ITEM 1. DESCRIPTION OF BUSINESS.
Organizational History
The Company was incorporated on June 1, 2007 under the laws of the State of Nevada. We have only been engaged in our current and proposed business operations since June 2007, and to date, we have been primarily involved in research and development activities. Our principal offices are located at 5645 West Adams Blvd., Los Angeles, California 90016. Our telephone number is (323) 939-6645. Our website address is www.originoil.com. Our website and the information contained on our website are not incorporated into this Form 10-K.
Overview of Business
The Company is currently developing technologies to help companies produce algae using a cost-effective, high-speed manufacturing process to replace petroleum in various applications such as diesel, gasoline, jet fuel, plastics and solvents, in addition to feed, nutritionals and fertilizer. Algae, unlike other bio-fuel feedstock such as corn and sugarcane, do not destroy vital farmlands and rainforests, disrupt global food supplies or create new environmental problems.
The Company has developed a number of processes in the areas of algae growth and extraction. Based on its initial commercial success in the area of extraction, it is primarily focused on the oil extraction.
The Company’s process is designed to control the harvesting and oil extraction cycles in a high-speed, round-the-clock, streamlined industrial production of algae oil. At this early stage, to prove the devices, the Company must build, sell and support its devices to companies developing such algae production systems. On March 28, 2011, the Company stated its intention to provide other technologies and integration services to its early stage customers.
The Company’s business model is based on licensing this technology to distributors, manufacturers, engineering service firms, and specialty operators, as well as fuel refiners, chemical and oil companies. The Company is not in the business of producing and marketing oil or fuel, based on algae, as an end product, nor of developing sales distribution networks or engaging in volume manufacturing.
We have only been engaged in our current and proposed business operations since June 2007, and to date, we have been primarily involved in research and development activities. We began our planned principal operations in December 2010 and have exited the development stage.
Algae Oil Industry Overview and OriginOil’s System
Algae can take many forms, such as seaweed (macro-algae) and kelp. But for oil, we use micro-algae as found in outdoor ponds. Micro-algae is actually a highly efficient biological factory capable of consuming carbon dioxide (CO2), and converting it into a high-density natural oil through photosynthesis. Much of the world's petroleum is actually made up of algae that decomposed over hundreds of millions of years. But by drilling for, extracting, and burning that oil now, we are releasing the CO2 that was absorbed long ago. This "carbon positive" effect is what causes global warming and the acidification of lakes, rivers and oceans.
Algae cultivated today absorbs CO2 from the atmosphere or other CO2 emitted sources. Burning freshly produced algae oil releases only what it absorbed in the first place, resulting in a balanced "carbon neutral" effect and beneficially displacing the equivalent energy value of fossil fuel. This makes algae oil an environment-friendly oil.
Oil Generation from Algae
Algae reproduce by cellular division. They divide and grow until they fill the space available to them and have consumed all nutrients in it.
In the right environment, fresh algae cells grow and divide exponentially, doubling every few hours, while absorbing all available nutrients, CO2 and light energy. This is not unique to OriginOil’s technology and process. Algae are fast growing and each oil-producing algae cell can mature in just hours. Algae are oil-rich and contain as much as 60% of its dry weight in oil.
Algae typically protect their oil behind a tough cell wall and the challenge is to harvest the oil. Our process then goes on to control the harvesting and oil extraction cycles in a high-speed, round-the-clock, streamlined industrial production of algae oil. With our technology and other technologies, oil can be extracted in a matter of days from algae cells. With our technology, we believe we can extract a higher volume of oil.
Instead of waiting hundreds of millions years for algae to become oil, OriginOil's breakthrough technology and process can help transform algae into oil in a matter of days. At this early stage, to prove the devices, the Company must build, sell and support its devices to companies developing such algae production systems; and prospectively integrate other vendor technologies to assure an end-to-end solution.
Making the Process Viable
To make the entire algae-to-oil process viable, OriginOil devised a method for energy efficient algae dewatering and oil extraction which does not use hazardous chemical solvents.
The process of dewatering first, and then breaking down algae cells to release oil, known as lysing, has long represented a challenge - and a final hurdle - for the algae-to-oil industry. Algae cell walls are difficult to break down. Mechanical methods are energy-intensive and often ineffective. Commonly used chemical solvents such as benzene, ether or hexane are toxic and require special handling. Such practices increase operating costs and make it harder to site algae production systems.
In OriginOil's extraction unit, the flowing algae biomass is first dewatered and then separated, using low-wattage, frequency-tuned electromagnetic pulses and other non-chemical methods.
Overcoming this final hurdle for the algae industry will enable low-energy, environmentally-safe and viable, industrialized algae oil production.
Distribution Plan
OriginOil is currently proving and scaling up its technology by working with pilot, or strategic, customers.
Ultimately, the Company will distribute its technology through distribution and licensing deals with distributors, manufacturers, engineering service firms, and specialty operators, as well as fuel refiners, chemical and oil companies.
OriginOil’s blend of Strategic Partnerships in the short to medium term, and Distribution/Licensing in the long term, offers a host of potential advantages, including:
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Limited Capital Requirements
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Clean balance sheet and minimal leverage requirements
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No capital cost for manufacturing, no time wasted on building distribution
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Collaborate with major players instead of competing with them
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Diversified revenue streams (large customer sales now, blending into licensing annuities)
Petroleum Alternatives Are Our Future
Driven by rising oil prices, Kyoto protocol and global warming concerns, countries worldwide are increasingly embracing petroleum alternatives such as ethanol, biodiesel and renewable gasoline, diesel and jet fuel, which can curb their dependence on imported oil with minimal infrastructure change. The market for a new oil is proven and expanding rapidly.
OriginOil’s technology, based on algae, is targeted at fundamentally changing the world’s source of oil without disrupting the environment or food resources. An endless supply of this new oil can be used in many of products like diesel, gasoline, jet fuel, plastics and solvents without the global warming effects of petroleum.
Only by industrializing the manufacture of new oil can the current and future demands of global industrialization be met.
Benefits of Algae Oil Production
Cleaner to Produce and Burn
Petroleum contains sulfur and other toxins. It is a heavy pollutant. Drilling operations are highly noxious; crude spills on sea and land are natural catastrophes; and refineries produce heavy pollutants. By contrast, the algae production process generates no toxins - it’s a lot like growing grass hydroponically, in water without soil. Oil created using OriginOil technology generates no heavy metals or sulfur when burned, and a reduced output of greenhouse gases.
Can Be Produced Close to Point of Demand
Petroleum often travels tens of thousands of miles to reach its destination. This adds cost and gives suppliers a stranglehold on consumers. Using OriginOil technology, fuel can now be produced close to the site of usage and demand - virtually eliminating the transport cost of petroleum. In the future, portable systems based in part on OriginOil technology may be transported to the point of demand and quickly start producing oil for electricity generation or fuel.
Does Not Compete with Food
The ethanol mandate is already having a disastrous effect on food prices. Fast-rising prices of corn have caused havoc in global food supplies and the commodities markets. Using algae as a feedstock, including to replace corn in ethanol production, avoids creating shortages in food supplies or markets.
Works with Existing Refineries
Unlike other solutions which bypass the existing refining infrastructure, OriginOil’s technology enables the production of fully compatible fuels. The petroleum industry has already announced plans to support the refining of biofuels. Of these, algae oil, or bio-crude created from the whole algae mass is most like petroleum in structure as it can be readily “cracked” into the lighter components of crude oil such as jet fuel, diesel, gasoline, solvents and plastics.
Works With Existing Gas Stations and Vehicles
Most solutions to the energy problem require massive new infrastructure: hybrids require new cars with toxic batteries; hydrogen cars need a new fuel network; and electric cars need their own recharging stations. By contrast, fuel refined from systems using OriginOil technology can be seamlessly integrated into the current petroleum distribution system.
A Complete Solution to Produce a New Oil
Companies implementing algae oil production systems will need to know that they can generate product consistently at a competitive price. OriginOil’s complete industrial processes will help ensure that these companies can confidently plan and invest in algae as a fuel and valuable set of by-products. Our industrial processes, however, have not yet been externally validated or peer reviewed. At this stage, to prove the devices, we must build, sell and support our devices to companies developing algae production systems.
Competitors
Our achievement of business success will be based on the validity of our technology which can only be determined after we have a complete and validated industrial process. At that time, we can begin to assess competitive issues, including our position in the industry and methods of competition.
Companies in the new algae fuels industry tend to organize themselves as integrated producers and to keep their intellectual property to themselves. We believe that the algae industry will be far too great for any one company to dominate, and companies will succeed that do not compete with their customers and partners.
We have, however, identified other companies producing algae for the purpose of creating feedstocks for fuel. The list of algae companies includes Synthetic Genomics, PetroAlgae, Infinifuel, Valcent Products, Aquaflow Bionomic, Livefuels, Solazyme, Enhanced Biofuels & Technologies (EBT), Veridium, PetroSun, Sapphire Energy, GS AgriFuels (previously GreenShift), A2BE Carbon Capture, Algoil, Aurora Biofuels, Cellana, Solix Biofuels, Martek, Texas Clean Fuels, Algenol, AlgaeLink (NL), BioKing (NL) and Eco-Erg (PT).
With respect to harvesting and oil extraction technology, we are aware that Algae Ventures, Cavitation Technologies, Diversified Technologies, Evodus, New Oil Resources, Open Algae, LLC, Phycal, SRS Energy and Unitel Technologies, Inc. are developing competing technology.
These companies have also advertised technology which they claim will enable the efficient production of algal oil and other algae culture derivatives. We believe our technology may, in some cases, complement these companies’ offerings, however there is no guarantee that our company’s technology will produce more efficiently or cost-effectively than these other technologies.
The market for the manufacture, marketing and the sale of alternative fuels is highly competitive. Such competition could drive up the cost of retaining qualified engineers, chemists and other key employees, as well as other operating expenses. Moreover, if production capacity in the industry increases faster than demand for alternative fuels, sales prices could be depressed. Increases in the alternative energies as well as falling oil prices may negatively affect demand and the competitive position of our technology.
Competition from other alternative fuels will likely increase if prices of energy on the commodities markets, including oil and bio-diesel, rise, as they have in recent years. Additionally, new companies are constantly entering the market, thus increasing the competition. This could also have a negative impact on us or our customers’ ability to obtain additional capital from investors. Larger foreign owned and domestic companies which have been engaged in the alternative energy business for substantially longer periods of time may have access to greater financial and other resources. These companies may have greater success in the recruitment and retention of qualified employees, as well as in conducting their own fuel manufacturing and marketing operations, which may give them a competitive advantage. In addition, actual or potential competitors may be strengthened through the acquisition of additional assets and interests. If we or our customers are unable to compete effectively or adequately respond to competitive pressures, this may materially adversely affect our results of operation and financial condition.
Suppliers and Customers
The Company’s business model is based on licensing this technology to customers such as fuel refiners, chemical and oil companies. The Company is not in the business of producing and marketing oil or fuel, based on algae, as an end product, nor of building machinery for customers to build refining plants. The direct and indirect costs associated with its process for producing oil from algae and other biofuels, therefore, is not relevant to the Company’s business.
Currently, our only customer is MBD Energy. The Company is working with MBD Energy to validate its technology as the Company must build, sell and support its devices to companies developing such algae production systems.
Government and Environmental Regulation
We are not aware of any existing or probable government regulations that would negatively impact on our operations. As a licensor we are not subject to government regulations of algae production. However, our customers are subject to local, state and federal laws and regulations governing environmental quality and pollution control. To date, our compliance with government regulations has had no material effect on our operations, capital, earnings, or competitive position, and the cost of such compliance has not been material. We are unable to assess or predict at this time what effect additional regulations or legislation could have on our activities.
We are part of a new and emerging biofuels industry that may subject to economic and other regulations that may have an adverse effect on the entire industry and subsequently our business. For example, the cost of biofuels has historically been higher than petroleum, therefore the lack of governmental subsidies for biofuels may limit the demand and marketability of our technology.
The Company’s long-term business model is based on licensing its technology to Original Equipment Manufacturers (OEMs) who will build, install and operate algae production systems in varied applications for bio-fuels, bio-chemicals, and animal feed and human nutritional feedstocks. The Company is not in the business of producing and marketing oil or fuel, based on algae, as an end product, nor of developing sales distribution networks or engaging in volume manufacturing. As a result, the Company will not be required to obtain government approval for the production, distribution, and/or use of its technology.
Intellectual Property
Since our business is based on licensing of our technology and not manufacturing oil, it is critical to the Company that it achieves one or more patents. We have filed the following patent applications with the U.S. Patent and Trademark Office:
1.
On July 28, 2007, to protect the intellectual property rights for “Algae Growth System for Oil Production”. The inventors listed on the patent application are Nicholas Eckelberry and T. Riggs Eckelberry, the Company’s founders. The Company is listed as the assignee. We have received initial correspondence from the USPTO, with respect to this patent application.
2.
On May 23, 2008, to protect the intellectual property rights for “Apparatus And Method For Optimizing Photosynthetic Growth In a Photo Bioreactor”. The inventors listed on the patent application are Steven Shigematsu and Nicholas Eckelberry. The Company is listed as the assignee. We have not received any correspondence from the USPTO, with respect to this patent application.
3.
On May 30, 2008, to protect the intellectual property rights for “Modular Portable Photobioreactor System”. The inventors listed on the patent application are Steven Shigematsu and Nicholas Eckelberry. The Company is listed as the assignee. We have not received any correspondence from the USPTO, with respect to this patent application.
4.
On January 6, 2009, to protect the intellectual property rights for “Apparatus And Method For Optimizing Photosynthetic Growth In A Photobioreactor”. The inventor listed on the patent application is Nicholas Eckelberry. The Company is listed as the assignee. We have not received any correspondence from the USPTO, with respect to this patent application.
5.
On April 17, 2009, to protect the intellectual property rights for “Device and Method for Separation, Cell Lysing and Flocculation of Algae From Water”. The inventor listed on the patent application is Nicholas Eckelberry. The Company is listed as the assignee. We have not received any correspondence from the USPTO, with respect to this patent application.
6.
On July 13, 2009, a provisional filing to protect the intellectual property rights for “Algae Growth Lighting and Control System”. The inventors listed on the patent application are Scott Fraser, Vikram Pattarkine, Ralph Anderson and Nicholas Eckelberry. The Company is listed as the assignee. We have not received any correspondence from the USPTO, with respect to this patent application.
7.
On July 26, 2009, a provisional filing to protect the intellectual property rights for “Procedure For Extraction Of Lipids From Algae Without Cell Sacrifice”. The inventors listed on the patent application are Paul Reep and Scott Fraser. The Company is listed as the assignee. We have not received any correspondence from the USPTO, with respect to this patent application.
8.
On September 30, 2009, a provisional filing to protect the intellectual property rights for “Methods and Apparatus for Growing Algae on a Solid Surface”. The inventors listed on the patent application are and Scott Fraser and Vikram Pattarkine. The Company is listed as the assignee. We have not received any correspondence from the USPTO, with respect to this patent application.
9.
On June 18, 2010, a provisional filing to protect the intellectual property rights for “Bio-Energy Reactor”. The inventors listed on the patent application is Michael Green. The Company is listed as the assignee. We have not received any correspondence from the USPTO, with respect to this patent application.
10.
On October 17, 2010, a provisional filing to protect the intellectual property rights for “Methods and Apparatus for Dewatering, Flocculation and Harvesting of Algae Cells”. The inventors listed on the patent application are Michael Green, Nicholas Eckelberry, Scott Fraser and Brian Goodall. The Company is listed as the assignee. We have not received any correspondence from the USPTO, with respect to this patent application.
11.
On October 20, 2010, a provisional filing to protect the intellectual property rights for “Methods and Apparatus for Dewatering, Flocculation and Harvesting of Algae Cells”. The inventors listed on the patent application are Michael Green, Nicholas Eckelberry, Scott Fraser and Brian Goodall. The Company is listed as the assignee. We have not received any correspondence from the USPTO, with respect to this patent application.
12.
On March 18, 2011, a provisional filing to protect the intellectual property rights for “Enhancing Algae Growth by Reducing Competing Microorganisms in a Growth Medium”. The inventors listed on the patent application are Michael Green, Scott Fraser, Nicholas Eckelberry and Jose Sanchez. The Company is listed as the assignee. We have not received any correspondence from the USPTO, with respect to this patent application.
The Company abandoned the pursuit of two provisional patent filings filed in 2008 relating to “In-Line Lysing And Extraction System For Microorganisms” and “Renewable Carbon Sequestering Method Of Producing Pollution Free Electricity”. Neither patent is required for the Company’s business or products and the Company is focusing its efforts on the patent applications listed above.
Employees
As of March 24, 2010, we have nine full-time employees. The Company has not experienced any work stoppages and the Company considers relations with its employees to be good. On 1 September 2009, CTO Dr. Vikram Pattarkine requested a transition from full-time to part-time employment and accepted a new title as Chief Scientist. On March 1, 2010, he transitioned from part-time employment to consultancy status with a new title of Consulting Scientist. These changes were occasioned by Dr. Pattarkine’s difficulty in relocating to the company headquarters in Los Angeles. Dr. Brian Goodall succeeded Dr. Pattarkine as CTO on 28 June 2010 and resigned effective 15 March 2011, in part to be located closer to family. On 15 March 2011, Paul Reep joined the company as Senior Vice President for Technology, taking over Dr. Goodall’s functions.
ITEM 1A.
ITEM 1A. RISK FACTORS
RISKS RELATED TO ORIGINOIL’S BUSINESS AND FINANCIAL CONDITION
HAS A LIMITED OPERATING HISTORY.
Our Company was formed in June 2007 and is currently developing a new technology that has not yet gained market acceptance. As such, it has a limited operating history upon which you can base an evaluation of its business and prospects. Since we have not been profitable, there are substantial risks, uncertainties, expenses and difficulties that OriginOil is subject to. To address these risks and uncertainties, OriginOil must do the following:
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Successfully execute its business strategy;
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Respond to competitive developments; and
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Attract, integrate, retain and motivate qualified personnel.
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There can be no assurance that at this time we will operate profitably or that we will have adequate working capital to meet our obligations as they become due. Subscribers must consider the risks and difficulties frequently encountered by early stage companies, particularly in rapidly evolving markets.
We cannot be certain that our business strategy will be successful or that we will successfully address these risks. In the event that we do not successfully address these risks, our business, prospects, financial condition, and results of operations could be materially and adversely affected.
OUR REVENUES ARE DEPENDENT UPON ACCEPTANCE OF OUR PRODUCTS BY THE MARKET; THE FAILURE OF WHICH WOULD CAUSE US TO CURTAIL OR CEASE OPERATIONS.
We believe that virtually all of our revenues will come from the sale or license of our products. As a result, we will continue to incur substantial operating losses until such time as we are able to generate revenues from the sale or license of our products. There can be no assurance that businesses and customers will adopt our technology and products, or that businesses and prospective customers will agree to pay for or license our products. In the event that we are not able to significantly increase the number of customers that purchase or license our products, or if we are unable to charge the necessary prices or license fees, our financial condition and results of operations will be materially and adversely affected.
ORIGINOIL WILL NEED TO INCREASE THE SIZE OF ITS ORGANIZATION, AND MAY EXPERIENCE DIFFICULTIES IN MANAGING GROWTH.
OriginOil is a small company with a minimal number of employees. With the start of our planned principle activities, we expect to experience a period of significant expansion in headcount, facilities, infrastructure and overhead and anticipate that further expansion will be required to address potential growth and market opportunities. Future growth will impose significant added responsibilities on members of management, including the need to identify, recruit, maintain and integrate managers. Our future financial performance and our ability to compete effectively will depend, in part, on our ability to manage any future growth effectively.
WE MAY NOT BE ABLE TO SUCCESSFULLY DEVELOP AND COMMERCIALIZE OUR TECHNOLOGIES WHICH WOULD RESULT IN CONTINUED LOSSES AND MAY REQUIRE US TO CURTAIL OR CEASE OPERATIONS.
We are currently commercializing our technology. We are unable to project when we will achieve profitability, if at all. As is the case with any new technology, we expect the research and development process to continue. We cannot assure that our engineering resources will be able to develop the product fast enough to meet market requirements. We can also not assure that our product will gain market acceptance and that we will be able to successfully commercialize the technologies. The failure to successfully develop and commercialize the technologies would result in continued losses and may require us to curtail or cease operations.
OUR ABILITY TO PRODUCE AND DISTRIBUTE COMMERCIALLY VIABLE BIO-FUEL IS UNPROVEN, WHICH COULD HAVE A DETRIMENTAL EFFECT ON OUR ABILITY TO GENERATE OR SUSTAIN REVENUES.
The technologies we will use to transform algae into a new form of oil have never been utilized on a commercial basis. The OriginOil System, through our Quantum Fracturing technology, while intended to create a new bio-fuel feedstock for many products such as diesel, gasoline, jet fuel, plastics and solvents, is in fact a new bio-fuel that may never achieve technical or commercial viability. All of the tests conducted to date by us with respect to the technology have been performed in a limited scale environment and the same or similar results may not be obtainable at competitive costs on a large-scale commercial basis. We have never utilized technology under the conditions or in the volumes that will be required for us to be profitable and cannot predict all of the difficulties that may arise. The technology, when used, may require further research, development, regulatory approvals, environmental permits, design and testing prior to commercialization. Accordingly, our technology may not perform successfully on a commercial basis and may never generate any revenues or be profitable.
OUR BUSINESS DEPENDS ON PROPRIETARY TECHNOLOGY THAT WE MAY NOT BE ABLE TO PROTECT AND MAY INFRINGE ON THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS.
Our success will depend, in part, on our technology’s commercial viability and on the strength of our intellectual property rights. The technology is not patented and the only intellectual property rights that exist at present, if any, are trade secret rights. However, trade secrets are difficult to protect and others could independently develop substantially equivalent technology, otherwise gain access to trade secrets relating to the technology. Accordingly, we may not be able to protect the rights to our trade secrets. In addition, our agreements with our employees, consultants, advisors, customers and strategic partners restricting the disclosure and use of trade secrets, inventions and confidential information relating to the technology may not provide meaningful protection in the event of unauthorized use or disclosure.
We recently filed several U.S. patent applications. It could take several years for the applications to be processed. However, patent protection may not be obtainable for the technology whether in the U.S. or internationally. Alternatively, any protection that is obtained may not be broad enough to be effective and of value, or it may not withstand challenges as to validity and enforceability.
Third parties may assert that the technology, or the products we or our customers or partners commercialize using the technology, infringes upon their proprietary rights. We have yet to complete an infringement analysis and, even if such an analysis were available at the current time, it is virtually impossible for us to be certain that no infringement exists, particularly in our case where our products have not yet been fully developed.
We may need to acquire additional licenses from third parties in order to avoid infringement. Any required license may not be available to us on acceptable terms, or at all.
We could incur substantial costs in defending ourselves in suits brought against us for alleged infringement of another party’s intellectual property rights as well as in enforcing our rights against others, and if we are found to infringe, the manufacture, sale and use of our or our customers’ or partners’ products could be enjoined. Any claims against us, with or without merit, would likely be time-consuming, requiring our management team to dedicate substantial time to addressing the issues presented. Furthermore, the parties bringing claims may have greater resources than we do.
A LACK OF GOVERNMENT SUBSIDIES FOR THE BIOFUELS INDUSTRY MAY HINDER THE USEFULNESS OF OUR COMPANY’S TECHNOLOGY.
The Company’s business model is based on licensing its technology to OEMs who will build, install and operate algae production systems in varied applications for bio-fuels, bio-chemicals, and animal feed and human nutritional feedstocks. The Company is not in the business of producing and marketing oil or fuel, based on algae, as an end product, nor of building machinery for customers to build refining plants. As a result, the Company’s business is not currently subject to government regulation for the production, distribution, and/or use of its technology.
The Company, however, is part of a new and emerging biofuels industry that may be subject to economic and other regulations that may have an adverse effect on the entire industry and subsequently our business. For example, the cost of biofuels has historically been higher than petroleum, therefore the lack of governmental subsidies for biofuels may limit the demand and marketability of the Company’s technology. There is no assurance that the biofuels industry, or any industry the Company markets to, will have the need or the financial ability to use the Company’s technology. If government regulations on the electrical industry or fossil fuel industry were enacted, it may affect the outlook for oil from algae.
WE DO NOT MAINTAIN THEFT OR CASUALTY INSURANCE, LIABILITY OR PROPERTY INSURANCE COVERAGE AND THEREFORE WE COULD INCUR LOSSES AS A RESULT OF AN UNINSURED LOSS.
We do not maintain theft, casualty insurance, liability or property insurance coverage. We cannot assure that we will not incur uninsured liabilities and losses as a result of the conduct of our business. Any such uninsured or insured loss or liability could have a material adverse effect on our results of operations.
IF WE LOSE KEY EMPLOYEES AND CONSULTANTS OR ARE UNABLE TO ATTRACT OR RETAIN QUALIFIED PERSONNEL, OUR BUSINESS COULD SUFFER.
Our success is highly dependent on our ability to attract and retain qualified scientific, engineering and management personnel. We are highly dependent on our management, including T. Riggs Eckelberry, who has been critical to the development of our technology and business. The loss of the services of Mr. Eckelberry could have a material adverse effect on our operations. We do not have an employment agreement with Mr. Eckelberry. Accordingly, there can be no assurance that he will remain associated with us. His efforts will be critical to us as we continue to develop our technology and as we attempt to transition to a company with profitable company commercialized products and services. If we were to lose Mr. Eckelberry, or any other key employees or consultants, we may experience difficulties in competing effectively, developing our technology and implementing our business strategies.
COMPETITION FROM OTHER COMPANIES IN OUR MARKET AND FROM PRODUCERS OF OTHER ALTERNATIVE FUELS MAY AFFECT THE MARKET FOR OUR TECHNOLOGY.
If prices of energy on the commodities markets, including oil and bio-diesel, rise, as they have in recent years, competition from other alternative fuels will likely increase. Additionally, new companies are constantly entering the market, thus increasing the competition. This could also have a negative impact on us or our customers’ ability to obtain additional capital from investors. Larger foreign owned and domestic companies which have been engaged in the alternative energy business for substantially longer periods of time may have access to greater financial and other resources. These companies may have greater success in the recruitment and retention of qualified employees, as well as in conducting their own fuel manufacturing and marketing operations, which may give them a competitive advantage. In addition, actual or potential competitors may be strengthened through the acquisition of additional assets and interests. If we or our customers are unable to compete effectively or adequately respond to competitive pressures, this may materially adversely affect our results of operation and financial condition.
RISKS RELATED TO ORIGINOIL’S COMMON STOCK AND ITS MARKET VALUE
THERE IS CURRENTLY A LIMITED PUBLIC MARKET FOR OUR STOCK.
Our shares are not traded on a national securities exchange and there can be no assurance that an active market for our Common Stock will continue to develop. If an active public market for our Common Stock does not continue to develop, shareholders may not be able to re-sell the shares of our Common Stock that they own and affect the value of the Shares.
THE PRICE OF OUR COMMON STOCK MAY BE VOLATILE.
If an active public market for our Common Stock does develop, the trading price of our Common Stock may fluctuate substantially as a result of the following factors:
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price and volume fluctuations in the overall stock market from time to time;
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significant volatility in the market price and trading volume of securities of companies in our industry; and
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general economic conditions and trends.
OUR STOCK IS SUBJECT TO THE PENNY STOCK RULES, WHICH IMPOSE SIGNIFICANT RESTRICTIONS ON BROKER-DEALERS AND MAY AFFECT THE RESALE OF OUR STOCK.
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A penny stock is generally a stock that:
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is not listed on a national securities exchange or NASDAQ,
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is listed in the "pink sheets" or on the NASD OTC Bulletin Board,
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has a price per share of less than $5.00 and
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is issued by a company with net tangible assets less than $5 million.
The penny stock trading rules impose additional duties and responsibilities upon broker-dealers and salespersons effecting purchase and sale transactions in Common Stock and other equity securities, including:
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determination of the purchaser's investment suitability,
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delivery of certain information and disclosures to the purchaser, and
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receipt of a specific purchase agreement before effecting the purchase transaction.
Many broker-dealers will not effect transactions in penny stocks, except on an unsolicited basis, in order to avoid compliance with the penny stock trading rules. In the event our Common Stock becomes subject to the penny stock trading rules:
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such rules may materially limit or restrict the ability to resell our Common Stock, and
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the liquidity typically associated with other publicly traded equity securities may not exist.
Because of the significant restrictions on trading penny stocks, a public market may never emerge for our securities. If this happens, you may never be able to publicly sell your shares.
THE AVAILABILITY OF A LARGE NUMBER OF AUTHORIZED BUT UNISSUED SHARES OF COMMON STOCK MAY, UPON THEIR ISSUANCE, LEAD TO DILUTION OF EXISTING STOCKHOLDERS.
At March 24, 2011, 200,611,432 shares of Common Stock were issued and outstanding. We are authorized to issue 500,000,000 shares of Common Stock These shares may be issued by our Board of Directors without further stockholder approval. The issuance of large numbers of shares, possibly at below market prices, is likely to result in substantial dilution to the interests of other stockholders. In addition, issuances of large numbers of shares may adversely affect the market price of our Common Stock.
WE MAY NEED ADDITIONAL CAPITAL THAT COULD DILUTE THE OWNERSHIP INTEREST OF INVESTORS.
The Company has estimated its current average burn, and has assets to ensure that it can function without liquidation over the next twelve months, due to its cash on hand, growing revenue, and the Company’s ability to raise money from their investor base, as evidenced by its most recent round ending January 20, 2011. Also, the Company has purchase orders totaling $263,000 from a customer, in addition to estimated potential revenue of $1 million that could be attained in the current year 2011. The Company believes it has the ability to continue its operations for the foreseeable future and will be able to realize assets and discharge liabilities in the normal course of operations.
We will, however, require substantial working capital to fund further research and development projects. If we raise additional funds through the issuance of equity, equity-related or convertible debt securities, these securities may have rights, preferences or privileges senior to those of the rights of holders of our Common Stock and they may experience additional dilution. We cannot predict whether additional financing will be available to us on favorable terms when required, or at all. Since our inception, we have experienced negative cash flow from operations and expect to experience significant negative cash flow from operations in the future. The issuance of additional Common Stock by our management may have the effect of further diluting the proportionate equity interest and voting power of holders of our Common Stock.
ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS
N/A
ITEM 2.
ITEM 2. PROPERTIES.
Our principal offices are located at 5645 West Adams Blvd., Los Angeles California 90016. We rent space on a renewable two-year sublease with a monthly rent of $9,734. Our headquarters has office, construction and laboratory space which makes it adequate for the Company to conduct its ongoing business operations.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
From time to time we may be a defendant and plaintiff in various legal proceedings arising in the normal course of our business. We are currently not a party to any material pending legal proceedings or government actions, including any bankruptcy, receivership, or similar proceedings. In addition, management is not aware of any known litigation or liabilities involving the operators of our properties that could affect our operations. Should any liabilities incurred in the future, they will be accrued based on management’s best estimate of the potential loss. As such, there is no adverse effect on our financial position, results of operations or cash flow at this time. Furthermore, Management of the Company does not believe that there are any proceedings to which any director, officer, or affiliate of the Company, any owner of record of the beneficially or more than five percent of the Common Stock of the Company, or any associate of any such director, officer, affiliate of the Company, or security holder is a party adverse to the Company or has a material interest adverse to the Company.
ITEM 4.
ITEM 4. [Reserved].
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS ISSUER PURCHASES OF EQUITY SECURITIES.
MARKET INFORMATION
Our Common Stock is quoted on the OTC Bulletin Board under the symbol “OOIL”. A summary of our Common Stock’s market price by fiscal quarter from January 1, 2009 through December 31, 2010 is as follows:
The market price of our common stock, like that of other technology companies, is highly volatile and is subject to fluctuations in response to variations in operating results, announcements of technological innovations or new products, or other events or factors. Our stock price may also be affected by broader market trends unrelated to our performance.
Holders
At March 24, 2011, there were 200,611,432 shares of common stock outstanding and approximately 300 stockholders of record.
Transfer Agent and Registrar
Our transfer agent is Computer share, 350 Indiana Street, Suite 800, Golden, CO 80401; telephone (303) 262-0600.
Dividend Policy
We have never paid any cash dividends on our Common Stock and do not anticipate paying any cash dividends on our Common Stock in the foreseeable future. We intend to retain future earnings to fund ongoing operations and future capital requirements of our business. Any future determination to pay cash dividends will be at the discretion of the Board of Directors and will be dependent upon our financial condition, results of operations, capital requirements and such other factors as the Board of Directors deems relevant.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
N/A
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION.
Results of Operations for the year ended December 31, 2010 compared to the year ended December 31, 2009:
Revenues and Cost of Sales
The Company for the years ended December 31, 2010 and 2009,generated revenues of $45,500 and $0. There were no associated costs of goods sold in any of the years represented. The Company to date has had minimal revenues due to focusing on product development and testing. Revenues earned were part of a May 2010 agreement to supply MBD Energy with its algae-to-oil technology platform. The first phase, totaling $108,000, is being supplied on a one-year lease-to-own basis, with payments being made quarterly. In January, 2011, MBD Energy, issued a purchase order for $150,000 to purchase a single step oil extraction and additional piece of equipment.
General and Administrative Expenses
General and administrative (“G&A”) expenses decreased by $(254,404) to $3,814,538 for the year ended December 31, 2010, compared to $4,068,942 for the prior year ended December 31, 2009. The decrease was primarily due to a decrease of $934,391 in stock warrant compensation expense partially offset by an aggregate increase of $689,663 in salaries, public relations and marketing expense.
Research and Development Cost
Research and development (“R&D”) cost decreased by $(128,052) to $662,347 for the year ended December 31, 2010, compared to $790,399 for the prior year ended December 31, 2009. R&D costs consist primarily of salaries, outside consultants, and supplies for research of product development and testing.
Net Loss
Our net loss decreased by $(434,471) to $(4,480,600) for the year ended December 31, 2010, compared to $(4,915,071) for the prior year ended December 31, 2009. The majority of the decrease is due to the non-cash stock compensation expense and research and development. Currently operating costs exceed revenue because sales are not yet sufficient to cover costs. We cannot assure when or if revenue will exceed operating costs.
Liquidity and Capital Resources
As of December 31, 2010, we had $227,747 of working capital as compared to $333,328 for the year ended December 31, 2009. This decrease in working capital was due primarily to ongoing costs of developing the company and preparing its technologies for market.
Net cash used in operating activities was $(2,728,430) for the year ended December 31, 2010, compared to $(2,678,694) for the prior year ended December 31, 2009. The increase in net cash used in operating activities was primarily due to an increase in accounts payable, other payables, other receivables, and a decrease in prepaid expense.
Net cash used in investing activities was $(43,233) for the year ended December 31, 2010, compared to $(24,511) for the prior year ended December 31, 2009. The increase of cash used by investing activities was due primarily to an increase in expenditures for patents and small tangible assets.
Net cash flows provided from financing activities was $2,653,908 for the year ended December 31, 2010, as compared to $2,479,329 for the prior year ended December 31, 2009. The increase in cash provided from financing activities was due primarily to proceeds received from the issuance of common stock.
Prepaid expenses increased due to an agreement with a consultant that will expire in 2011, property and equipment, net, decreased as a result of annual depreciation, patents increased due to legal fees associated with patent filings, and accounts payable increased as a result of additional operations in 2010 compared to 2009.
During the year ended December 31, 2010, we issued through a private placement 23,169,359 shares of common stock and subscription payable for $2,658,710 in cash; issued 929,091 shares of common stock for services at a fair value of $221,400; 1,000,000 shares of common stock for prepaid marketing at fair value of $220,000. Also, the Company received $20,400 in cash for exercisable Class A warrants to purchase 190,000 shares of common stock; During the year ended December 31, 2009, we issued through a private placement 15,141,182 shares of common stock and subscription payables for $2,482,343.
The Company has estimated its current average burn, and has assets to ensure that it can function without liquidation over the next twelve months, due to its cash on hand, growing revenue, and the Company’s ability to raise money from their investor base, as evidenced by its most recent round ending January 20, 2011. Also, the Company has purchase orders totaling $263,000 from a customer, in addition to estimated potential revenue of $1 million that could be attained in the current year 2011. The Company believes it has the ability to continue its operations for the foreseeable future and will be able to realize assets and discharge liabilities in the normal course of operations.
Critical Accounting Policies
The Securities and Exchange Commission ("SEC") defines "critical accounting policies" as those that require application of management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. Not all of the accounting policies require management to make difficult, subjective or complex judgments or estimates. However, the following policies could be deemed to be critical within the SEC definition.
Revenue Recognition
The Company will recognize revenue when services are performed, and at the time of shipment of products, 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. To date, the Company has had insignificant revenues.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the accompanying financial statements. Significant estimates made in preparing these financial statements include the estimate of useful lives of property and equipment, the deferred tax valuation allowance, and the fair value of stock options. Actual results could differ from those estimates.
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 December 31, 2010, the amounts reported for cash, prepaid expenses, accounts payable and accrued expenses approximate the fair value because of their short maturities.
Off-Balance Sheet Arrangements
We do not have any off balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition, revenues, and results of operations, liquidity or capital expenditures.
Related Party Transactions
The Company is currently not party to any related party transactions.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
All financial information required by this Item is attached hereto at the end of this report beginning on page and is hereby incorporated by reference.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None
ITEM 9A(T).
ITEM 9A(T). CONTROLS AND PROCEDURES.
Evaluation of disclosure controls and procedures
Based on an assessment, our principal executive officer and principal financial officer have now concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the fiscal year ended December 31, 2010 were effective to ensure that information required to be disclosed in reports that we file or submit under the Exchange Act are (i) accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
Management’s annual report on internal control over financial reporting
We are responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) and Rule 15d-15(f) promulgated under the Exchange Act as a process designed by, or under the supervision of, our Chief Executive Officer (our principal executive officer) and Chief Financial Officer (our principal accounting and financial officer), and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that:
• pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;
• provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and our directors; and
• provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.
We have assessed the effectiveness of the Company's internal control over financial reporting as of December 31, 2010. In making this assessment, we used the criteria set forth in the Internal Control over Financial Reporting-Guidance for Smaller Reporting Companies issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on our assessment, we believed that, as of December 31, 2010, our internal control over financial reporting is effective at a reasonable assurance level based on these criteria.
This annual report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s independent registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission.
Disclosure controls are controls and procedures that are designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company's management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
A controls system cannot provide absolute assurance, however, that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.
Changes in internal controls
There were no changes (including corrective actions with regard to significant deficiencies or material weaknesses) in our internal controls over financial reporting that occurred during the quarter ended December 31, 2010 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B.
ITEM 9B. OTHER INFORMATION.
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES
The following table sets forth the names and ages of the members of our Board of Directors and our executive officers and the positions held by each. There are no family relationships among any of our Directors and Executive Officers.
The following table sets forth certain information with respect to our directors and executive officers.
Name
Age
Position
T. Riggs Eckelberry
Chief Executive Officer and Chairman of the Board of Directors, Secretary, Treasurer, President and acting Chief Financial Officer.
Ivan Ivankovich
Director
Paul Reep
Director
T. Riggs Eckelberry - Chief Executive Officer and President
T. Riggs Eckelberry, co-inventor of the Company’s technology, brings his veteran technology management skills to the alternative energy sector. In 2007, he developed and launched OriginOil. As President and COO of CyberDefender Corporation from 2005 to 2006, he was instrumental in building the company and its innovative product line, helping to achieve initial funding and a public company filing at the end of 2006. Previously, as founder and President of TechTransform, a technology consulting firm, he specialized in high tech launches and turnarounds, helping to turn around YellowPages.com in 2004, resulting in its sale for $100 million to SBC/BellSouth, and in 2003 helping to make Panda Software a key player in the US market as the General Manager of its US unit. During the high tech boom of the 1990s, he was responsible for the global brand success of the software product, CleanSweep; as Chief Operating Officer of MicroHouse Technologies, he drove record sales and a modernization of the company’s technology, helping to achieve a successful sale of the company to Earthweb; and as VP Marketing of venture-backed TriVida, he was a key member of the team that commercialized the company’s technology and achieved the sale of this technology company to BeFree, Inc. (now part of ValueClick: VCLK). As one of the founders of the Company and a recognized expert in the algae oil area, Mr. Eckelberry’s experience and qualifications are essential to the Board of Directors.
Ivan Ivankovich - Director
Ivan Ivankovich has over 20 years of financial and operational expertise. Since 2006 to present, he has served as consultant and advisor to several technology companies. From 2005 to 2006, he served as the managing director of VisionPoint Capital, a boutique investment bank, advising clients in the middle market. From 2003 to 2005, he served as the Chief Financial Officer of YellowPages.com, an on-line directory of national and local merchants. Prior to YellowPages.com, from 2001 to 2003, he served as Vice President of Portfolio Operations at Platinum Equity, a global acquisition firm where he managed and operated certain of its portfolio companies. Over the years, he also served as a senior financial executive for venture-backed companies such as, HealthAllies and TriVida Corporation, which was acquired by Befree Inc. (now part of ValueClick: VCLK). He started his career with Ernst & Young in their audit practice in Los Angeles. A Certified Public Accountant and a member of the California Society of CPAs, he earned his B.A. in Business Economics with an emphasis in accounting from the University of California, Santa Barbara. Mr. Ivankovich’s financial experience is invaluable to the Company and necessary to the function of the Board of Directors at this point in its development.
Paul Reep - Director
With more than 25 years of senior management experience in technology and engineering, Mr. Reep has a proven ability for facilitating government and private sector partnerships, including a major multi-agency technology transfer initiative with the Departments of Commerce, Energy, Interior, Agriculture, and the Environmental Protection Agency. The result of this work is still ongoing at the Department of Energy, where bio-energy is a key mission area. Mr. Reep joins the Company from the USC Stevens Institute for Innovation where he served as Manager of Technology Advancement and Licensing from 2009 to 2011. Prior to his work at the USC Stevens Institute for Innovation, Mr. Reep was President and Chief Technology Officer of Manakoa Services from 2007 to 2009. Mr. Reep also served as the Chief Technology Officer of Applied DNA Sciences from 2004 to 2007. Paul’s experience with developing technology companies contributes to the Board of Directors during this stage in the Company’s growth.
Committees of the Board of Directors
Our Board of Directors does not have any committees.
Compensation Committee Interlocks and Insider Participation
None of our executive officers serves as a member of the Board of Directors or compensation committee of any other entity that has one or more of its executive officers serving as a member of our Board of Directors.
Code of Ethics
The Company has adopted a code of business conduct and ethics that applies to all its directors, officers (including its chief executive officer, chief financial officer and any person performing similar functions) and employees. The Company has made its Code of Ethics available on its website at www.originoil.com.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
The following table sets forth the cash compensation (including cash bonuses) paid or accrued by us to our Chief Executive Officer from January 1, 2008 to December 31, 2010:
Employment Agreements
The Company currently has no employment agreements with its executive officers. The Company currently pays the Chief Executive Officer an annual salary of $260,000. Bonus payments, if any, will be determined by the Board of Directors.
Independent members of the Company’s board of directors, acting as a compensation committee, reviewed the compensation policies and practices relating to the compensation provided to the Company’s employees to determine whether such policies and practices are reasonably likely to have a material adverse effect on the Company. Based on such review, the Company determined that any risks associated with the Company’s compensation policies and practices were not reasonably likely to have a material adverse effect on the Company. In reaching that conclusion, the directors considered, among other factors, that the Company’s salary and annual bonus programs, the two primary methods of compensation provided to the Company’s employees, were appropriately mitigated because salary levels and bonuses are generally discretionary in nature and considered on an annual basis. In addition, the Company considered the overall level of its pay practices, including its incentive compensation awards and practices, in making this determination.
Employee Benefit Plans
Beginning June 1, 2008, the Company implemented a company health plan for its employees.
Stock Option Plan
On July 1, 2009, the Company instituted the OriginOil 2009 Incentive Stock Plan (the “Plan”), after approval by the Board of Directors and a majority of the Company’s shareholders. The purpose of the Plan is to retain executives and selected employees and consultants and reward them for making contributions to the success of the Company. These objectives are accomplished by making long-term incentive awards under the Plan thereby providing participants with a proprietary interest in the growth and performance of the Company.
Under the Plan, 15,000,000 Shares of the Company’s common stock were reserved for use. The Plan shall be administered by the Company’s Board of Directors.
During the years ended December 31, 2010 and 2009, the Company granted 11,665,000 and 4,150,000 stock options, respectively. 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 between $0.15 and $0.32 per share. At December 31, 2010, 1,785,993 options are exercisable by their holders.
Warrants
As of December 31, 2010, warrants exercisable for an aggregate of up to 22,215,000 were outstanding.
At December 31, 2010, the weighted average remaining contractual life of warrants outstanding:
Each of the warrants contains a customary net issuance feature, which allows the warrant holder to pay the exercise price of the warrant by forfeiting a portion of the exercised warrant shares with a value equal to the aggregate exercise price.
Election and Compensation of Directors
The Directors of the Company are elected by the vote of a majority in interest of the holders of the voting stock of the Company and hold office until the expiration of the term for which he or she was elected and until a successor has been elected and qualified.
A majority of the authorized number of directors constitutes a quorum of the Board for the transaction of business. The directors must be present at the meeting to constitute a quorum. However, any action required or permitted to be taken by the Board may be taken without a meeting if all members of the Board individually or collectively consent in writing to the action.
The Company’s directors currently do not receive monetary compensation for their service on the Board of Directors. Directors may receive compensation for their services in the future and reimbursement for their expenses as shall be determined from time to time by resolution of the Board. In 2009, Ivan Ivankovich and Adam Meislik, both independent directors at the time of issuance, were granted warrants, exercisable at $0.31, that expire on July 1, 2014. Ivan Ivankovich received 1,000,000 warrants, valued at $179,417, using the Black Scholes method. Adam Meislik received 2,000,000 warrants, valued at $358,833 using the Black Scholes method. In 2010, they were granted warrants to purchase 2,000,000 shares of our common stock, exercisable at $0.20, that expire on December 22, 2015. The warrants were valued at $220,000 using the Black-Scholes method.
On March 9, 2011, Adam Meislik resigned from the Company’s Board of Directors.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
The following table sets forth certain information regarding the beneficial ownership of our Common Stock as of March 24, 2010 by (i) each director, (ii) each executive officer, (iii) all directors and executive officers as a group, and (iv) each person who beneficially owns more than five percent of our Common Stock. Beneficial ownership is determined in accordance with the rules of the SEC. The percentage ownership of each beneficial owner is based on 200,611,432 outstanding shares of Common Stock. Except as indicated, each person listed below has sole voting and investment power with respect to the shares set forth opposite such person’s name.
(1)
Unless otherwise indicated and subject to applicable community property laws, to our knowledge each stockholder named in the table possesses sole voting and investment power with respect to all shares of Common Stock, except for those owned jointly with that person’s spouse.
(2)
Includes 500,000 Shares of Common Stock, a warrant to purchase 1,000,000 Shares of the Company’s common stock at a price of $0.31 per Share, and a warrant to purchase 2,000,000 Shares of the Company’s common stock at a price of $0.20 per Share.
(3)
Includes 250,000 Shares of Common Stock, a warrant to purchase 750,000 Shares of the Company’s common stock at a price of $0.31 per Share.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The Company is currently not party to any related party transactions.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Audit Fees
The aggregate fees billed by our principal accountant for the audit of our annual financial statements, review of financial statements included in the quarterly reports and other fees that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for the fiscal years ended December 31, 2010and 2009were $36,400 and $34,100, respectively.
Tax Fees
The aggregate fees billed for professional services rendered by our principal accountant for tax compliance, tax advice and tax planning for the fiscal years ended December 31, 2010and 2009were $0. These fees related to the preparation of federal income and state franchise tax returns.
All Other Fees
There were no other fees billed for products or services provided by our principal accountant for the fiscal years ended December 31, 2010 and 2009.
ITEM 15.
ITEM 15. EXHIBITS.
SEC Ref. No.
3.1
Articles of Incorporation
3.3
By-laws
10.4
OriginOil, Inc. 2009 Incentive Stock Plan (2)
Code of Ethics (2)
Certification of Chief Executive Officer pursuant to Sec. 302 of the Sarbanes-Oxley Act of 2002 (2)
Certification of Chief Executive Officer pursuant to 18 U.S.C. SECTION 1350 (2)
(1)
Incorporated by reference to the Company’s SB-2 filed with the Securities and Exchange Commission on December 11, 2007.
(2)
Filed herewith
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Los Angeles, State of California, on March 30, 2011.
Pursuant to the requirements of the Securities Act of 1933, this registration statement or amendment has been signed below by the following persons in the capacities and on the dates indicated.
Date: March 30, 2011
By:
/s/ T Riggs Eckelberry
T Riggs Eckelberry
Director
Date: March 30, 2011
By:
/s/ Paul Reep
Paul Reep
Director
Date: March 30, 2011
By:
/s/ Ivan Ivankovich
Ivan Ivankovich
Director
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
OriginOil, Inc.
Los Angeles, California
We have audited the balance sheets of OriginOil, Inc. as of December 31, 2010 and 2009, and the related statements of operations, shareholders' equity (deficit), and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of OriginOil, Inc. as of December 31, 2010 and 2009, and the results of its operations and cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.
/s/ HJ Associates & Consultants, LLP
HJ Associates & Consultants, LLP
Salt Lake City, Utah
March 30, 2011
ORIGINOIL, INC.
BALANCE SHEETS
The accompanying notes are an integral part of these financial statements
ORIGINOIL, INC.
STATEMENTS OF OPERATIONS
The accompanying notes are an integral part of these financial statements
ORIGINOIL, INC.
STATEMENTS OF SHAREHOLDERS’ EQUITY
The accompanying notes are an integral part of these financial statements
ORIGINOIL, INC.
STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of these financial statements
ORIGINOIL, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2010 and 2009
1. ORGANIZATION AND LINE OF BUSINESS
Organization
OriginOil, Inc. (the "Company") was incorporated in the state of Nevada on June 1, 2007. The Company, based in Los Angeles, California, began operations on June 1, 2007 to develop and market a renewable oil technology. The Company began planned principal operations in December, 2010 and thus has exited the development stage.
Line of Business
OriginOil is a pure technology company. The technology will produce "new oil" from algae, through a cost-effective, high-speed manufacturing process. This endless supply of new oil can be used for many products such as diesel, gasoline, jet fuel, plastics and solvents without the global warming effects of petroleum.
Liquidity
The Company has estimated its current average burn, and has assets to ensure that it can function without liquidation over the next twelve months, due to its cash on hand, growing revenue, and the Company’s ability to raise money from their investor base, as evidenced by its most recent round ending January 20, 2011. Also, the Company has purchase orders totaling $263,000 from a customer, in addition to estimated potential revenue of $1 million that could be attained in the current year 2011. The Company believes it has the ability to continue its operations for the foreseeable future and will be able to realize assets and discharge liabilities in the normal course of operations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This summary of significant accounting policies of OriginOil, Inc. 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 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.
During the year ended December 31, 2010, one customer accounted for all of the Company’s revenue.
Cash and Cash Equivalent
The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. Occasionally, the Company’s cash balances exceeded the Federal Deposit Insurance Corporation’s insurance limits per financial institution
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the accompanying financial statements. Significant estimates made in preparing these financial statements include the estimate of useful lives of property and equipment, the deferred tax valuation allowance, and the fair value of stock options. Actual results could differ from those estimates.
ORIGINOIL, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2010 and 2009
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Property and Equipment
Property and equipment are stated at cost, and are depreciated using straight line over its estimated useful lives:
Leasehold improvements
2 years
Computer equipment
5 Years
Furniture & fixtures
7 Years
Machinery & equipment
10 Years
Depreciation expense for the years ended December 31, 2010 and 2009, was $46,029 and $55,772, respectively.
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 December 31, 2010 and 2009, the amounts reported for cash, prepaid expenses, accounts payable, and accrued expenses, approximate the fair value because of their short maturities.
Investments
Certificate of Deposits with banking institutions are short-term investments with initial maturities of more than 90 days. The carrying amount of these investments is a reasonable estimate of fair value due to their short-term nature.
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 years ended December 31, 2010 and 2009, as the inclusion of any potential shares would have had an anti-dilutive effect due to the Company generating a loss.
Income Taxes
The Company uses the liability method of accounting for income taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to financial statements carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry-forwards. The measurement of deferred tax assets and liabilities is based on provisions of applicable tax law. The measurement of deferred tax assets is reduced, if necessary, by a valuation allowance based on the amount of tax benefits that, based on available evidence, is not expected to be realized.
Research and Development
Research and development costs are expensed as incurred. Total research and development costs were $662,347 and $790,399 for the years ended December 31, 2010 and 2009, respectively.
Advertising Costs
The Company expenses the cost of advertising and promotional materials when incurred. Total advertising costs were $183,669 and $175,647 for the years ended December 31, 2010 and 2008, respectively.
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 will be 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 would then be amortized over the respective vesting period of the stock option. The adoption of share based compensation has no material impact on our results of operations.
ORIGINOIL, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2010 and 2009
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Reclassification
Certain expenses for the period ended December 31, 2009 were reclassified to conform to the expenses for the period ended December 31, 2010.
Recently Issued Accounting Pronouncements
Management reviewed accounting pronouncements issued during the year ended December 31, 2010, and adopted the following pronouncements:
The Company adopted accounting pronouncement ASC TOPIC 605 for “Revenue Recognition”, to recognize revenue when earned. An entity’s revenue earning activities involve delivering or producing goods, rendering services, or other activities that constitute its ongoing operation and revenues are considered to have been earned when the entity has substantially accomplished what it must do to be entitled to the benefits represented by the revenues. The adoption of this pronouncement did not have a material effect on the Company's financial statements.
The Company adopted accounting pronouncement ASC TOPIC 855 for “Subsequent Events”, whereby an entity shall recognize in the financial statements the effects of all subsequent events that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements. The adoption of this pronouncement did not have a material effect on the Company’s financial statements.
The Company adopted ASC TOPIC 730 accounting pronouncement for “Research and Development Costs” associated with materials, equipment, and facilities. The cost of materials and equipment or facilities that are acquired or constructed for research and development activities and that have alternative future uses shall be capitalized as tangible assets when acquired or constructed. The cost of such materials consumed in research and development activities and the depreciation of such equipment or facilities used in those activities are research and development costs. However, the costs of materials, equipment, or facilities that are acquired or constructed for a particular research and development project and that have no alternative future uses and therefore no separate economic values are research and development costs at the time the costs are incurred.
3. CAPITAL STOCK
During the year ended December 31, 2010, the Company issued through a private placement 23,169,359 shares of common stock and subscription payable for $2,658,710 in cash; issued 929,091 shares of common stock for services at a fair value of $221,400; 1,000,000 shares of common stock for prepaid marketing at fair value of $220,000. Also, the Company received $20,400 in cash for exercisable Class A warrants to purchase 190,000 shares of common stock; During the year ended December 31, 2009, the Company issued through a private placement 15,141,182 shares of common stock and subscription payables for $2,482,343.
4. STOCK OPTIONS AND WARRANTS
The Company adopted a Stock Option 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 Fifteen Million (15,000,000) 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 (10th) anniversary from the effective date of this option. During the years ended December 31, 2010 and 2009, the Company granted 11,665,000 4,150,000 stock options, respectively. 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 between $0.15 and $0.32 per share.
ORIGINOIL, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2010 and 2009
4. STOCK OPTIONS AND WARRANTS (Continued)
A summary of the Company’s stock option activity and related information follows:
The weighted average remaining contractual life of options outstanding issued under the plan as of December 31, 2010 was as follows:
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 year ended December 31, 2010, included compensation expense for the stock-based payment awards granted prior to, but not yet vested, as of December 31, 2010 based on the grant date fair value estimated, and compensation expense for the stock-based payment awards granted subsequent to December 31, 2010, 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 income during the years ended December 31, 2010 and 2009 is $235,115 and $57,806, respectively.
Warrants
During the years ended December 31, 2010 and 2009, the Company granted 10,640,000 and 12,000,000 warrants for services, respectively, determined using the Black Scholes pricing model.
ORIGINOIL, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2010 and 2009
4. STOCK OPTIONS AND WARRANTS (Continued)
During the years ended December 31, 2010 and 2009, the Company issued warrants for services. A summary of the Company’s warrant activity and related information follows:
At December 31, 2010, the weighted average remaining contractual life of warrants outstanding:
Warrants with a fair value of $1,041,800 and $2,153,500 determined using the Black Scholes pricing model, was recognized in the statement of income for the years ended December 31, 2010 and 2009, respectively.
ORIGINOIL, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2010 and 2009
Warrants with a fair value of $17,000 determined using the Black Scholes pricing model, was recognized in the balance sheet for the year ended December 31, 2010, for common stock issuance cost. Also, the Company offered investors through a private placement Class A warrants to purchase one share of common stock exercisable at a price of $0.25 per share within six months or Class B warrants to purchase one share of common stock exercisable at a price of $0.35 per share within three years after the completion of the offering.
ORIGINOIL, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2010 and 2009
5. INTANGIBLE ASSETS
Intangible assets that have finite useful lives continue to be amortized over their useful lives, and are reviewed for impairment when warranted by economic condition.
As of December 31, 2010 and 2009, the patents are in the process of being approved, and will be amortized over their useful lives once approved.
6.
INCOME TAXES
The Company files income tax returns in the U.S. Federal jurisdiction, and the state of California. With few exceptions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 2008.
Deferred income taxes have been provided by temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for tax purposes. To the extent allowed by GAAP, we provide valuation allowances against the deferred tax assets for amounts when the realization is uncertain. Included in the balance at December 31, 2010 and 2009, are no tax positions for which the ultimate deductibility is highly certain, but for which there is uncertainty about the timing of such deductibility. Because of the impact of deferred tax accounting, other than interest and penalties, the disallowance of the shorter deductibility period would not affect the annual effective tax rate but would accelerate the payment of cash to the taxing authority to an earlier period.
The Company's policy is to recognize interest accrued related to unrecognized tax benefits in interest expense and penalties in operating expenses. During the periods ended December 31, 2010 and 2009, the Company did not recognize interest and penalties.
7.
DEFERRED TAX BENEFIT
At December 31, 2010, the Company had net operating loss carry-forwards of approximately $7,655,000, which expire at dates that have not been determined. No tax benefit has been reported in the December 31, 2010 financial statements since the potential tax benefit is offset by a valuation allowance of the same amount.
The income tax provision differs from the amount of income tax determined by applying the U.S. federal income tax rate to pretax income from continuing operations for the years ended December 31, 2010 and 2009 due to the following:
7.
DEFERRED TAX BENEFIT (continued)
Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible differences and operating loss and tax credit carry-forwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the difference between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
Net deferred tax liabilities consist of the following components as of December 31, 2010 and 2009.
Due to the change in ownership provisions of the Tax Reform Act of 1986, net operating loss carry-forwards for Federal income tax reporting purposes are subject to annual limitations. Should a change in ownership occur, net operating loss carry-forwards may be limited as to use in future years.
8.
SUBSEQUENT EVENTS
Management evaluated subsequent events as of the date of the financial statements pursuant to ASC TOPIC 855.
As of January 14, 2011, a customer, MBD Energy, issued a purchase order to OriginOil in the amount of $150,000 to purchase a single step oil extraction and electro-flocculation piece of equipment.
As of February 2, 2011, the Company issued 25,000 shares to purchase shares of common stock for services.
On February 3, 2011, T. Riggs Eckelberry, Chairman of the Board and Chief Executive Officer of OriginOil, Inc. (the "Company"), entered into a pre-arranged stock trading plan (the "Plan") with a broker to sell shares of Company’s common stock owned by him. The Plan was established under Rule 10b-5-1 of the Securities Exchange Act of 1934, as amended.
As of February 11, 2011, the Company received cash of $1,278,140 for subscription payables to purchase 15,976,750 shares of common stock through a private placement.
On March 9, 2011, Adam Meislik resigned from the Board of Directors of OriginOil (the “Company”). To fill the vacancy created by Mr. Meislik’s resignation, the Company appointed Paul Reep to the Board of Directors and also appointed him as the Company’s Senior Vice President of Technology.
On March 18, 2011, the Company granted 250,000 warrants for services exercisable at $0.21 per share having a 5 year term, and a provision for a cashless exercise.