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OOIL > SEC Filings for OOIL > Form 10-Q on 20-May-2013All Recent SEC Filings

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Form 10-Q for ORIGINOIL INC


20-May-2013

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 processed 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 and 'frac flowback' water. Testing using fluid imaging has reported a 99.9% reduction in free oil and a 99.5% reduction in suspended solids.

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 sales and licensing agreements.

Recent Developments

? On February 5, 2013, we announced that we partnered with an aquaculture producer to study the impact of their technology in transforming a $100 billion global market.

? On February 13, 2013 we announced that we strengthened our focus on frack water cleanup and launched a licensing group to accelerate commercialization in secondary markets.

? On February 28, 2013 we announced that our CLEAN-FRAC™ water treatment system yields successful first field results.

? On March 13, 2013 we announced that we teamed up with another California startup to challenge Halliburton's costs for cleaning produced water and frack water.

? On April 2, 2013 we announced that we accelerated commercialization of our CLEAN-FRAC system with the first commercial unit planned for 3rd quarter.

? On April 26, 2013 we announced that we enhanced third party testing showing 99% oil and solids removal, further validating our CLEAN-FRAC process.

? On May 9, 2013 we announced that Garden State bioEnterprises adopted our technology for high-value astaxanthin harvesting.

? On May 15, 2013 we announced that we named a manufacturer for our new performance-based frack water cleanup program.

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 March 31, 2013, the amounts reported for cash, prepaid expenses, accounts payable and accrued expenses approximate the fair value because of their short maturities.

Recently Issued Accounting Pronouncements

Management reviewed accounting pronouncements issued during the three months ended March 31, 2013, and no pronouncements were adopted during the period.


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Results of Operation

Results of Operations for the three months ended March 31, 2013 compared to the three months ended March 31, 2012.

Revenue and Cost of Sales

Revenue for the three months ended March 31, 2013 and 2012 was $0 and $538,163, respectively. Cost of sales for the three months ended March 31, 2013 and 2012 were $0 and $386,091, respectively. We had two equipment sales pending as of March 31, 2013 totaling $100,000 which are expected to be recognized in the second quarter of 2013.

To date we have had minimal revenues due to our focus on product development and testing. In addition, our equipment sales are primarily for trial purposes, intended for licensing or private labeling type transactions, which we believe have the potential to yield stronger long term revenue.

Operating Expenses

Selling and General Administrative Expenses

Selling and general administrative ("SG&A") expenses decreased by $(383,389) to $723,828 for the three months ended March 31, 2013, compared to $1,107,217 for the three months ended March 31, 2012. The majority of the decrease in SG&A expenses was due primarily to a decrease in marketing and legal expenses.

Research and Development Cost

Research and development ("R&D") cost decreased by $(37,940) to $212,775 for the three months ended March 31, 2013, compared to $250,715 for the three months ended March 31, 2012. 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 $(859,084) to $(2,647,476) for the three months ended March 31, 2013, compared to $(1,788,392) for the three months ended March 31, 2012. The majority of the increase in net loss was due primarily to the increase in other expenses of $1,139,227, which consisted of accounting for the increase in net loss on change in derivative valuation in the amount of $(625,603), an increase in convertible note commitment fees of $(358,187), an increase in loss on settlement of debt in the amount of $(79,520), an increase in amortization of debt discount and original issue discount of $(82,873), a decrease in loss on foreign exchange of $1,182, offset by a decrease in gross profit of $(152,072) and general administrative and research and development expenses of $394,275 and $37,940 respectively. Currently operating costs exceed revenue because sales are not yet sufficient to cover costs. We cannot assure of when or if revenue will exceed operating costs.

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 March 31, 2013 and December 31, 2012, we had cash of $257,923 and $507,355, respectively and working capital deficit of $(2,917,488) and $(936,099), respectively. The increase in working capital deficit was primarily due to the increase in accounts payable, accrued expenses, deferred income, convertible promissory notes and derivative liability.

During the first quarter of 2013, we raised an aggregate of $335,000 in an offering of unsecured convertible notes and $207,533 in an offering of shares of our common stock and warrants. Since April 1, 2013 through May 17, 2013, we raised an aggregate of $125,000 in an offering of unsecured convertible notes and $730,000 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 revenue.

Net cash used in operating activities was $(739,910) for the three months ended March 31, 2013, compared to $(878,464) for the prior period March 31, 2012. The decrease of $(138,554) in cash used in operating activities was primarily due to the net increase in prepaid expenses, work in progress, accounts payable, accrued expenses and net loss. The net loss includes non-cash expenses of depreciation, stock issued for services, loss on change in valuation of derivative liability, debt discount and original issue discount, commitment fees and stock compensation expense. Currently, operating costs exceed revenue because sales are not yet significant.

Net cash flows used in investing activities for the three months ended March 31, 2013 and 2012 were $(52,055) and $0, respectively. 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 $542,533 for the three months ended March 31, 2013, as compared to $910,329 for the prior period March 31, 2012. The decrease in cash provided by financing activities was due to a decrease in debt financing. To date we have principally financed our operations through the sale of our common stock and the issuance of debt.


Table of Contents

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

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

Off-Balance Sheet Arrangements

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

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