Figure 3: Solids Out of Solution: OriginOil's hub technology.
Distribution Plan
OriginOil is currently marketing its Algae Appliance and CLEAN-FRAC systems at the demonstration scale, as a way to penetrate markets and prove the technology for these markets, and create future customers.
This process is intended to lead to wide distribution of our technology through OEM (Original Equipment Manufacturer) and licensing deals with distributors, manufacturers, engineering service firms, and specialty operators, as well as fuel refiners, and chemical and oil companies.
OriginOil’s OEM/licensing model, offers, in our view, a host of potential advantages, including:
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limited capital requirements;
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no capital cost for volume manufacturing, no time or expense wasted on building distribution channels;
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collaboration with major players instead of competing with them;
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opportunity to make the core Solids out of Solution technology a de facto standard in the multiple industries where it has application.
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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 with a larger number of commercial-scale customers and licensees. At that time, we can begin to assess competitive issues, including our position in the industry and methods of competition.
The Algae Industry
Companies in the new algae fuels industry tend to organize themselves as integrated producers and to keep their intellectual property to themselves. Our strategy, on the other hand, is to share our technology widely.
With respect to our focus in algae harvesting technology, we are aware that Algae Ventures, Cavitation Technologies, Diversified Technologies, Evodos, New Oil Resources, Open Algae LLC, Phycal, SRS Energy (aka Solution Recovery Services), Unitel Technologies, Inc., Pall Energy Group, Alfa Laval and Smartflow Technologies, among others, offer competing or possibly complementary technologies.
We believe that OriginOil has one or more advantages over some of the potential competitors, in that our process is free of the use of any chemicals, is highly scalable on a continuous flow process, and may be significantly lower in energy consumption. We believe our technology may, in some cases, complement these companies’ offerings, however there is no guarantee that our technology will produce more efficiently or cost-effectively than these other technologies.
The market for the manufacture, marketing and the sale of algae processing equipment 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. These companies may have greater success in the recruitment and retention of qualified employees, as well as in conducting their own algae production and/or harvesting 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.
The Oil and Gas Industry
Historically the solution to the treatment of produced and frac flowback water has primarily been disposal in injection wells. Many technologies existed for the “filtering” of these waters and were used in certain situations driven by particular needs. More recently, because of environmental concerns and regulatory requirements these “filtering” technologies are being used to replace or at least minimize disposal. The growing trend, in fact the mantra, in the industry is the recycling of the produced and frac flowback waters for use in water flooding, enhanced oil recovery, new hydraulic fracturing operations, irrigation and even drinking water. As the technologies have developed and the cost of disposal has risen, recycling is becoming the economic choice.
The “filtering” technologies range from simple decanting to distillation. These technologies are used to create a multi-stage process to remove contaminants to the extent that is necessary to meet the quality standards necessary for the planned reuse. The first stage of any of these multi-stage processes, which includes OriginOil’s CLEAN-FRAC technology, is to remove oil and suspended solids from the water stream. Subsequent stages could remove the heavy metals, scaling chemicals, salts and other natural and introduced chemicals. Many of the subsequent or downstream processes are in fact complementary to CLEAN-FRAC and offer significant opportunity.
CLEAN-FRAC synergistically utilizes the technologies of electro-coagulation and electrolysis. Other companies using similar technologies include: Halliburton, Bosque, Ecolotron. Quantum-ionics, Kaselco and Ecosphere. Other technologies also compete with CLEAN-FRAC, but are differentiated by their use of chemical coagulants, batch operation or high level of consumables. . Those include: Aqua-Tech, Aqua-Pure, Myclex, Osmonics, Filterboxx, MECO, Layne and Altela.
We believe OriginOil’s CLEAN-FRAC technology has many advantages over some of the potential competitors, in that our process is free of the use of any chemicals, is highly scalable on a continuous flow process, and may be significantly lower in energy consumption. However there is no guarantee that our technology will produce more efficiently or cost-effectively than these other technologies.
As with algae processing equipment, the market for the manufacture, marketing and the water treatment processing equipment for oil and gas 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. These companies may have greater success in the recruitment and retention of qualified employees, as well as in conducting their own algae production and/or harvesting 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.
The Aquaculture Industry
As it is in technology development stage, the Aquaculture industry does not figure in our competitive planning.
Suppliers and Customers
OriginOil currently manufacturers its demonstration equipment in-house, with engineering support from PACE Engineering of Fountain Valley, California. Additionally, the company has chosen Clean Water Technology as its contract manufacturer for larger scale demonstration systems, where required.
Given the number of potential industries in which Solids Out of Solution can be applied, it is manifestly impossible for OriginOil to enter into each market and exploit it effectively. Therefore, OriginOil’s market strategy is to build and sell demonstration units only. For larger systems, it seeks OEMs, who will embed the technology in their own end-to-end systems, and ultimately, master licensees for each industry of application.
Algae
MBD Energy
OriginOil’s first sale of a pilot system for algae harvesting was to Melbourne-based MBD Energy, who ordered a series of larger systems, culminating in a full set of Single Step Extraction systems for its Tarong Power Station proof of concept plant.
However on September 25, 2012, we filed a complaint in the US District Court Central District of California against MBD to protect our intellectual property asserting among, other things, breach of contract, conversion, fraudulent non-disclosure and unfair competition by MBD. On December 20, 2012, we entered into a Settlement Agreement with Mutual Releases and Covenants (the “Settlement Agreement”) with MBD pursuant to which we agreed to a final settlement and release of claims in connection with the complaint.
Under the Settlement Agreement, MBD agreed, among other things, to withdraw its patent application that related to certain company technology and provide us with certain assurances of non-infringement of our technology and we agreed, among other things, to file a dismissal of the complaint, which was entered on March 1, 2013, and to withdraw our notice of default of the Master Project Agreement (“MPA”) previously entered into with MBD. The Settlement Agreement provided for a continuation of the commercial relationship of the parties and that the MPA will terminate in its entirety on June 30, 2013. The parties have agreed to review their relationship further at that time. The Settlement Agreement also provides for a standard mutual release, denial of liability and covenant not to sue.
As called for in the Settlement Agreement, OriginOil will provide updated demonstration systems for MBD’s research site at James Cook University (JCU Upgrade), and at its proof of concept site at Tarong Power Station (Tarong Upgrade). The JCU demonstration system is expected to be delivered in the 2nd Quarter 2013. Upon completion of the Tarong Upgrade, the parties agree to discuss whether a future commercial relationship may be entered into, as originally envisioned in the MPA.
Additional Sales
Currently, we are marketing the Algae Appliance Model 4, a test level system. In 2012, we sold and delivered two such systems, the first to our joint venture Ennesys and the second to an undisclosed customer. In addition, we loaned an Algae Appliance to a university for a research program.
In the first Quarter of 2013, we agreed to ship three Algae Appliances, one of which was shipped in the 1st Quarter for testing by a customer, the other two to be shipped in the 2nd Quarter, subject to non-refundable deposits.
Oil and Gas
Unlike the algae market which requires research or test scale equipment, the oil and gas market requires commercial scale equipment. Due to these requirements of scale, OriginOil is going directly to the licensing of its’ Solid’s Out of Solution technology, which is embedded in the CLEAN-FRAC system, to Original Equipment Manufacturers (OEMs). These OEMs will build the commercial units that will integrate CLEAN-FRAC and provide all the necessary deployment tools. To date, OriginOil has signed OEM Agreements for licensing with two companies: PearlH2O on October 16, 2012 and LH Opportunity Group on November 22, 2012.
PearlH2O, a subsidiary of PACE Engineering, has designed and is to begin construction of an integrated one barrel per minute system in the 2nd Quarter of 2013 with installation planned in 3rd Quarter of 2013. The system, which utilizes CLEAN-FRAC as its’ first stage, is designed to treat frac flowback water to allow it to be recycled as new frac water.
LH Opportunity Group, which is based in Calgary, is focusing on the development of a CLEAN-FRAC system for the treatment of tailing pond water from oil sands production.
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 and/or provider of equipment to operators of algae production facilities and water treatment processing we are not subject to government regulations of algae production, other than normal safety standards and certifications (such as UL or CE) for manufactured goods. However, our prospective 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 become 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.
Our long-term business model is based on licensing our technology to distributors, manufacturers, engineering firms, specialty operators, as well as, fuel refiners, chemical and oil companies, for building, installing and operating algae production systems in varied applications for bio-fuels, bio-chemicals, and animal feed and human nutritional feedstocks; integrated water cleanup systems in oil and gas; and other applications such as aquaculture. We are not in the business of producing and marketing end products, nor of developing sales distribution networks or engaging in volume manufacturing. As a result, we are not currently required to obtain government approval for the production, distribution, and/or use of our technology.
Intellectual Property
OriginOil’s business is also based on developing a strong intellectual property portfolio and establishing a network of OEM distributors and core technology licensees. We have filed the following patent and trademark applications with the U.S. Patent and Trademark Office and World Intellectual Property Organization:
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On July 28, 2007, to protect the intellectual property rights for “Algae Growth System for Oil Production”, a utility patent application was filed with the USPTO. The inventors listed on the patent application are Nicholas Eckelberry and Riggs Eckelberry, our founders. We are listed as the assignee. On January 29, 2009 the application published with the publication number US 2009-0029445 A1.
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On May 23, 2008, to protect the intellectual property rights for “Apparatus And Method For Optimizing Photosynthetic Growth In a Photo Bioreactor”, a utility patent application was filed with the USPTO. The inventors listed on the patent application are Steven Shigematsu and Nicholas Eckelberry. We are listed as the assignee. On November 26, 2009 the application published with the publication number US 2009-0291485 A1.
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On July 26, 2009, to protect the intellectual property rights for “Procedure For Extraction Of Lipids From Algae Without Cell Sacrifice”, a provisional patent application was filed with the USPTO. The inventors listed on the patent application are Paul Reep and Michael Green. We are listed as the assignee. This application was re-filed as a provisional application on August 13, 2010.
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On April 20, 2010, to protect the intellectual property rights for “Systems, Apparatus and Methods for Obtaining Intracellular Products and Cellular Mass and Debris from Algae and Derivative Products and Process Use Thereof”, a PCT application was filed with the USPTO. The inventors are Nicholas Eckelberry, Michael Green, and Scott Fraser. We are listed as the assignee. On October 10, 2010 the application published with the publication number WO/2010/123903.
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On June 18, 2010, to protect the intellectual property rights for “Bio-Energy Reactor”, a provisional patent was filed with the USPTO. The inventors listed on the patent application are Michael Green, and Nicholas Eckelberry. On December 22, 2011, the application was published with the publication number US 2011-0308962 A1. We are listed as the assignee.
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On October 17, 2010, to protect the intellectual property rights for “Methods and Apparatus for Dewatering, Flocculation and Harvesting of Algae Cells”, a provisional patent application was filed with the USPTO. The inventors listed on the patent application are Michael Green, Nicholas Eckelberry, Scott Fraser and Brian Goodall. We are listed as the assignee. On May 24, 2012, the application was published with the publication number US 2012-0129244 A1. The application was converted to a utility application on October 14, 2011.
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On October 19, 2010, to protect the intellectual property rights for “Methods and Apparatus for Dewatering, Flocculation and Harvesting Algae Cells”, a provisional patent application was filed with the USPTO. The inventors listed on the patent application are Michael Green, Nicholas Eckelberry, Scott Fraser, and Brian Goodall. We are listed as the assignee. The application was converted to a utility application on October 18, 2011. On April 28, 2011, the application was published with the publication number US 2011-0095225 A1.
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On October 19, 2010, to protect the intellectual property rights for “Systems and Methods for Extracting Non-Polar Lipids from an Aqueous Algae Slurry and Lipids Produced There from” a PCT application was filed with the Korean Receiving Office. The inventors are Nicholas Eckelberry, Michael Green, and Scott Fraser. We are listed as the assignee. On April 28, 2011, the application published with the publication number WO/2011/133181.
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On March 18, 2011, to protect the intellectual property rights for “Enhancing Algae Growth by Reducing Competing Microorganisms in a Growth Medium” a provisional patent application was filed with the USPTO. The inventors listed on the patent application are Michael Green, Scott Fraser, Nicholas Eckelberry, and Jose Sanchez Pina. We are listed as the assignee.
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On May 20, 2011, to protect the intellectual property rights for “Systems and Methods for Monitoring and Controlling Process Chemistry Associated with Biomass Growth, Oil Product and Oil Separation in Aqueous Mediums”, a provisional patent application was filed with the USPTO. The inventors listed on the patent application are Paul Reep and Gavin Grey. We are listed as the assignee.
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On June 16, 2011, to protect the intellectual property rights for “Bio-Energy Reactor”, a Utility Patent Application was filed with the USPTO. The inventors listed on the patent application are Michael Green and Nicholas Eckelberry. . On April 28, 2011 the application published with the publication number US 2011-0095225 A1. We are listed as the assignee.
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On August 10, 2011, to protect the intellectual property rights for “Procedure for Extracting of Lipids from Algae without Cell Sacrifice”, a Utility Patent Application was filed with the USPTO. The inventors listed on the patent application are Michael Green and Paul Reep. We are listed as the assignee.
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On August 12, 2011, to protect the intellectual property rights for “Procedure for Extracting of Lipids from Algae Without Cell Sacrifice”, a PCT Application was filed with the Korean Receiving Office. The inventors listed on the patent application are Michael Green and Paul Reep. On February 16, 2012 the application published with the publication number WO/2012/021831. We are listed as the assignee.
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On September 7, 2011, to protect the intellectual property rights for “Apparatuses, Systems and Methods for Increasing Contact Between Solutes and Solvents in an Aqueous Medium”, a provisional patent application was filed with the USPTO. The inventors listed on the patent application are Nicholas Eckelberry, Gavin Gray, Jose L Sanchez Pina and Maxwell Roth. We are listed as the assignee.
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On October 10, 2011, to protect the intellectual property rights for “Systems and Methods For Increasing Growth Of Biomass Feedstocks”, a provisional patent application was filed with the USPTO. The inventors listed on the patent application are Nicholas Eckelberry, Jose L Sanchez Pina and Michael Green. We are listed as the assignee.
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On October 14, 2011, to protect the intellectual property rights for “Systems and Methods For Developing Terrestrial and Algal Biomass Feedstocks and Bio-Refining the Same”, a provisional patent application was filed with the USPTO. The inventor listed on the patent application was Paul Reep. We are listed as the assignee.
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On October 14, 2011, to protect the intellectual property rights for “Systems, Methods And Apparatuses For Dewatering, Flocculating And Harvesting Algae Cells”, a utility patent application was filed with the USPTO. The inventors listed on the patent application are Michael Green, Scott Frasier, Brian Goodall and Nickolas Eckelberry. On May 24, 2012 the application published with the publication number US 2012/0129244 A1. We are listed as the assignee.
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On October 18, 2011, to protect the intellectual property rights for “Systems, Methods and Apparatuses For Dewatering, Flocculating and Harvesting Algae Cells”, a PCT application was filed with the Korean Receiving Office. The inventors listed on the patent application are Michael Green, Scott Frasier, Brian Goodall and Nickolas Eckelberry. On April 26, 2012 the application published with the publication number WO/2012/054404. We are listed as the assignee.
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On November 11, 2011, to protect the intellectual property rights for our company logo “O”, a trademark application was filed with the USPTO. On February 11, 2013 the trademark was issued with Certificate Number 4,284,801.
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On November 11, 2011, to protect the intellectual property rights for our company logo “OriginOil”, a trademark application was filed with the USPTO. On February 11, 2013 the trademark was issued with Certificate Number 4,284,800.
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On January 30, 2012, to protect the intellectual property rights for “Systems and Methods for Harvesting and Dewatering Algae”, a provisional patent application was filed with the USPTO. The inventor listed on the patent application is Nicholas Eckelberry. We are listed as the assignee.
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On March 12, 2012, to protect the intellectual property rights for “Enhancing Algae Growth by Reducing Competing Microorganisms in a Growth Medium” a utility patent application and PCT applications were filed with the Korean Receiving Office. The inventors listed on the patent application are Michael Green, Scott Fraser, Nicholas Eckelberry, and Jose Sanchez Pina. We are listed as the assignee. On November 27, 2012, the application published with the publication number WO/2012/129031.
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On April 17, 2012, to protect the intellectual property rights for “Solute Extraction From an Aqueous Medium Using a Modular Device”, a provisional patent application was filed with the USPTO. The inventor listed on the patent application is Nicholas Eckelberry. We are listed as the assignee.
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On May 18, 2012, to protect the intellectual property rights for “Modular Systems and Methods for Extracting a Contaminant from a Solution”, a provisional patent application was filed with the USPTO. The inventor listed on the patent application is Nicholas Eckelberry. We are listed as the assignee.
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On May 18, 2012, to protect the intellectual property rights for “Monitoring Systems for Biomass Processing Systems”, a utility patent application was filed with the USPTO. The inventors listed on the patent application are Paul Reep and Gavin Grey. We are listed as the assignee.
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On May 21, 2012, to protect the intellectual property rights for “Monitoring Systems for Biomass Processing Systems”, a PCT application was filed with the Korean Receiving Office. The inventors listed on the patent application are Paul Reep and Gavin Grey. We are listed as the assignee.
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27.
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On September 6, 2012, the Australian Patent Office issued patent 2010239380 titled “Systems, Apparatus and Methods for Obtaining Intracellular Products and Cellular Mass and Debris from Algae and Derivative Products and Process of Use Thereof”. This application was nationalized from PCT application PCT/US2010/031756.
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28.
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On September 7, 2012, to protect the intellectual property rights for “Increasing Contact Between Solutes and Solvents in an Aqueous Medium”, a utility patent application was filed with the USPTO. The inventors listed on the patent application are Nicholas Eckelberry, Gavin Grey, Jose Sanchez Pina, and Maxwell Roth. We are listed as the assignee.
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29.
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On September 9, 2012, to protect the intellectual property rights for “Systems and Methods for Increasing Growth of Biomass Feedstocks” a utility patent application was filed with the USPTO. The inventors listed on the patent application are Nicholas Eckelberry, Mike Green, and Jose Sanchez Pina. We are listed as the assignee.
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30.
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On October 10, 2012, to protect the intellectual property rights for “Systems and Methods for Increasing Growth of Biomass Feedstocks” a PCT application was filed with the Korean Receiving Office. The inventors listed on the patent application are Nicholas Eckelberry, Mike Green, and Jose Sanchez Pina. We are listed as the assignee.
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On October 15, 2012, to protect the intellectual property rights for “Systems and methods for Developing Terrestrial and Algal Biomass Feedstocks and Bio-refining the Same”, a utility patent application was filed with the USPTO. The inventor listed on the patent application is Paul Reep. We are listed as the assignee.
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On October 18, 2012, to protect the intellectual property rights for “Systems and methods for Extracting Non-polar Lipids from an Aqueous Algae Slurry and Lipids Produced There from”, a utility patent application was filed with the USPTO. The inventors listed on the patent application are Nicholas Eckelberry, Michael Green and Scott Fraser. We are listed as the assignee.
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On October 19, 2012, to protect the intellectual property rights for “Systems and methods for Extracting Non-polar Lipids from an Aqueous Algae Slurry and Lipids Produced There from” a national stage application was filed with the EPO. The inventors listed on the patent application are Nicholas Eckelberry, Michael Green and Scott Fraser. We are listed as the assignee.
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On January 29, 2013, to protect the intellectual property rights for “Systems and Methods for Harvesting and Dewatering Algae” a utility patent application was filed with the USPTO. The inventor listed on the patent application is Nicholas Eckelberry. We are listed as the assignee.
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On January 30, 2013 to protect the intellectual property rights for “Systems and Methods for Harvesting and Dewatering Algae”, a PCT application was filed with the Korean Receiving Office. The inventor listed on the patent application is Nicholas Eckelberry. We are listed as the assignee.
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In 2008 we abandoned the pursuit of two provisional patent filings filed in relating to “In-Line Lysing And Extraction System For Microorganisms” and “Renewable Carbon Sequestering Method of Producing Pollution Free Electricity”.
In 2009 we abandoned the pursuit of a provisional patent related to “Modular Portable Photobioreactor System”.
In 2010 we abandoned the pursuit of utility patent application related to “Device and Method for Separation, Cell Lysing and Flocculation of Algae From Water” and provisional patent application “Methods and Apparatus for Growing Algae on a Solid Surface”.
In 2011 we abandoned the pursuit of provisional patent application related to “Algae Growth Lighting and Control System”.
In 2012 we abandoned the pursuit of provisional patent filings related to “Multi-Plane Growth Apparatus and Method”, “Systems and Methods for Monitoring and Controlling Algae Growth and Harvesting Cellular Mass and Intracellular Products”, “Method for Extracting Intracellular Products from Microorganisms Using Gas Embolism”, “Algae Harvest Appliance”, “A System, Method And Apparatus To Produce Dewatered And Densified Algae Biomass” and foreign rights for “Bio-Energy Reactor”.
None of these patents are required for our business or products and we are focusing our efforts on the patent applications listed above.
Research and Development
During the years ended December 31, 2012 and 2011, we invested approximately $980,170, and $1,145,749, respectively, on research and development of our technologies. Research and development costs include activities related to development and innovations in the core Solids Out of Solution™ (SOS) technology, fabrication and improvement of commercial products such as the Algae Appliance™ and CLEAN-FRAC™, development of firmware and process automation, development of new applications in industries such as aquaculture, technical support of customers, agents, joint venture partners and licensees, and miscellaneous research.
Employees
As of April 15, 2013, we have 10 full-time employees. We have not experienced any work stoppages and we consider relations with our employees to be good.
Risks Relating to Our Business
We have a limited operating history which makes it difficult to evaluate our business and prospects.
We were formed in June 2007 and are currently developing a new technology that has not yet gained market acceptance. As such, we have a limited operating history upon which you can base an evaluation of our business and prospects. Since we have not been profitable, there are substantial risks, uncertainties, expenses and difficulties that we are subject to. To address these risks and uncertainties, we must do among the following:
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Successfully execute our 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. Investors 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.
We have a history of losses and can provide no assurance of our future operating results.
We currently have limited product revenues, and may not succeed in commercializing any products which will generate product or licensing revenues. Until recently, our primary activity has been research and development. We have experienced net losses and negative cash flows from operating activities since inception and we expect such losses and negative cash flows to continue in the foreseeable future. As of December 31, 2012 and 2011, we had working capital (deficit) of ($936,099) and $(1,068,155), respectively, and shareholders' equity (deficit) of $(540,896) and $(798,294), respectively. For the years ended December 31, 2012 and 2011, we incurred net losses of $(10,570,029) and $(5,649,043). As of December 31, 2012, we had an aggregate accumulated deficit of $(27,567,112). We may never achieve profitability. The opinion of our independent registered public accountants 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.
We will need significant additional capital, which we may be unable to obtain.
Revenues generated from our operations are not presently sufficient to sustain our operations. Therefore, we will need to raise additional capital to continue our operations. There can be no assurance that additional funds will be available when needed from any source or, if available, will be available on terms that are acceptable to us. We may be required to pursue sources of additional capital through various means, including debt or equity financings. Future financings through equity investments are likely to be dilutive to existing stockholders. Also, the terms of securities we may issue in future capital transactions may be more favorable for our new investors. Newly issued securities may include preferences, superior voting rights, the issuance of warrants or other derivative securities, and the issuances of incentive awards under equity employee incentive plans, which may have additional dilutive effects. Further, we may incur substantial costs in pursuing future capital and/or financing, including investment banking fees, legal fees, accounting fees, printing and distribution expenses and other costs. We may also be required to recognize non-cash expenses in connection with certain securities we may issue, such as convertible notes and warrants, which will adversely impact our financial condition. Our ability to obtain needed financing may be impaired by such factors as the capital markets and our history of losses, which could impact the availability or cost of future financings. If the amount of capital we are able to raise from financing activities, together with our revenues from operations, is not sufficient to satisfy our capital needs, even to the extent that we reduce our operations accordingly, we may be required to cease operations.
We have incurred substantial indebtedness.
As of April 15, 2013, we have convertible notes with outstanding principal and accrued but unpaid interest of approximately $1,229,995. All such debt is payable within the following twelve months. Our level of indebtedness increases the possibility that we may be unable to generate cash sufficient to pay, when due, the principal of, interest on or other amounts due in respect of the indebtedness. Our indebtedness, combined with other financial obligations and contractual commitments, could:
· make it more difficult for us to satisfy our obligations with respect to the indebtedness and any failure to comply with the obligations under any of our debt instruments, including restrictive covenants, could result in events of default under the loan agreements and instruments governing the indebtedness;
· require us to dedicate a substantial portion of our cash flow from operations to payments on indebtedness, thereby reducing funds available for working capital, capital expenditures, acquisitions, research and development and other corporate purposes;
· increase our vulnerability to adverse economic and industry conditions, which could place us at a competitive disadvantage compared to competitors that have relatively less indebtedness;
· limit our flexibility in planning for, or reacting to, changes in business and the industry in which we operate;
· limit our ability to borrow additional funds, or to dispose of assets to raise funds, if needed, for working capital, capital expenditures, acquisitions, research and development and other corporate purposes; and
· in the case of convertible debt that is converted into equity, result in a reduction in the overall percentage holdings of our stockholders, put downward pressure on the market price of our common stock, result in adjustments to conversion and exercise prices of outstanding notes and warrants and obligate us to issue additional shares of common stock to certain of our stockholders.
We may incur significant additional indebtedness in the future. If we incur a substantial amount of additional indebtedness, the related risks that we face could become more significant. Additionally, the terms of any future debt that we may incur may impose requirements or restrictions that further affect our financial and operating flexibility or subject us to other events of default.
Our revenues are dependent upon acceptance of our technology and products by the market; the failure of which would cause us to curtail or cease operations.
We believe that most of our future revenues will come from the sale or license of our technology and systems. 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 technology and systems. There can be no assurance that businesses and prospective customers will adopt our technology and systems, or that businesses and prospective customers will agree to pay for or license our technology and systems. In the event that we are not able to develop a customer base that purchases or licenses our technology and systems, 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.
We will need to increase the size of our organization, and may experience difficulties in managing growth.
We are a small company with a minimal number of employees. With the start of our planned principal 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 technology and systems 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 our technology and systems fast enough to meet market requirements. We can also not assure that our technology and systems 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 and clean-up frac flowback water on a commercially viable basis 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 and to clean up frac flowback water have never been utilized on a full-scale commercial basis. Our technology and systems, 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 and our frac flowback water treatment technology was only recently developed. All of the tests conducted to date by us with respect to the technology have been performed in a limited scale or small commercial 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. Accordingly, our technology may not perform successfully on a commercial basis and may never generate any revenues or be profitable.
If a competitor were to achieve a technological breakthrough, our operations and business could be negatively impacted.
There currently exist a number of businesses that are pursuing the use of algae, bacteria and other micro-crops and other methods for creating biomass and other alternative fuels. Should a competitor achieve a research and development, technological or biological breakthrough where production costs are significantly reduced, or if the costs of similar competing products were to fall substantially, we may have difficulty attracting customer licensees. In addition, competition from other technologies considered “green technologies” could lessen the demand for the end-products produced by our technology. Furthermore, competitors may have access to larger resources (capital or otherwise) that provide them with an advantage in the marketplace, which could result in a negative impact on our business.
Any competing technology that produces biomass of similar quality, at a superior growth rate and more cost efficient than ours, could render our technology obsolete. In addition, because we do not have any issued patents for all but one of our patent applications, we may not be able to preclude development of even directly competing technologies using the same methods, materials and procedures as we use to achieve our results. Any of these competitive forces may inhibit or materially adversely affect our ability to attract customer licensees, or to obtain royalties or other fees from our customer licensees. This could have a material adverse effect on our business, prospects, results of operation and financial condition.
Our long-term success depends on future royalties paid to us by licensees, and we face the risks inherent in a royalty-based business model.
We intend to generate revenue through the licensing of our technology and systems, and our long-term success depends on future royalties paid to us by prospective customer licensees. The amount of royalty payments we may receive is expected to be based upon the revenues generated by our prospective customer licensees’ operations, and so we will be dependent on the successful operations of our prospective customer licensees for a significant portion of our revenues. We face risks inherent in a royalty-based business model, many of which are outside of our control, including those arising from our reliance on the management and operating capabilities of our customer licensees and the cyclicality of supply and demand for end-products produced using our technology. Should our prospective customer licensees fail to achieve sufficient profitability in their operations, our royalty payments would be diminished and our results of operations, cash flows and financial condition could be adversely affected, and any such effects could be material.
We rely on strategic partners.
We rely on strategic partners to aid in the development and marketing of our technology and processes. Should our strategic partners not regard us as significant to their own businesses, they could reduce their commitment to us or terminate their relationship with us, pursue competing relationships or attempt to develop or acquire products or services that compete with the end-products produced using our technology. Any such action could materially adversely affect our business.
A lack of government subsidies for the biofuels industry may hinder the usefulness of our technology.
Our business model is based on licensing our technology to distributors, manufacturers, engineering service firms, specialty operators, as well as, fuel refiners, chemical and oil companies, for building, installing and operating algae production systems in varied applications for bio-fuels, bio-chemicals, and animal feed and human nutritional feedstocks. We are 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, our business is not currently subject to government regulation for the production, distribution, and/or use of its technology.
We are however 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 our technology. There is no assurance that the biofuels industry, or any industry we market to, will have the need or the financial ability to use our technology. If government regulations on the electrical industry or fossil fuel industry were enacted, it may affect the outlook for oil from algae.
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 would 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 Our Intellectual Property
If we fail to establish, maintain and enforce intellectual property rights with respect to our technology, our financial condition, results of operations and business could be negatively impacted.
Our ability to establish, maintain and enforce intellectual property rights with respect to the technology that we intend to license will be a significant factor in determining our future financial and operating performance. We seek to protect our intellectual property rights by relying on a combination of patent, trade secret and copyright laws. We also use confidentiality and other provisions in our agreements that restrict access to and disclosure of our confidential know-how and trade secrets.
We have filed patent applications with respect to many aspects of our technologies. However, we cannot provide any assurances that any of these applications will ultimately result in issued patents or, if patents are issued, that they will provide sufficient protections for our technology against competitors. Although we have filed patent applications for some of our core technologies, we do not currently hold any issued patents other than one issued patent in Australia and we may face delays and difficulties in obtaining these patents, or we may not be able to obtain such patents at all.
Outside of these patent applications, we seek to protect our technology as trade secrets and technical know-how. However, trade secrets and technical know-how are difficult to maintain and do not provide the same legal protections provided by patents. In particular, only patents will allow us to prohibit others from using independently developed technology that are similar. If competitors develop knowledge substantially equivalent or superior to our trade secrets and technical know-how, or gain access to our knowledge through other means such as observation of our technology that embodies trade secrets at customer sites which we do not control, the value of our trade secrets and technical know-how would be diminished.
While we strive to maintain systems and procedures to protect the confidentiality and security of our trade secrets and technical know-how, these systems and procedures may fail to provide an adequate degree of protection. For example, although we generally enter into agreements with our employees, consultants, advisors, and strategic partners restricting the disclosure and use of trade secrets, technical know-how and confidential information, we cannot provide any assurance that these agreements will be sufficient to prevent unauthorized use or disclosure. In addition, some of the technology deployed at customer sites in the future, which we do not control, may be readily observable by third parties who are not under contractual obligations of non-disclosure, which may limit or compromise our ability to continue to protect such technology as a trade secret.
In addition, on September 25, 2012, we filed a complaint in the US District Court Central District of California against MBD Energy Limited to protect our intellectual property. MBD is our first pilot customer who previously purchased from us test scale algae processing equipment as well as larger scale units. On December 20, 2012, we entered into a settlement agreement with MBD pursuant to which we agreed to a final settlement and release of claims in connection with the complaint. On March 1, 2013, an order was entered dismissing the action without prejudice.
Monitoring and policing unauthorized use and disclosure of intellectual property is difficult. If we learned that a third party was in fact infringing or otherwise violating our intellectual property, we may need to enforce our intellectual property rights through litigation. Litigation relating to our intellectual property may not prove successful and might result in substantial costs and diversion of resources and management attention.
From our customer licensee’s standpoint, the strength of the intellectual property under which we intend to grant licenses can be a critical determinant of the value of these licenses. If we are unable to secure, protect and enforce our intellectual property, it may become more difficult for us to attract new customers. Any such development could have a material adverse effect on our business, prospects, financial condition and results of operations.
Although we have filed patent applications for some of our core technologies, we do not currently hold any issued patents other than one issued patent in Australia and we may face delays and difficulties in obtaining these patents, or we may not be able to obtain such patents at all.
Patents are a key element of our intellectual property strategy. We have over thirty currently pending patent applications in the United States and abroad but, to date, other than one issued patent in Australia, no patents have issued from these applications. It may take a long time for any patents to issue from the applications, and we cannot provide any assurance that any patents will ultimately be issued or that any patents that do ultimately issue will issue in a form that will adequately protect our commercial advantage.
Our ability to obtain patent protection for our technologies is uncertain due to a number of factors, including that we may not have been the first to make the inventions covered by our pending patent applications or to file patent applications for these inventions.
Further, changes in U.S. and foreign patent law may also impact our ability to successfully prosecute our patent applications. For example, the United States Congress and other foreign legislative bodies may amend their respective patent laws in a manner that makes obtaining patents more difficult or costly. Courts may also render decisions that alter the application of patent laws and detrimentally affect our ability to obtain patent protection.
Even if patents do ultimately issue from our patent applications, these patents may not provide meaningful protection or commercial advantage. In the US, patents only provide protection for a 20-year period starting from the filing date and the longer a patent application takes to issue the less time there is to enforce it. Further, the claims under any patents that issue from our applications may not be broad enough to prevent others from developing technologies that are similar or that achieve similar results. It is also possible that the intellectual property rights of others will bar us from licensing our technology and bar us or our future licensees from exploiting any patents that issue from our pending applications. Numerous U.S. and foreign issued patents and pending patent applications owned by others exist in the fields in which we have developed and are developing our technology. These patents and patent applications might have priority over our patent applications and could subject our patent applications to invalidation. Finally, in addition to those who may claim priority, any patents that issue from our applications may also be challenged by our competitors on the basis that they are otherwise invalid or unenforceable.
We may face claims that we are violating the intellectual property rights of others.
We may face claims, including from direct competitors, other energy companies, scientists or research universities, asserting that our technology or the commercial use of such technology infringes or otherwise violates the intellectual property rights of others. We have not conducted infringement, freedom to operate or landscape analyses, and as a result we cannot be certain that our technologies and processes do not violate the intellectual property rights of others. We expect that we may increasingly be subject to such claims as we begin to earn revenues and our market profile grows.
We may also face infringement claims from the employees, consultants, agents and outside organizations we have engaged to develop our technology. While we have sought to protect ourselves against such claims through contractual means, we cannot provide any assurance that such contractual provisions are adequate, and any of these parties might claim full or partial ownership of the intellectual property in the technology that they were engaged to develop.
If we were found to be infringing or otherwise violating the intellectual property rights of others, we could face significant costs to implement work-around methods, and we cannot provide any assurance that any such work-around would be available or technically equivalent to our current technology. In such cases, we might need to license a third party’s intellectual property, although any required license might not be available on acceptable terms, or at all. If we are unable to work around such infringement or obtain a license on acceptable terms, we might face substantial monetary judgments against us or an injunction against continuing to license our technology, which might cause us to cease operations.
In addition, even if we are not infringing or otherwise violating the intellectual property rights of others, we could nonetheless incur substantial costs in defending ourselves in suits brought against us for alleged infringement. Also, if any license agreements provide that we will defend and indemnify our customer licensees for claims against them relating to any alleged infringement of the intellectual property rights of third parties in connection with such customer licensees’ use of our technologies, we may incur substantial costs defending and indemnifying any customer licensees to the extent they are subject to these types of claims. Such suits, even if without merit, would likely require our management team to dedicate substantial time to addressing the issues presented. Any party bringing claims might have greater resources than we do, which could potentially lead to us settling claims against which we might otherwise prevail on the merits.
Any claims brought against us or any customer licensees alleging that we have violated the intellectual property of others could have negative consequences for our financial condition, results of operations and business, each of which could be materially adversely affected as a result.
Risks Related to Our Common Stock
Our common stock could be further diluted as the result of the issuance of additional shares of common stock, convertible securities, warrants or options.
In the past, we have issued common stock, convertible securities (such as convertible debentures and notes) and warrants in order to raise money, some of which have anti-dilution and other similar protections. We have also issued options and warrants as compensation for services and incentive compensation for our employees and directors. We have shares of common stock reserved for issuance upon the exercise of certain of these securities and may increase the shares reserved for these purposes in the future. Our issuance of additional common stock, convertible securities, options and warrants could affect the rights of our stockholders, result in a reduction in the overall percentage holdings of our stockholders, could put downward pressure on the market price of our common stock, could result in adjustments to conversion and exercise prices of outstanding notes and warrants, and could obligate us to issue additional shares of common stock to certain of our stockholders.
There may be a limited public market for our securities.
Trading in our common stock continues to be conducted on the electronic bulletin board in the over-the-counter market. As a result, an investor may find it difficult to dispose of or to obtain accurate quotations as to the market value of our common stock, and our common stock may be less attractive for margin loans, for investment by financial institutions, as consideration in future capital raising transactions or other purposes.
We may be unable to list our common stock on NASDAQ or on any securities exchange.
Our common stock currently does not meet all of the requirements for initial listing on a registered stock exchange. Although we may apply to list our common stock on NASDAQ or the NYSE Amex in the future, we cannot assure you that we will be able to meet the initial listing standards, including the minimum bid price per share and minimum capitalization requirements, or that we will be able to maintain a listing of our common stock on either of those or any other trading venue. Until such time as we qualify for listing on NASDAQ, the NYSE Amex or another trading venue, we expect our common stock will continue to trade on electronic bulletin board in the over-the-counter market.
The price of our common stock is volatile, which may cause investment losses for our stockholders.
The market for our common stock is highly volatile, having ranged in the last twelve months from a low of $0.42 to a high of $1.85 on the OTCBB. The trading price of our common stock on the OTCBB is subject to wide fluctuations in response to, among other things, quarterly variations in operating and financial results, and general economic and market conditions. In addition, statements or changes in opinions, ratings, or earnings estimates made by brokerage firms or industry analysts relating to our market or relating to us could result in an immediate and adverse effect on the market price of our common stock. The highly volatile nature of our stock price may cause investment losses for our shareholders. In the past, securities class action litigation has often been brought against companies following periods of volatility in the market price of their securities. If securities class action litigation is brought against us, such litigation could result in substantial costs while diverting management’s attention and resources.
Shares eligible for future sale may adversely affect the market.
From time to time, certain of our stockholders may be eligible to sell all or some of their shares of common stock by means of ordinary brokerage transactions in the open market pursuant to Rule 144 promulgated under the Securities Act, subject to certain limitations. In general, pursuant to Rule 144, non-affiliate stockholders may sell freely after six months subject only to the current public information requirement. Affiliates may sell after six months subject to the Rule 144 volume, manner of sale (for equity securities), current public information and notice requirements. Mr. Eckelberry, our Chief Executive Officer and Chairman, previously sold an aggregate of 224,461 shares under a pre-arranged stock trading plan with a broker and beneficially owns 1,113,075 shares of our common stock. Any substantial sales of our common stock pursuant to Rule 144 may have a material adverse effect on the market price of our common stock.
Our stock is subject to the penny stock rules, which impose significant restrictions on broker-dealers and may affect the resale of our stock.
Our common stock has been subject to the provisions of Section 15(g) and Rule 15g-9 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), commonly referred to as the “penny stock” rule. Section 15(g) sets forth certain requirements for transactions in penny stocks and Rule 15g-9(d)(1) incorporates the definition of penny stock as that used in Rule 3a51-1 of the Exchange Act. The SEC generally defines penny stock to be any equity security that has a market price less than US$5.00 per share, subject to certain exceptions. Rule 3a51-1 provides that any equity security is considered to be penny stock unless that security is: registered and traded on a national securities exchange meeting specified criteria set by the SEC; issued by a registered investment company; excluded from the definition on the basis of price (at least US$5.00 per share) or the registrant’s net tangible assets; or exempted from the definition by the Commission. Our common stock is considered to be a “penny stock.” The SEC has adopted rules that regulate broker-dealer practices in connection with transactions in “penny stocks.” As our common stock is considered to be “penny stock,” trading in our common stock will be subject to additional sales practice requirements on broker-dealers who sell penny stock to persons other than established customers and accredited investors. This may reduce the liquidity and trading volume of our shares.
Financial Industry Regulatory Authority, Inc. (“FINRA”) sales practice requirements may limit a shareholder’s ability to buy and sell our common shares.
In addition to the “penny stock” rules described above, FINRA has adopted rules that require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative low priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives and other information. Under interpretations of these rules, FINRA believes that there is a high probability that speculative low priced securities will not be suitable for at least some customers. FINRA requirements make it more difficult for broker-dealers to recommend that their customers buy our common stock, which may limit your ability to buy and sell our stock and have an adverse effect on the market for our shares.
If we fail to maintain effective internal controls over financial reporting, the price of our common stock may be adversely affected.
Our internal control over financial reporting may have weaknesses and conditions that could require correction or remediation, the disclosure of which may have an adverse impact on the price of our common stock. We are required to establish and maintain appropriate internal controls over financial reporting. Failure to establish those controls, or any failure of those controls once established, could adversely affect our public disclosures regarding our business, prospects, financial condition or results of operations. In addition, management’s assessment of internal controls over financial reporting may identify weaknesses and conditions that need to be addressed in our internal controls over financial reporting or other matters that may raise concerns for investors. Any actual or perceived weaknesses and conditions that need to be addressed in our internal control over financial reporting or disclosure of management’s assessment of our internal controls over financial reporting may have an adverse impact on the price of our common stock.
We are required to comply with certain provisions of Section 404 of the Sarbanes-Oxley Act of 2002 and if we fail to comply in a timely manner, our business could be harmed and our stock price could decline.
Rules adopted by the SEC pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 require an annual assessment of internal controls over financial reporting, and for certain issuers an attestation of this assessment by the issuer’s independent registered public accounting firm. The standards that must be met for management to assess the internal controls over financial reporting as effective are evolving and complex, and require significant documentation, testing, and possible remediation to meet the detailed standards. We expect to incur significant expenses and to devote resources to Section 404 compliance on an ongoing basis. It is difficult for us to predict how long it will take or costly it will be to complete the assessment of the effectiveness of our internal control over financial reporting for each year and to remediate any deficiencies in our internal control over financial reporting. As a result, we may not be able to complete the assessment and remediation process on a timely basis. In addition, although attestation requirements by our independent registered public accounting firm are not presently applicable to us we could become subject to these requirements in the future and we may encounter problems or delays in completing the implementation of any resulting changes to internal controls over financial reporting. In the event that our Chief Executive Officer or Chief Financial Officer determine that our internal control over financial reporting is not effective as defined under Section 404, we cannot predict how regulators will react or how the market prices of our shares will be affected; however, we believe that there is a risk that investor confidence and share value may be negatively affected.
We do not intend to pay dividends.
We do not anticipate paying cash dividends on our common stock in the foreseeable future. We may not have sufficient funds to legally pay dividends. Even if funds are legally available to pay dividends, we may nevertheless decide in our sole discretion not to pay dividends. The declaration, payment and amount of any future dividends will be made at the discretion of our board of directors, and will depend upon, among other things, the results of our operations, cash flows and financial condition, operating and capital requirements, and other factors our board of directors may consider relevant. There is no assurance that we will pay any dividends in the future, and, if dividends are paid, there is no assurance with respect to the amount of any such dividend.
Not applicable.
Our principal offices are located at 5645 West Adams Blvd., Los Angeles, CA 90016. We rent 7,500 square feet of space in a corporate building at a current monthly rent of $10,528.78. Our lease expires August 31, 2016.
On September 25, 2012, we filed a complaint (the “Complaint”) in the US District Court Central District of California against MBD Energy Limited (“MBD”) to protect our intellectual property asserting among, other things, breach of contract, conversion, fraudulent non-disclosure and unfair competition by MBD. On December 20, 2012, we entered into a Settlement Agreement with Mutual Releases and Covenants (the “Settlement Agreement”) with MBD pursuant to which we agreed to a final settlement and release of claims in connection with the Complaint. On March 1, 2013, an order was entered dismissing the action without prejudice.
Under the Settlement Agreement, MBD has agreed, among other things, to withdraw its patent application that related to certain of our technology and provide us with certain assurances of non-infringement of our technology and we agreed, among other things, to file a dismissal of the Complaint and to withdraw our notice of default of the Master Project Agreement (“MPA”) previously entered into with MBD. The Settlement Agreement provides for a continuation of the commercial relationship of the parties and that the MPA will terminate in its entirety on June 30, 2013. The Settlement Agreement also provides for a standard mutual release, denial of liability and covenant not to sue.
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 pending legal proceeding, nor is our property the subject of a pending legal proceeding, that is not in the ordinary course of business or otherwise material to the financial condition of our business. None of our directors, officers or affiliates is involved in a proceeding adverse to our business or has a material interest adverse to our business.
Not applicable.
PART II
Our common stock is quoted on the OTC Bulletin Board under the symbol “OOIL”.
For the periods indicated, the following table sets forth the high and low bid prices per share of common stock. These prices represent inter-dealer quotations without retail markup, markdown, or commission and may not necessarily represent actual transactions. Where applicable, the prices set forth below give retroactive effect to our one-for-thirty reverse stock split which became effective on August 11, 2011.
|
|
Fiscal Year
2011
|
|
|
|
High
|
|
|
Low
|
|
First Quarter
|
|
$
|
8.10
|
|
|
$
|
5.40
|
|
Second Quarter
|
|
$
|
6.00
|
|
|
$
|
3.30
|
|
Third Quarter
|
|
$
|
5.90
|
|
|
$
|
1.95
|
|
Fourth Quarter
|
|
$
|
2.48
|
|
|
$
|
1.53
|
|
|
|
Fiscal Year
2012
|
|
|
|
High
|
|
|
Low
|
|
First Quarter
|
|
$
|
1.95
|
|
|
$
|
1.50
|
|
Second Quarter
|
|
$
|
1.85
|
|
|
$
|
0.73
|
|
Third Quarter
|
|
$
|
1.28
|
|
|
$
|
0.82
|
|
Fourth Quarter
|
|
$
|
0.99
|
|
|
$
|
0.76
|
|
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
As of April 12, 2013, we had approximately 411 holders of record of our common stock. This number does not include beneficial owners whose shares are held in the names of various security brokers, dealers, and registered clearing agencies.
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.
Equity Compensation Plan Information
On July 1, 2009, we instituted the OriginOil 2009 Incentive Stock Plan (the “2009 Plan”), after approval by the Board of Directors and a majority of our shareholders. The purpose of the 2009 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 2009 Plan thereby providing participants with a proprietary interest in our growth and performance. Under the 2009 Plan, 500,000 shares of our common stock were reserved for use. The 2009 Plan shall be administered by our Board of Directors.
On May 25, 2012, we instituted the OriginOil 2012 Incentive Stock Plan (the “2012 Plan”), after approval by the Board of Directors and a majority of our shareholders. Like the 2009 Plan, the purpose of the 2012 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 2012 Plan thereby providing participants with a proprietary interest in our growth and performance. Under the 2012 Plan, 1,000,000 shares of our common stock were reserved for use. The 2012 Plan shall be administered by our Board of Directors.
The following table summarizes information as of the close of business on December 31, 2012 about the 2009 Plan and 2012 Plan.
Plan category
|
Number of securities to be
issued upon exercise of
outstanding options
(a)
|
|
|
Weighted-average
exercise price of
outstanding options
(b)
|
|
Securities remaining available
for future issuance under equity
compensation plans (excluding
securities reflected in column (a))
(c)
|
|
|
|
|
|
|
|
|
|
Equity compensation plans approved by security holders
|
|
465,294
|
|
|
$ |
|
|
|
1.67
|
|
|
534,706
|
|
Equity compensation plans not approved by security holders
|
|
|
0 |
|
|
|
|
|
|
|
N/A |
|
|
|
N/A |
|
Total
|
|
|
465,294 |
|
|
|
|
|
|
$ |
1.67 |
|
|
|
534,706 |
|
During the years ended December 31, 2012 and 2011, we granted 384,000 and 223,334 stock options, respectively. The stock options granted during 2012 and 2011 vest as follows: 1/48 every 30 days thereafter until the remaining stock options have vested, and are exercisable for a period of four years from the date of grant at an exercise price between $0.89 and $7.20 per share. At December 31, 2012, 75,732 options are exercisable by their holders.
Recent Sales of Unregistered Securities
None
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
None
N/A
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.
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.)
OOIL
Results of Operations for the year ended December 31, 2012 compared to the year ended December 31, 2011.
|
|
Year Ended
|
|
|
|
December 31,
2012
|
|
|
December 31,
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.
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.
Not applicable.
All financial information required by this Item is attached hereto at the end of this report beginning on page F-1 and is hereby incorporated by reference.
None
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, 2012 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 our internal control over financial reporting as of December 31, 2012. 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, 2012, 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 our 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 a permanent exemption from the auditor’s attestation requirement provided by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 that requires the company to provide only management’s report in this annual report.
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 year ended December 31, 2012 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Exchange of Warrants
The following disclosure would have otherwise been filed on Form 8-K under the heading “Item 3.02 Unregistered Sales of Equity Securities”:
During the month of March 2013, holders of warrants exercisable for 254,911 shares of our common stock were exchanged on a cashless basis for 254,911 shares of our common stock.
The securities above were offered and sold pursuant to an exemption from the registration requirements under Section 4(2) of the Securities Act since, among other things, the transactions did not involve a public offering.
CEO Bonus
The following disclosure would have otherwise been filed on Form 8-K under the heading “Item 3.02 Unregistered Sales of Equity Securities” and “Item 5.02 Departure of Directors 0r Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangement of Certain Officers”:
In recognition of T. Riggs Eckelberry’s contributions in 2012 as our Chief Executive Officer, on April 12, 2013, the Board of Directors awarded to Mr. Eckelberry a cash bonus of $40,000 and issued to him a five-year option to purchase 759,645 shares of our common stock exercisable at $0.43 per share.
The securities above were offered and sold pursuant to an exemption from the registration requirements under Section 4(2) of the Securities Act and Rule 506 of Regulation D promulgated thereunder since, among other things, the transactions did not involve a public offering and the securities were acquired for investment purposes only and not with a view to or for sale in connection with any distribution thereof.
Common Stock and Warrant Offering
The following disclosure would have otherwise been filed on Form 8-K under the heading “Item 3.02 Unregistered Sales of Equity Securities”:
As previously disclosed in our Current Report on Form 8-K filed with the SEC on March 19, 2013, on February 15, 2013, we commenced a private placement offering, as subsequently amended, of up to 12,000,000 shares of common stock together with up to four series of warrants to purchase up to an aggregate of 48,000,000 shares of common stock.
From March 20, 2013 to April 15, 2013, we sold to accredited investors and to a non-U.S. person 2,286,000 shares of our common stock together with one-year warrants to purchase an aggregate of 2,000,000 shares of our common stock, three-year warrants to purchase an aggregate of 2,000,000 shares of our common stock and five-year warrants to purchase an aggregate of 4,000,000 shares of our common stock for aggregate gross proceeds of $371,500. Each of the warrants is exercisable at a price per share of $0.15 subject to adjustment for stock splits, dividends, distributions, recapitalizations and the like.
The securities offered will not be and have not been registered under the Securities Act and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements. This Annual Report on Form 10-K shall not constitute an offer to sell or the solicitation of an offer to buy, nor shall there be any sale of these securities in any state in which such offer, solicitation or sale would be unlawful prior to the registration or qualification under the securities laws of any such state.
Except as set forth below, the securities above were offered and sold pursuant to an exemption from the registration requirements under Section 4(2) of the Securities Act and Rule 506 of Regulation D promulgated thereunder since, among other things, the transactions did not involve a public offering and the securities were acquired for investment purposes only and not with a view to or for sale in connection with any distribution thereof. The Company issued securities to one non- U.S. person in an offshore transaction relying on Regulation S.
Conversion of Notes
The following disclosure would have otherwise been filed on Form 8-K under the heading “Item 3.02 Unregistered Sales of Equity Securities”:
On February 4, 2013, a holder of a convertible promissory note, known in our filings as the “January Notes” or “January 2012 Notes” converted an aggregate outstanding principal amount of $100,000, plus unpaid interest of $7,467 into an aggregate of 245,639 shares of our common stock.
On March 20, 2013, a holder of a convertible promissory note issued on June 20, 2012, converted an aggregate principal and interest amount of $90,796 into 255,000 shares of our common stock.
On April 12, 2013, holders of original issuance discount convertible promissory notes issued in October 2012 in the aggregate principal amount of $125,000 plus interest and extension fees of $233,066 were converted into an aggregate of 1,432,285 shares of our common stock.
The securities above were offered and sold pursuant to an exemption from the registration requirements under Section 4(2) of the Securities Act since, among other things, the transactions did not involve a public offering.
Consultant Issuance
The following disclosure would have otherwise been filed on Form 8-K under the heading “Item 3.02 Unregistered Sales of Equity Securities”:
On March 26, 2013, we issued to a consultant 100,000 shares of our common stock in lieu of cash consideration and agreed to issue up to 120,000 shares of our common stock to such consultant in lieu of cash consideration.
The securities above were offered and sold pursuant to an exemption from the registration requirements under Section 4(2) of the Securities Act and Rule 506 of Regulation D promulgated thereunder since, among other things, the transactions did not involve a public offering and the securities were acquired for investment purposes only and not with a view to or for sale in connection with any distribution thereof.
PART III
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.
Name
|
|
Age
|
|
Position
|
T. Riggs Eckelberry
|
|
61
|
|
Chief Executive Officer, Chairman of the Board of Directors, Secretary, Treasurer, President and Acting Chief Financial Officer.
|
|
|
|
|
|
Ivan Ivankovich
|
|
46
|
|
Director
|
|
|
|
|
|
Steven Glovsky
|
|
49
|
|
Director
|
|
|
|
|
|
Anthony Fidaleo
|
|
54
|
|
Director
|
T. Riggs Eckelberry - Chief Executive Officer, Chairman of the Board of Directors, Secretary, Treasurer, President and Acting Chief Financial Officer.
Mr. Eckelberry has served as our Chief Executive Officer, Chairman, Secretary, Treasurer, President and Acting Chief Financial Officer since our inception in June 2007. Mr. 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
Mr. Ivankovich has served as our director since our inception in June 2007. 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.
Steven Glovsky – Director
Mr. Glovsky has served as our director since April 2012. Mr. Glovsky is currently a consultant of a robotics company that designs and builds mobile robots for use in manufacturing. Prior to that from 2008 until 2009, he served as Director of Enrollment for Adult Studies at Aquinas College, managed by the Institute for Professional Development (a division of Apollo Group (NASDAQ:APOL). From 2000 until 2008, Mr. Glovsky served as a consultant to a number of technology and media companies, where he advised the Chief Executive Officers and Division Managers on strategic, product, business and financial matters; including MaxPreps, Inc. (acquired by CBS), a leading online sports publisher, Adstar, Inc. (NASDAQ: ADST), a technology company in the publishing industry and Titan (NYSE:TTN - acquired by L-3 Communications), a leading provider of information and communications products, solutions, and services to government entities. Among his responsibilities at AdStar, Mr. Glovsky managed the initial set up and implementation of Sarbanes-Oxley and SAS70 regulatory requirements. Prior to this Mr. Glovsky was a Senior Manager at Arthur Andersen in the turnaround and bankruptcy practice. Mr. Glovsky also spent five years in the banking industry at Bank of America where he managed an employee compensation program for 6,000+ employees and Security Pacific National Bank where he built and managed compensation programs for four operating divisions. Mr. Glovsky is a non-practicing attorney of law. He received his Juris Doctor from the University of Southern California Law Center and Bachelor of Arts from Tufts University. Mr. Glovsky’s financial experience qualifies him to serve as a director.
Anthony Fidaleo – Director
Mr. Fidaleo has served as our director since June 2012. Mr. Fidaleo has run his own accounting and consulting practice since 1992, primarily as an acting Chief Financial Officer or Senior Consultant for publicly traded companies ranging from start-ups to Fortune 500’s. From November 2005 to February 2009 Mr. Fidaleo was the Chief Financial Officer, Chief Operating Officer, Executive Vice President and Member of the Board of Directors and Operating Committee for iMedia International, Inc. an early stage publicly traded interactive content solutions company. Mr. Fidaleo is a California CPA (inactive) and was in public accounting from 1982 through 1992, primarily with BDO Seidman, LLP where he attained the level of audit senior manager. Mr. Fidaleo holds a B.S. degree in Accounting from California State University at Long Beach. Mr. Fidaleo’s financial experience qualifies him to serve as a director.
Election of Directors
Our directors are elected by the vote of a majority in interest of the holders of our voting stock 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. The Board of Directors may also appoint additional directors to fill vacancies up to the maximum number permitted under our by laws.
A majority of the authorized number of directors constitutes a quorum of the Board of Directors 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 of Directors may be taken without a meeting if all members of the Board of Directors individually or collectively consent in writing to the action.
Board Independence
We currently have four directors serving on our Board of Directors. We are not a listed issuer and, as such, are not subject to any director independence standards. Using the definition of “independent director,” as defined by Section 5605(a)(2) of the rules of the Nasdaq Stock Market, Ivan Ivankovich, Steve Glovsky and Anthony Fidaleo, would be considered an independent director.
Committees of the Board of Directors
We have established an audit committee and compensation committee however we have not yet nominated any members to such committees, which we intend to do in the near future. To date, our entire board has performed all of the duties and responsibilities which might be contemplated by a committee.
Audit Committee. The audit committee will be composed of three independent directors, one of whom that meets the requirements of an “Audit Committee Financial Expert.” The audit committee's duties will be to recommend to the board of directors the engagement of independent auditors to audit our financial statements and to review our accounting and auditing principles. The audit committee will review the scope and fees for the annual audit and the results of audit examinations performed by the internal auditors and independent public accountants, including their recommendations to improve the system of accounting and internal controls. The audit committee will at all times to be composed exclusively of directors who are, in the opinion of the board of directors, free from any relationship which would interfere with the exercise of independent judgment as a committee member and who possess an understanding of financial statements and generally accepted accounting principles.
Compensation Committee. The compensation committee will be composed of at least two independent directors. The compensation committee will review and approve our compensation policies, including compensation of executive officers. The compensation committee will also review and administer our stock option plans, and recommend and approve grants of stock options under that plan.
We do not have a standing nominating committee nor are we required to have one. We do not currently have any established procedures by which security holders may recommend nominees to our Board of Directors, however, any suggestions on directors, and discussions of board nominees in general, is handled by the entire Board of Directors.
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
We have adopted a code of business conduct and ethics that applies to all our directors, officers (including our chief executive officer, chief financial officer and any person performing similar functions) and employees. We have made our Code of Ethics available on our website at www.originoil.com.
Board Leadership Structure and Role in Risk Oversight
Although we have not adopted a formal policy on whether the Chairman and Chief Executive Officer positions should be separate or combined, we have traditionally determined that it is in our best interests and our shareholders to combine these roles. Mr. Eckelberry has served as our Chairman since our inception in 2007. Due to the small size and early stage of the Company, we believe it is currently most effective to have the Chairman and Chief Executive Officer positions combined. Our Board of Directors receives and reviews periodic reports from management, auditors, legal counsel, and others, as considered appropriate regarding our company’s assessment of risks.
Our Board of Directors focuses on the most significant risks facing us and our general risk management strategy, and also ensures that risks undertaken by us are consistent with the Board’s appetite for risk. While the Board oversees our risk management, management is responsible for day-to-day risk management processes. We believe this division of responsibilities is the most effective approach for addressing the risks facing us.
Summary Compensation Table
The following table sets forth the cash compensation (including cash bonuses) paid or accrued by us to our Chief Executive Officer for the years ended 2012 and 2011:
Name and Principal Position
|
Year
|
|
Salary
|
|
|
Bonus
|
|
|
Stock Awards
|
|
Option Awards
|
|
Non-Equity Incentive Plan Compensation
|
|
Non-qualified Deferred Compensation Earnings
|
|
All Other Compensation
|
|
Total
|
|
|
|
|
($)
|
|
|
($)
|
|
|
($)(1)
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
|
T. Riggs Eckelberry,
Chairman of the Board, Acting
|
2012
|
|
|
260,000 |
|
|
|
130,000 |
|
|
- |
|
- |
|
- |
|
- |
|
- |
|
|
390,000 |
|
CFO, President, Secretary & Treasurer and CEO
|
2011
|
|
|
263,667 |
|
|
|
104,000 |
|
|
- |
|
- |
|
- |
|
- |
|
- |
|
|
367,667 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paul Reep,
|
2012
|
|
|
45,000 |
|
|
|
15,000 |
|
|
|
102,000 |
|
- |
|
- |
|
- |
|
- |
|
|
162,000 |
|
Former Senior VP of
Technology (2)
|
2011
|
|
|
95,462 |
|
|
|
30,000 |
|
|
|
- |
|
- |
|
- |
|
- |
|
- |
|
|
125,462 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
___________
(1)
|
Reflects the aggregate grant date fair value of stock awards granted during the relevant fiscal year calculated in accordance with FASB ASC Topic 718. See Note 3 to our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2012.
|
(2)
|
On May 15, 2012, we accepted Paul Reep’s resignation and appointed him an advisor to the Company. He received 60,000 shares of compensation in compensation for past and future contributions.
|
Outstanding Equity Awards at Fiscal Year-End
There were no outstanding unexercised options, unvested stock and/or equity incentive plan awards issued to our named executive officers as of December 31, 2012.
Employment Agreements
We currently do not have an employment agreement with our Chief Executive Officer, Mr. Eckelberry, who is paid an annual salary of $260,000. Bonus payments, if any, are determined by the Board of Directors. For the year ended 2012, our Chief Executive Officer had been awarded bonuses payments of $130,000.
In recognition of Mr. Eckelberry’s contributions in 2012 as our Chief Executive Officer, the Board of Directors issued to Mr. Eckelberry a five-year option to purchase 759, 645 shares of our common stock exercisable at $0.43 per share.
Independent members of our Board of Directors, acting as a compensation committee, reviewed the compensation policies and practices relating to the compensation provided to our employees to determine whether such policies and practices are reasonably likely to have a material adverse effect on the Company. Based on such review, we determined that any risks associated with our compensation policies and practices were not reasonably likely to have a material adverse effect on us. In reaching that conclusion, the directors considered, among other factors, that salary and annual bonus programs, the two primary methods of compensation provided to our employees, were appropriately mitigated because salary levels and bonuses are generally discretionary in nature and considered on an annual basis. In addition, we considered the overall level of our pay practices, including our incentive compensation awards and practices, in making this determination.
Employee Benefit Plans
Beginning June 1, 2008, we implemented a company health plan for our employees.
Compensation of Directors
Except as set forth below, our current directors presently do not receive monetary compensation for their service on the Board of Directors. Directors may receive compensation for their services in the future and reimbursement for their expenses as shall be determined from time to time by resolution of the Board of Directors.
The following table reflects all compensation awarded to or earned by our directors for the fiscal year ended December 31, 2012.
Name
|
|
Fees Earned
|
|
Stock Awards
|
|
Options Awards
|
|
Non-Equity Incentive Plan Compensation
|
|
Nonqualified Deferred Compensation Earnings
|
|
All Other Compensation
|
|
Total
|
|
|
|
($) |
|
($)(1)
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
|
T. Riggs Eckelberry
|
|
- |
|
- |
|
- |
|
- |
|
- |
|
- |
|
- |
|
Ivan Ivankovich
|
|
- |
|
- |
|
- |
|
- |
|
- |
|
- |
|
- |
|
Steve Glovsky (2)
|
|
- |
|
|
87,500 |
|
- |
|
- |
|
- |
|
- |
|
|
87,500 |
|
Anthony Fidaleo (3)
|
|
- |
|
|
50,500 |
|
- |
|
- |
|
- |
|
- |
|
|
50,500 |
|
___________
(1)
|
Reflects the aggregate grant date fair value of stock awards granted during the relevant fiscal year calculated in accordance with FASB ASC Topic 718. See Note 3 to our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2012.
|
(2)
|
In connection with the appointment of Mr. Glovsky to the Board effective April 9, 2012, Mr. Glovsky was issued 50,000 shares of our common stock.
|
(3)
|
In connection with the appointment of Mr. Fidaleo to the Board effective June 8, 2012, Mr. Fidaleo was issued 50,000 shares of our common stock.
|
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
The following table sets forth certain information as of April 15, 2013 regarding the beneficial ownership of our common stock, by (i) each person or entity who, to our knowledge, owns more than 5% of our common stock; (ii) our executive officers; (iii) each director; and (iv) all of our executive officers and directors as a group. Unless otherwise indicated in the footnotes to the following table, each person named in the table has sole voting and investment power and that person’s address is c/o OriginOil, Inc., 5645 W Adams Blvd., Los Angeles, CA 90016. Shares of common stock subject to options, warrants, or other rights currently exercisable or exercisable within 60 days of April 15, 2013, are deemed to be beneficially owned and outstanding for computing the share ownership and percentage of the stockholder holding such options, warrants or other rights, but are not deemed outstanding for computing the percentage of any other stockholder.
Name and Title of Beneficial Owner
|
Number of Shares
Beneficially Owned
|
|
|
Percentage of Shares
|
T. Riggs Eckelberry,
Chief Executive Officer, Chairman, Secretary, Treasurer, President
and Acting Chief Financial Officer (1)
|
1,872,720
|
|
|
7.8
|
% |
|
|
|
|
|
|
Ivan Ivankovich, Director (2) |
108,335
|
|
|
* |
|
|
|
|
|
|
|
Steve Glovsky, Director
|
50,000
|
|
|
* |
|
|
|
|
|
|
|
Anthony Fidaleo, Director
|
50,000
|
|
|
* |
|
|
|
|
|
|
|
Eng Cheh Hong (3)
|
2,420,657
|
|
|
10.4 |
% |
|
|
|
|
|
|
Directors and executive officers as a group (4 persons) |
2,081,055
|
|
|
8.7 |
% |
_______
* Less than 1%
(1)
|
Includes 759,645 shares of common stock issuable upon exercise of stock options at a price of $0.43 per shares.
|
(2)
|
Includes a warrant to purchase 33,333 shares of our common stock at a price of $9.30 per share, and a warrant to purchase 66,667 shares of our common stock at a price of $6.00 per share.
|
(3)
|
Subject to certain exceptions, we are prohibited from effecting an exercise of the warrants beneficially owned by Mr. Hong to the extent that, as a result of the exercise, the holder of the warrants beneficially owns more than 4.99% in the aggregate of the outstanding shares of our common stock calculated immediately after giving effect to the issuance of shares of common stock upon such exercise, which may be increased upon 61 days’ prior written notice to 9.99%. The number of shares and the percentage, as the case may be, in this table is reflective of this ownership limitation and accordingly 9,123,077 shares of our common stock issuable upon exercise of warrants beneficially owned by Mr. Hong have been excluded. In the event, this ownership limitation were not in effect, Mr. Hong would beneficially own 35.6% of the outstanding shares of our common stock calculated immediately after giving effect to the issuance of shares of common stock upon exercise of the warrants.
|
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Except as set forth in Item 11 under “Executive Compensation”, there has not been, nor is there any proposed transaction where we were or will be a party in which the amount involved exceeded or will exceed $120,000 and in which any director, executive officer, holder of more than 5% of any class of our voting securities, or any member of the immediate family of any of the foregoing persons had or will have a direct or indirect material interest.
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, 2012 and 2011 were $74,012 and $81,946 respectively.
Tax Fees
There were no 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, 2012 and 2011.
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, 2012 and 2011.
SEC Ref. No.
|
|
|
|
3.1
|
|
Articles of Incorporation (1)
|
|
3.2
|
|
Certificate of Change (2)
|
|
3.3
|
|
By-laws (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
101
|
|
The following materials from OriginOil Inc.’s Annual Report on Form 10-K for the year ended December 31, 2012 are formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) Consolidated Statement of Shareholders' Equity/ (Deficit), (iv) the Consolidated Statements of Cash Flow, and (iv) Notes to Consolidated Financial Statements tagged as blocks of text. (4)
|
|
*Filed herewith
(1)
(2)
|
Incorporated by reference to the Company’s From SB-2 filed with the SEC on December 11, 2007.
Incorporated by reference to Company’s Current Report on Form 8-K filed with the SEC on July 20, 2011.
|
(3)
|
Certain confidential information contained in this exhibit was omitted by means of redacting a portion of the text and replacing it with [...]. This exhibit has been filed separately with the Commission without the redaction pursuant to a Confidential Treatment Request under Rule 24b-2 of the Securities Exchange Act of 1934.
|
(4)
|
In accordance with Item 601of Regulation S-K, this Exhibit is hereby furnished to the SEC as an accompanying document and is not deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities of that Section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933.
|
|
|
(5)
|
In accordance with Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 to this Annual Report on Form 10-K shall not be deemed to be “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be incorporated by reference into any registration statement or other document filed under the Securities Act of 1933, as amended, or the Exchange Act, except as shall be expressly set forth by specific reference in such filing.
|
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 April 16, 2013.
|
ORIGINOIL, INC.
|
|
|
|
|
|
|
By:
|
/s/ T Riggs Eckelberry |
|
|
|
T Riggs Eckelberry
|
|
|
|
Chief Executive Officer (Principal Executive Officer)
|
|
|
|
Acting Chief Financial Officer
|
|
|
|
(Principal Accounting and Financial Officer)
|
|
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: April 16, 2013
|
By:
|
/s/ T Riggs Eckelberry |
|
|
|
T Riggs Eckelberry
|
|
|
|
Chief Executive Officer, President, Acting Chief Financial Officer, Secretary, Treasurer and Chairman of the Board
|
|
Date: April 16, 2013
|
By:
|
/s/ Ivan Ivankovich |
|
|
|
Ivan Ivankovich
|
|
|
|
Director
|
|
Date: April 16, 2013
|
By:
|
/s/ Steve Glovsky |
|
|
|
Steve Glovsky
|
|
|
|
Director
|
|
Date: April 16, 2013
|
By:
|
/s/ Anthony Fidaleo |
|
|
|
Anthony Fidaleo
|
|
|
|
Director
|
|