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OOIL > SEC Filings for OOIL > Form 10-K on 15-Apr-2014All Recent SEC Filings

Show all filings for ORIGINOIL INC



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

We have developed a breakthrough water cleanup technology for the oil and gas, algae and other water-intensive industries.

Unlike other technologies, our patent-pending Electro Water Separation™ (EWS) process rapidly and efficiently removes organic material from large quantities of water without the need for chemicals.

EWS, our breakthrough water cleanup technology, is a high-speed, chemical-free process that efficiently extracts organic contaminants from very large quantities of water. It is the core technology powering OriginOil's innovative product line that spans multiple industries. These include:

Algae Harvesting

EWS is used cost-effectively to harvest algae, intact and bacteria-free, without chemicals, at a continuously high flow rate. Systems can be operated in parallel for increased throughput rates. Built-in intelligence ensures a minimum of operator intervention.

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Oil and Gas Water Cleanup

When applied to the oil and gas industry, EWS technology is used in a continuous process to remove oils, suspended solids, insoluble organics and bacteria from produced and frac flowback water in well operations. This allows the water to be easily recycled for future fracking operations or disposed of safely.

Aquaculture Water Cleanup

EWS operates in a continuous, chemical-free loop to dramatically reduce ammonia levels, and kill up to 98% of bacteria and other invaders, potentially eliminating antibiotics usage. Optionally, it can produce nitrate-rich water to grow algae for highly nutritious and cost-effective fish feed.

Organic Waste Remediation (still in prototype phase)

In many applications, such as agriculture, fish farming and animal farming, EWS can efficiently remove organic contaminants and pathogens from incoming or outgoing water supplies.

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 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 recently moved into the commercialization phase of our business plan.

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, warrants, convertible notes and common stock for services. 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, 2013, 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, 2013, 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, 2013 compared to the year
ended December 31, 2012.

                                                                             Year Ended
                                                               December 31,
                                                                   2013            December 31, 2012
Revenue                                                        $     140,500      $           588,163
Cost Of Goods Sold                                                    50,510                  401,647
Operating Expenses, Depreciation and Amortization                  6,634,802                5,936,090

Loss from Operations before Other Income/(Expense)                (6,544,812 )              5,749,574

Other Income/(Expense)                                            (2,218,179 )             (4,820,456 )

Net Loss                                                       $  (8,762,991 )    $       (10,570,029 )

Revenue and Cost of Sales

Revenue for the year ended December 31, 2013 and 2012 was $140,500 and $588,163, respectively. Cost of sales for the year ended December 31, 2013 and 2012, was $50,510 and $401,647, respectively. To date we have had minimal revenues due to our focus on product development and testing. In addition, our equipment sales are primarily for trial purposes, intended for licensing or private labeling type transactions, which we believe have the potential to yield stronger long term revenue.

Operating Expenses

Selling and General Administrative Expenses

Selling and general administrative ("SG&A") expenses increased by $288,645 to $5,244,565 for the year ended December 31, 2013, compared to $4,955,920 for the year ended December 31, 2012. The majority of the increase in SG&A expenses was due primarily to the increase in marketing expense of $251,342, payroll expense of $69,346, with a net decrease in overall SG&A expenses of $32,043.

Research and Development Cost

Research and development ("R&D") costs increased by $92,378 to $1,072,548 for the year ended December 31, 2013, compared to $980,170 for the year ended December 31, 2012. The increase in overall R&D costs was primarily due to an increase in the purchase of durable items for testing.

Impairment of Patents

As of December 31, 2012, we had unamortized capitalized patent costs of $317,689. We initially determined that our patents have a finite useful life which were to be amortized over their useful life. We performed our annual impairment test of our capitalized patents as of December 31, 2013, and determined that such costs were impaired and recorded an impairment loss of $317,689 at December 31, 2013.

Other Income and (Expense)

Other income and (expense) decreased by $2,602,277 to ($2,218,179) for the year ended December 31, 2013, compared to ($4,820,456) for the year ended December 31, 2012. The decrease was the result of a decrease in non-cash accounts associated with the fair value of the derivatives in the amount of $3,395,755 due to debt financing, with an increase in non-cash cost of modification of warrants in the amount of $645,398, foreign exchange loss of $3,096, and interest expense of $151,176.

Net Loss

Our net loss decreased by $1,807,038 to $8,762,991 for the year ended December 31, 2013, compared to a net loss of $10,570,029 for the year ended December 31, 2012. The majority of the decrease in net loss was due primarily to a decrease in other income and (expenses) of $2,602,277, and gross profit of $96,527, with an increase in SG&A expenses of $288,645, R&D in the amount of $92,378, and impairment of patents in the amount of $317,689. Currently operating costs exceed revenue because sales are not yet sufficient to cover costs. We cannot assure of when or if revenue will exceed operating costs.

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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.

During the year ended December 31, 2013, we did not generate significant revenue, incurred a net loss of $8,762,991 and cash used in operations of $4,488,315. As of December 31, 2013, we had a working capital deficit of $1,535,766 and a shareholders' deficit of $1,513,199. These factors, among others raise substantial doubt about the Company's ability to continue as a going concern. Our independent auditors, in their report on our audited financial statements for the year ended December 31, 2013 expressed substantial doubt about our ability to continue as a going concern. The ability of us to continue as a going concern and appropriateness of using the going concern basis is dependent upon, among other things, additional cash infusion. We have obtained funds from its shareholders in the year ended December 31, 2013, and have standing purchase orders and open invoices with customers. Management believes this funding will continue from its' current investors and has also obtained funding from new investors. Management believes the existing shareholders, the prospective new investors and future sales will provide the additional cash needed to meet our obligations as they become due, and will allow the development of our core business operations.

At December 31, 2013 and December 31, 2012, we had cash of $821,448 and $507,355, respectively and working capital deficit of $1,535,766 and $961,099 respectively. The increase in working capital deficit was primarily due to an increase in cash, derivative liabilities and convertible promissory notes, with a decrease in work-in-process, prepaid expenses, other receivables, accounts payable and accrued expenses.

During the year ended December 31, 2013, we raised an aggregate of $2,395,000 in an offering of unsecured convertible notes and $2,463,368 in an offering of shares of our common stock and warrants. During the subsequent period, we raised an aggregate of $885,000 for unsecured convertible notes. Our ability to continue as a going concern is dependent upon raising capital from financing transactions and future revenue.

Net cash used in operating activities was $(4,488,315) for the year ended December 31, 2013, compared to $(3,102,421) for the year end December 31, 2012. The increase of $1,385,894 in cash used in operating activities was primarily due to an increase in non-cash fair value of stock and warrant compensation, with a net increase in fair value of derivatives. The net loss includes operating expenses and other income and (expenses). Currently, operating costs exceed revenue because sales are not yet significant.

Net cash used in investing activities for the year ended December 31, 2013 and 2012 were $(45,960) and $(173,065) respectively. The net decrease in cash used in investing activities was due to expensing the patents, rather than capitalizing compared to the previous year.

Net cash provided by financing activities was $4,848,368 for the year ended December 31, 2013, as compared to $3,584,973 for the year end December 31, 2012. The increase in cash provided by financing activities was due to an increase in debt and 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 the issuance of convertible debt, 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 9 months, due to our cash on hand, our ability to raise money from our investor base and future expected revenue. 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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