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OOIL > SEC Filings for OOIL > Form 10-K on 16-Apr-2013All Recent SEC Filings

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Annual Report


The following discussion and analysis should be read together with our financial statements and the related notes appearing elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements reflecting our current expectations that involve risks and uncertainties. See "Forward-Looking Statements" for a discussion of the uncertainties, risks and assumptions associated with these statements. Actual results and the timing of events could differ materially from those discussed in our forward-looking statements as a result of many factors, including those set forth under "Risk Factors" and elsewhere in this prospectus.

Overview of Business

OriginOil has developed an energy production process for harvesting algae and cleaning up oil and gas water. Operating at the first stage of extraction, this high-speed and chemical-free process can be embedded in other systems to improve performance. Originally invented to solve the biggest problem in algae production, it is now finding demand in oil and gas fracking and production water cleanup, an immediate and fast-growing market that desperately needs clean technology solutions. OriginOil is a pure technology company. We are neither a producer nor a service company. We intend to embed our technology into the systems others build and sell through joint ventures, private labeling and licensing agreements.

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Algae Harvesting Application

The OriginOil System is designed to control the harvesting of algae, and intended to result in a concentrate which can be either converted by other companies into bio-oil, bio-gas or bio-carbon for refining into fuel and chemicals, or further separated into lipids and biomass for processing by other companies into valuable products.

Oil and Gas Water Cleanup Application

When applied to the oil and gas industry, OriginOil's process is used continuously to remove oils, suspended solids, insoluble organics and bacteria from produced or 'frac flowback' water. Testing has shown that OriginOil's process can reduce Total Organic Carbon (TOC) by as much as 98% in the first pass.

Business Model For All Applications

At this early stage, to prove our systems for wide-scale distribution and licensing, we must build, sell and support our system to companies making use of such systems.

Our long-term 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. We are not in the business of producing and marketing oil or fuel 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. While continuing to engage in research and development, we have begun to make our first licensing agreements.

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

We 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.

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, 2012, the amounts reported for cash, prepaid expenses, accounts payable and accrued expenses approximate the fair value because of their short maturities.

Recently Issued Accounting Pronouncements

Management reviewed accounting pronouncements issued during the year ended December 31, 2012, and the Company adopted certain pronouncements during the period. (See Notes to Financial Statements, No. 2, Summary of Significant Accounting Policies, Recently Issued Accounting Pronouncements.)

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Results of Operations for the year ended December 31, 2012 compared to the year
ended December 31, 2011.

                                                                Year Ended
                                                      December 31,      December 31,
                                                          2012              2011
Revenue                                              $      588,163     $     180,000
Cost Of Goods Sold                                          401,647            57,102
Operating Expenses, Depreciation and Amortization         5,936,090         5,370,697

Loss from Operations before Other Income/(Expense)      (5,749,574)       (5,247,799)

Other Income/(Expense)                                  (4,820,455)         (401,244)

Net Loss                                             $ (10,570,029)     $ (5,649,043)

Revenue and Cost of Sales

Revenue for the year ended December 31, 2012 and 2011 was $588,163 and $180,000, respectively. Cost of sales for the year ended December 31, 2012 and 2011 was $401,647 and $57,102, respectively. The increase in revenue and cost of sales was due to an increase in equipment sold and the related material supplies and consultant fees for equipment production.

To date we have had minimal revenues due to our focus on product development and testing. In addition, we are not focused on immediate sales of equipment, beyond demonstration equipment, but on licensing or private labeling type transactions, which we believe has the potential to yield stronger long term revenue.

Operating Expenses

Selling and General Administrative Expenses

SG&A expenses increased by $728,822 to $4,942,275 for the year ended December 31, 2012 compared to $4,213,453 for the year ended December 31, 2011. The increase in SG&A expenses was due primarily to an increase of $938,676 for investor relations and marketing of which approximately $894,173 was for non-cash stock compensation expense.

Research and Development Cost

R&D cost decreased by $165,579 to $980,170 for the year ended December 31, 2012 compared to $1,145,749 for the year ended December 31, 2011. The decrease in overall R&D costs was primarily due to a decrease in employee salaries and outside services for algae appliances and fracking research.

Net Loss

Our net loss increased by $(4,920,986) to $(10,570,029) for the year ended December 31, 2012 compared to $(5,649,043) for the year ended December 31, 2011. The majority of the increase is due to accounting for the net change in non-cash amortization of the debt discount, and loss derivative valuation in the amount of ($2,622,411), an increase in loss on settlement of debt in the amount of ($1,634,989) a decrease in non-cash stock and warrant compensation of ($194,671), and investor relations and marketing of ($938,676) offset by a decrease in general admin expenses of $150,769. 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

Liquidity is the ability of a company to generate funds to support its current and future operations, satisfy its obligations, and otherwise operate on an ongoing basis. Significant factors in the management of liquidity are funds generated by operations, levels of accounts receivable and accounts payable and capital expenditures.

At December 31, 2012 and December 31, 2011, we had cash of $507,355 and $197,868, respectively and working capital deficit of $(936,099) and $(1,068,155), respectively. This decrease in working capital deficit was due primarily to a decrease in convertible debt and deferred income.

During the first two quarters of 2012, we raised an aggregate of $1,479,578 in an offering of unsecured convertible notes, a subscription payable, and securities exchange agreement. From June 29, 2012 through December 28, 2012 we raised $1,576,893 in an offering of shares of our common stock and warrants. From June 1, 2012 through March 31, 2013, we raised an aggregate of $865,000 in an offering of unsecured convertible notes. From March 4, 2013 through April 12, 2013 we raised $537,532 in an offering of shares of our common stock and warrants.

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The opinion of our independent registered public accounting firm on our audited financial statements as of and for the year ended December 31, 2012 contains an explanatory paragraph regarding substantial doubt about our ability to continue as a going concern. Our ability to continue as a going concern is dependent upon raising capital from financing transactions and future sales.

Net cash used in operating activities was $(3,102,421) for the year ended December 31, 2012, compared to $(3,728,294) for the prior period December 31, 2011. The decrease of $(625,873) in cash used in operating activities was due to the net decrease in prepaid expenses, work in progress, accounts payable and deferred income, plus the increase in accounts receivable, accrued expenses, and net loss. Currently operating costs exceed revenue because sales are not yet significant.

Net cash flows used in investing activities was $(173,065) for the year ended December 31, 2012 as compared to $(147,687) for the prior period December 31, 2011. The net increase in cash used in investing activities was due to an increase in patent expenditures and research equipment.

Net cash flows provided by financing activities was $3,584,973 for the year ended December 31, 2012, as compared to $3,835,425 for the prior period December 31, 2011. The decrease in cash provided by financing activities was due to a decrease in equity financing. To date we have principally financed our operations through the sale of our common stock and the issuance of debt.

We do not have any material commitments for capital expenditures during the next twelve months. Although our proceeds from our offering of shares of common stock and warrants together with revenue from operations are currently sufficient to fund our operating expenses, we will need to raise additional funds in the future so that we can expand our operations. Therefore our future operations are dependent on our ability to secure additional financing. Financing transactions may include the issuance of equity or debt securities, obtaining credit facilities, or other financing mechanisms. However, the trading price of our common stock and a downturn in the U.S. equity and debt markets could make it more difficult to obtain financing through the issuance of equity or debt securities. Even if we are able to raise the funds required, it is possible that we could incur unexpected costs and expenses, fail to collect significant amounts owed to us, or experience unexpected cash requirements that would force us to seek alternative financing. Furthermore, if we issue additional equity or debt securities, stockholders may experience additional dilution or the new equity securities may have rights, preferences or privileges senior to those of existing holders of our common stock. The inability to obtain additional capital may restrict our ability to grow and may reduce our ability to continue to conduct business operations. If we are unable to obtain additional financing, we may have to curtail our marketing and development plans and possibly cease our operations.

We have estimated our current average burn, and believe that we have assets to ensure that we can function without liquidation over the next nine months, due to our cash on hand, growing revenue, and our ability to raise money from our investor base. Based on the aforesaid, we believe we have the ability to continue our operations for the foreseeable future and will be able to realize assets and discharge liabilities in the normal course of operations.

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.

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