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OOIL > SEC Filings for OOIL > Form 10-Q on 20-Nov-2012All Recent SEC Filings

Show all filings for ORIGINOIL INC

Form 10-Q for ORIGINOIL INC


20-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

This Form 10-Q contains forward-looking statements that are subject to a number of risks and uncertainties, many of which are beyond our control, which may include statements about our:

? business strategy;

? financial strategy;

? intellectual property;

? production;

? future operating results; and

? plans, objectives, expectations and intentions contained in this report that are not historical.

All statements, other than statements of historical fact included in this report, regarding our strategy, intellectual property, future operations, financial position, estimated revenues and losses, projected costs, prospects, plans and objectives of management are forward-looking statements. When used in this report, the words "could," "believe," "anticipate," "intend," "estimate," "expect," "project" and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain such identifying words. All forward-looking statements speak only as of the date of this report. You should not place undue reliance on these forward-looking statements. Although we believe that our plans, intentions and expectations reflected in or suggested by the forward-looking statements we make in this report are reasonable, we can give no assurance that these plans, intentions or expectations will be achieved. These statements may be found under "Management's Discussion and Analysis of Financial Condition and Results of Operations," as well as in this report generally. Actual events or results may differ materially from those discussed in forward-looking statements as a result of various factors. In light of these risks and uncertainties, there can be no assurance that the forward-looking statements contained in this filing will in fact occur.

Organizational History

OriginOil, Inc. ("we", "us", "our", the "Company" or "OriginOil") was incorporated on June 1, 2007 under the laws of the State of Nevada. We have only been engaged in our current and proposed business operations since June 2007, and to date, we have been primarily involved in research and development activities. Our principal offices are located at 5645 West Adams Blvd., Los Angeles, California 90016. Our telephone number is (323) 939-6645. Our website address is www.originoil.com. Our website and the information contained on our website are not incorporated into this quarterly report.

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.


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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.

Recent Developments

? On January 13, 2012, we announced that we plan to co-develop an integrated system with the U.S. Department of Energy's Idaho National Laboratory for direct conversion of raw algae into a renewable crude oil that can be used by existing petroleum refineries.

? On February 3, 2012, we announced that Algae producer Aquaviridis, Inc. has signed a commercial agreement with us to help develop the multi-phase algae production rollout at its Mexicali, Mexico site, a potential model for algae sites throughout the North American Free Trade Agreement (NAFTA) region, with a focus on desert areas of the American Southwest and Mexico.

? On February 7, 2012, we announced that we demonstrated our low-energy Algae Appliance™ to industry executives from a workshop hosted by the National Algae Association at the University of Southern California.

? On February 15, 2012, we announced that we have named Melbourne-based Frontline Engineering Australia as our first certified support partner worldwide.

? On February 24, 2012, we announced a new company study indicating for the first time that algae producers worldwide can now make transportation fuels cost-effectively themselves.

? On March 8, 2012, we announced that we received a firm order from Ennesys to supply a test scale version of our Algae Appliance™ harvester, and our Quantum Fracturing™ CO2 feeding technology for a test of urban algae production near Paris, France. The purchase order for the initial purchase totals $30,000 to be paid in full within ninety (90) days.


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? On March 23, 2012, we announced the introduction of the evaluation-sized Algae Appliance Model 4, a new entry-level, low-cost algae harvester that we believe will make it easier, faster and cheaper for producers and researchers to try and buy our proprietary harvesting technology. Driven by what we believe to be a major design breakthrough, the new price point of the Algae Appliance™ Model 4 is expected to greatly accelerate adoption of OriginOil's chemical-free, continuous-flow, very low-energy system.

? On April 18, 2012, we announced that our technology developed for algae harvesting has shown promise in reclaiming hydraulic fracturing flowback water.

? On April 25, 2012, we announced that in recent independent third-party testing our algae harvesting process was able to remove 98% of hydrocarbons from a sample of West Texas oil well 'frac flowback' water in the first stage alone.

? On May 3, 2012, we announced that we intend to collaborate with Algasol Renewables on the development of an integrated algae growth and harvesting system.

? On May 9, 2012, we announced that we signed a memorandum of understanding with California-based PACE to collaborate with oil field operators in Texas and elsewhere to improve petroleum recovery and water cleaning for re-use at well sites, using a process we originally developed for algae harvesting.

? On May 23, 2012, we announced that we filed, among other things, three patents with the United States Patent & Trademark Office including two patents describing our unique technology for processing solids in solution.

? On June 7, 2012, we announced that we are gearing up for the commercial roll out of our oil and gas wastewater clean-up systems and have selected Los Angeles-based Clean Water Technology to manufacture the company's systems.

? On June 8, 2012, our Board of Directors appointed Anthony Fidaleo as a director.

? On June 20, 2012, we announced that we have found that our platform technology which separates solids from liquids in a single pass, without the use of chemicals, has multiple market implications beyond the algae industry.

? On July 11, 2012, we announced that we have shipped the first production model of our Algae Appliance™ harvester to Paris-based Ennesys, our urban algae joint venture

? On July 19, 2012 we announced the formation of a dedicated business unit to aggressively market our continuous-flow, high efficiency and chemical-free technology for frack water cleanup and petroleum recovery.

? On July 25, 2012, we announced that we have received purchase orders for two test scale units from the United States Department of Energy's Idaho National Labs under our research agreement.

? On August 30, 2012, we announced that a Japanese research partner plans to employ our algae harvesting technology for an ambitious algae biofuels program to provide renewable fuels and help eliminate radioactive materials.

? On September 12, 2012, we announced that we intend to license our proprietary CLEAN-FRAC™ process under private label to firms offering oil and gas water treatment solutions, in a first deployment of the "Powered by OriginOil™" brand.

? On September 25, 2012, we filed a filed a 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 October 9, 2012, we announced that we received our first international patent for our algae harvesting technology from the Australian patent office.

? On October 17, 2012, we announced that we entered into an OEM Agreement with Pearl H20, LLC our first agreement to license our proprietary CLEAN-FRAC™ process with oil and gas water treatment.

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 September 30, 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 three months ended September 30, 2012, and no pronouncements were adopted during the period.


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Results of Operation

Results of Operations for the three and nine months ended September 30, 2012 compared to the three and nine months ended September 30, 2011.

Revenue and Cost of Sales

Revenue for the three months ended September 30, 2012 and 2011 was $30,726 and $0, respectively. Cost of sales for the three months ended September 30, 2012 and 2011 were $13,543 and $0, respectively. The increase in revenue and cost of sales for the current period was due to an increase in equipment sold and the related material supplies and consultant fees for equipment production.

Revenue for the nine months ended September 30, 2012 and 2011 was $583,889 and $142,500, respectively. Cost of sales for the nine months ended September 30, 2012 and 2011 were $420,906 and $0, 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 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

Selling and general administrative ("SG&A") expenses increased by $169,038 to $1,310,532 for the three months ended September 30, 2012, compared to $1,141,494 for the three months ended September 30, 2011. The increase in SG&A expenses was due primarily to a net increase in non-cash stock compensation in the amount of $129,068, and the net change of $237,802 for investor relations and public relations, of which $368,398 was a non-cash expense, plus an overall decrease in other SG&A expenses of $(197,832).

SG&A expenses increased by $1,280,525 to $3,910,316 for the nine months ended September 30, 2012, compared to $2,629,791 for the nine months ended September 30, 2011. The increase in SG&A expenses was due primarily to an increase of $322,604 in professional fees, $739,770 for investor and public relations of which $855,198 was a non-cash expense, $339,085 for non-cash stock compensation expense, and a decrease of $(120,934) in overall SG&Aexpenses.

Reseach and Development Cost

Research and development ("R&D") cost decreased by $(180,506) to $152,978 for the three months ended September 30, 2012, compared to $333,484 for the three months ended September 30, 2011. The decrease in R&D cost was due to a decrease in employee salaries, outside services, and consulting fees related to R&D associated activities.

R&D cost decreased by $(19,751) to $704,166 for the nine months ended September 30, 2012, compared to $723,917 for the nine months ended September 30, 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 $(449,573) to $(1,922,395) for the three months ended September 30, 2012, compared to $(1,472,822) for the three months ended September 30, 2011. The increase in net loss was primarily due to the net change in non-cash stock compensation cost of $129,068, investor relations and public relations of $368,398, a decrease in change in derivative valuation of $(446,919), plus an overall increase in operating expenses of $399,026.

Our net loss increased by $(3,765,181) to $(6,982,053) for the nine months ended September 30, 2012, compared to $(3,216,872) for the nine months ended September 30, 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 $2,333,063, an increase in non-cash stock and warrant compensation of $339,085, and investor relations of $739,770, plus the overall increase in the operating expenses of $353,263. 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.


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Liquidity and Capital Resources

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

At September 30, 2012 and December 31, 2011, we had cash of $98,612 and $197,868, respectively and working capital deficit of $(979,509) 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 $152,000 in an offering of unsecured convertible notes, a subscription payable, and securities exchange agreement. Since, July 1, 2012 through November 15, 2012 we raised $1,437,093 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, 2011 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.

Net cash used in operating activities was $(2,378,141) for the nine months ended September 30, 2012, compared to $(2,396,522) for the prior period September 30, 2011. The decrease of $(18,381) 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 $(109,089) for the nine months ended September 30, 2012, as compared to $(114,196) for the prior period September 30, 2011. The net decrease in cash used in investing activities was due to a decrease in expenditures for the purchase of investments and fixed assets, with an increase in patent expenditures and research equipment.

Net cash flows provided by financing activities was $2,388,474 for the nine months ended September 30, 2012, as compared to $3,584,175 for the prior period September 30, 2011. The decrease in cash provided by financing activities was due to an decrease in equity financing. To date we have principally financed our operations through the sale of our common stock and the issuance of debt.

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

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

Off-Balance Sheet Arrangements

We do not have any off balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition, revenues, and results of operations, liquidity or capital expenditures.

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