the Company recorded a liability of $1,176,500 representing the estimated present value of the conversion feature considering the historic volatility of the Company’s stock, and a discount representing the imputed interest associated with the embedded derivative. The discount is amortized over the life of the convertible debenture, which was converted during the period and resulted in the recognition of $443,984 in interest expense for the nine months ended September 30, 2012.
The derivative liability is adjusted periodically according to the Company’s stock price fluctuations. At the time of conversion of the warrants, any remaining derivative liability associated with the warrants will be charged to additional paid-in capital. For purpose of determining the fair market value of the derivative liability for the warrants, the Company used Black Scholes option valuation model. The significant assumptions used in the Black Scholes valuation of the derivative are as follows:
Risk free interest rate
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0.62% - 0.73%
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Stock volatility factor
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70.21% - 72.36%
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Weighted average expected option life
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5 years
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Expected dividend yield
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None
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The value of the derivative liability at September 30, 2012 was $123,957.
6.
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OBLIGATIONS UNDER CAPITAL LEASE
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On March 1, 2012, the Company entered into a short term capital lease for a six month period with an option to purchase the equipment at the end of the lease. The total cost of the asset is $65,000, which includes a fee of $5,000 that will be paid at the end of the lease. The monthly rental payment is $5,000 per month plus tax. A deposit of $10,000 was paid for first and last month rent. Since the lease is less than a year there are no future payments to disclose and no imputed interest necessary to reduce the minimum lease payments to present value. On May 31, 2012 the equipment was returned to the vendor and the deposit was applied to rental of the equipment for the three months. The capital lease was reclassified as an operating lease and a $16,750 expense was recorded as rental of equipment in the statement of operations.
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ORIGINOIL, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2012
7.
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UNSECURED CONVERTIBLE PROMISSORY NOTES
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During November 2011, the Company issued unsecured convertible promissory notes in the aggregate principal amount of $32,500 (the “November Notes”). During December 2011, the Company issued unsecured convertible promissory notes in the aggregate principal amount of $218,750 (the “December Notes”). As a result of an exchange, $20,000 in principal amounts of the November Notes was exchanged for like principal amounts of the December Notes. During the nine months ended September 30, 2012, the Company issued unsecured convertible promissory notes in the aggregate principal amounts of $1,479,578 (the “January Notes”). As a result of a further exchange, $190,250 in principal amounts of the December Notes was exchanged for like principal amounts of the January Notes. Accordingly, as of September 30, 2012, there were November Notes in the aggregate principal amount of $12,500 outstanding, December Notes in the aggregate principal amount of $48,500 outstanding, January Notes in the aggregate principal amount of $1,669,828 outstanding. During the month of November 2012, holders of the November, December and January Notes converted an aggregate principal amount of $1,438,326, plus unpaid accrued interest of $74,762 for 3,457,840 shares of common stock of the Company.
November Notes
As of September 30, 2012, the November Notes have an aggregate principal amount of $12,500 with a five-year term and are convertible into shares of common stock of the Company at a conversion price of $2.40 per share. Interest on the November Notes is calculated each quarter on the aggregate unconverted outstanding principal amount of the note, and is payable at the per annum rate of two (2) shares of common stock for each $100 outstanding principal of the note. If the market price per share is less than $2.40 then the interest will be paid in cash at 4.8% of the outstanding principal note. Interest is payable quarterly, upon redemption and/or at maturity.
December Notes
As of September 30, 2012, the December Notes have an aggregate principal amount of $48,500 with a one-year term and are convertible into shares of common stock of the Company at a conversion price of $1.75 per share. Also, the December Notes have detachable three (3) year warrants to purchase 55,429 shares of common stock. The December Notes accrue interest at 8% per annum and is payable on the conversion date and/or at maturity. The December Notes are also redeemable by us, at the investor’s option, at maturity at a redemption price of 112% of the outstanding principal plus accrued and unpaid interest.
The December Notes were originally issued with detachable three (3) year warrants to purchase an aggregate of 272,282 shares of common stock at an exercise price of $1.75 (the “December Warrants”), and 216,853 were subsequently exchanged for 133,005 shares of common stock. The detachable warrants were evaluated for purposes of classification under ASC 480-10, “Distinguishing Liabilities from Equity” (pre-Codification SFAS150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity). The warrants did not embody any of the conditions for liability classification under the ASC 480-10 context. The warrants were then evaluated under ASC 815, and were accounted for under the equity classification. The proceeds were then allocated based on the relative fair value of the instruments.
January Notes
As of September 30, 2012, the January Notes have an aggregate principal amount of $1,669,828 with a one-year term and are convertible into shares of common stock of the Company at a conversion price of $1.75 per share. In addition, the Company issued upfront shares of common stock in the amount of 1,411,351, which includes the amount from the December exchange during the period. In the event the note is converted in full prior to maturity, the holder is entitled to one additional share of common stock for each share converted. The January Notes accrue interest at 8% per annum and are payable on the conversion date and/or at maturity. The January Notes are also redeemable by the Company, at the holder’s option, at maturity at a redemption price of 112% of the outstanding principal plus accrued and unpaid interest.
The Company evaluated the three notes for a beneficial conversion feature and accounted for the notes under ASC 815 (Statement 133, EITF Issue 07-5, and EITF Issue 00-19). The instrument was not stated at fair value, and could not be settled partially or wholly in cash. The beneficial conversion feature is equal to the difference between the Company’s market price of its common stock on the measurement date and the effective conversion price multiplied by the number of shares the holder is entitled to upon conversion
The notes were issued with a discount, which is amortized over the life of the note. The Company recorded amortization of the debt discount of $974,140 in interest expense for the nine months ended September 30, 2012.
ORIGINOIL, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2012
8.
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SECURITES PURCHASE AGREEMENT
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On June 20, 2012, the Company entered into a securities purchase agreement with an investor providing for the issuance of a promissory note (the “Note”) in an aggregate principal amount of $400,000 and warrants to purchase an aggregate of up 615,384 shares of the Company’s common stock for an aggregate purchase price of $100,000 in a private placement. At closing, which took place simultaneously with execution of the securities purchase agreement, the Company issued the Note with an outstanding principal sum of $100,000 together with a warrant to purchase 153,846 shares of the Company’s common stock.
Under the terms of the securities purchase agreement, the investor has the option to purchase an additional $300,000 in principal under the Note and receive further warrants to purchase an aggregate of up to 461,538 shares of the Company’s common stock.
The Note matures six months from the date of each purchase made under the Note, and bears interest at a rate of 10% per annum, which increased to 15% when the Note was not repaid by September 18, 2012. The Note may be converted into shares of the Company’s common stock at a conversion price of $0.65. The warrants may be exercised at any time for a period of six years from the date of issuance at an exercise price of $0.65.
The notes were issued with a discount, which is amortized over the life of the note. The Company recorded amortization of the debt discount of $28,333 in interest expense for the nine months ended September 30, 2012.
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Management evaluated subsequent events as of the date of the financial statements pursuant to ASC TOPIC 855, and reported the following events:
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On October 1, 2012, the Company issued 15,384 shares of common stock at fair value of $14,614 for services performed by outside consultants.
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On October 11, 2012, the Company entered into a securities purchase agreement for the sale of a 10% convertible promissory note in the aggregate principal amount of $199,998 with a 25% Original Issue Discount (OID) of $49,998. For net proceeds of $150,000. The note is convertible into shares of common stock of the Company at a conversion price of $0.65 per share. All conversions shall be cashless. The note matures ninety (90) days from the effective date unless extended. A one-time interest charge of $20,000 will be applied to the principal sum.
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On October 15, 2012, the Company issued 24,359 shares of common stock at fair value of $19,731 for services performed by outside consultants.
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On October 18, 2012, the Board of Directors approved the issuance of 20,000 common stock purchase warrants to two consultants for services per their agreements.
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On October 24, 2012, the Company issued 172,462 shares of common stock at a price of $0.65 per share, through a private placement for cash and a subscription payable of $101,700, together with one (1) year warrants to purchase an aggregate of 172,462 shares of common stock, three (3) year warrants to purchase an aggregate of 78,000 shares of its common stock. Each warrant is exercisable at a price per share of $0.65.
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On November 1, 2012, holders of convertible notes, known in the Company’s filings with the SEC as the “November Notes”, “December Notes”, and ‘January Notes”, in the aggregate outstanding principal amount of $1,375,826, converted all outstanding principal and accrued and unpaid interest of $71,514 into an aggregate of 3,308,240 shares of common stock of the Company. Subdequently, three holders of the January Notes converted an additional aggregate outstanding principal amount of $62,500, plus unpaid accrued interest of $2,948 into an aggregate of 149,600 shares of common stock of the Company.
On November 1, 2012, the Board of directors approved the issuance of 50,000 shares of common stock purchase warrants to a consultant for advisory services per the agreement.
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On November 7, 2012, the Company issued 384,618 shares of common stock at a price of $0.65 per share, through a private placement for cash of $250,000, together with one (1) year warrants to purchase an aggregate of 384,618 shares of common stock, three (3) year warrants to purchase an aggregate of 462,618 shares of its common stock and five (5) year warrants to purchase an aggregate of 307,694 shares of common stock. Each warrant is exercisable at a price per share of $0.65.
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On November 12, 2012, the Company issued 43,589 shares of common stock at fair value of $37,487 for consultant fees.
On November 15, 2012, the Company issued 192,309 shares of common stock at a price of $0.65 per share, through a private placement for cash of $125,000, together with one (1) year warrants to purchase an aggregate of 192,309 shares of common stock, three (3) year warrants to purchase an aggregate of 153,847 shares of its common stock, and five (5) year warrants to purchase an aggregate of 153,847 shares of its common stock. Each warrant is exercisable at a price per share of $0.65.
On November 16, 2012, the Board of Directors approved a securities purchase agreement for the sale of a 10% convertible promissory note in the aggregate principal amount of $199,998 with a 25% Original Issue Discount (OID) of $49,998, for net proceeds of $150,000. The note is convertible into shares of common stock of the Company at a conversion price of $0.65 per share. All conversions shall be cashless. The note matures ninety (90) days from the effective date unless extended. A one-time interest charge of $20,000 will be applied to the principal sum.
On November 16, 2012, the Board of Directors approved the issuance of 380,000 stock options to three employees under the Company’s 2012 Incentive Stock Option Plan (the “Plan”). The stock options vest over four (4) years and can be exercised over a ten (10) year period. Also, approved were 100,000 five (5) year common stock purchase warrants to two employees per their agreements.
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