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OOIL > SEC Filings for OOIL > Form 10-Q on 19-Nov-2013All Recent SEC Filings

Show all filings for ORIGINOIL INC

Form 10-Q for ORIGINOIL INC


19-Nov-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 a breakthrough water cleanup technology for the oil & gas, algae and other water-intensive industries.

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

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

Algae Harvesting

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

Oil and Gas Water Cleanup

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

Aquaculture Water Cleanup

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


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Organic Waste Remediation (still in prototype phase)

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

Business Model for All Applications

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

Our long-term business model is based on licensing this technology to distributors, manufacturers, engineering service firms, and specialty operators, as well as fuel refiners, chemical and oil companies. We are not in the business of producing and marketing oil or fuel as an end product, nor of engaging in volume manufacturing.

We have only been engaged in our current and proposed business operations since June 2007. While continuing to engage in research and development, we recently moved into the commercialization phase of our business plan.

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.

· On June 25, 2013, we announced that New Global Energy will implement our water sanitizing and algae production technology as part of its strategy to acquire and restart shuttered fish farms in the Coachella Valley region of Southern California.

· On July 2, 2013, we announced that AlgEternal Technologies LLC will incorporate our technology to harvest algae as a key component of their proprietary algal production system.

· On July 10, 2013, we announced that we will establish a permanent technology showcase at Aqua Farming Technology in California's Coachella Valley.

· On July 11, 2013, we announced that we expanded our algae and aquaculture designs to achieve commercial scale.

· On July 18, 2013, we announced that our technology can successfully treat liquid sewage directly at the point of origin, in commercial buildings.


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· On July 24, 2013, we announced that we have initiated two consulting agreements with top water treatment engineering firms to validate the efficacy of its technology in the oil and gas and aquaculture markets.

· On July 31, 2013, we announced that we received our second international patent for our algae harvesting technology. The patent was issued by the Japan Patent Office.

· On August 6, 2013, we announced that we launched our Throughput Program for EWS Petro.

· On August 14, 2013, we announced the launch of our mid-sized algae harvester, designed, with producer input, for distributed algae production.

· On August 21, 2013, we announced today that AmericaCNG has selected EWS for the treatment of frac flowback and produced water.

· On August 29, 2013, we announced that after successful implementation and testing at its Weimar, Texas site, algae technology company AlgEternal will integrate EWS into its commercial algae production platform for paying customers in the US and overseas as early as the fourth quarter.

· On September 25, 2013, we announced that Algae Enviro Engineering, a Singapore-based photobioreactor systems provider and algae food producer, has adopted EWS technology for its algae production plant in Jurong, Singapore.

· On September 30, 2013, we announced that licensee PearlH2O has scheduled the installation of a commercial-scale three-quarter barrel per minute Frac-Back™ system in California's Monterey Formation during the fourth quarter of 2013.

· On October 8, 2013, we announced today that we have signed our first pay-per-barrel agreement with Industrial Systems, Inc., for a water treatment system integrating OriginOil's process as the first stage of treatment.

· On October 22, 2013, we announced that we have agreed to transfer three of our early patent applications to our French joint venture, Ennesys.

· On October 29, 2013, we announced that we have tripled the capacity of our entry-level algae harvester from four to twelve liters per minute at no additional cost, with improved energy efficiency.

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, 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 September 30, 2013, and the following pronouncements were adopted during the period.

In January 2013, the Financial Accounting Standards Board ("FASB") issued ASU 2013-01, Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities. This ASU clarifies which instruments and transactions are subject to the offsetting disclosure requirements established by ASU 2011-11. This guidance is effective for annual and interim reporting periods beginning January 1, 2013. We do not believe the adoption of this update will have a material effect on our financial position and results of operations.


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On March 4, 2013, the FASB issued ASU 2013-05, "Foreign Currency Matters (Topic 830): Parent's Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity" ("ASU 2013-05"). ASU 2013-05 updates accounting guidance related to the application of consolidation guidance and foreign currency matters. This guidance resolves the diversity in practice about what guidance applies to the release of the cumulative translation adjustment into net income. This guidance is effective for interim and annual periods beginning after December 15, 2013. We do not believe the adoption of this update will have a material effect on our financial position and results of operations.

In July 2013, the FASB issued ASU No. 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Loss, or a Tax Credit Carryforward Exists. Topic 740, Income Taxes, does not include explicit guidance on the financial statement presented of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. There is diversity in practice in the presentation of unrecognized tax benefits in those instances and the amendments in this update are intended to eliminate that diversity in practice. The amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The amendments should be applied prospectively to all unrecognized tax benefits that exist at the effective date. Early adoption is permitted. We do not believe the adoption of this update will have a material effect on our financial position and results of operations.

Other accounting pronouncements did not or are not believed by management to have a material impact on the Company's present or future consolidated financial statements.

Results of Operation

Results of Operations for the three months ended September 30, 2013 compared to the three months ended September 30, 2012.

Revenue and Cost of Sales

Revenue for the three months ended September 30, 2013 and 2012 was $40,500 and $30,726, respectively. Cost of sales for the three months ended September 30, 2013 and 2012, was $19,866 and $13,543, respectively. To date we have had minimal revenues due to our focus on product development and testing. In addition, our equipment sales are primarily for trial purposes, intended for licensing or private labeling type transactions, which we believe have the potential to yield stronger long term revenue.

Operating Expenses

Selling and General Administrative Expenses

Selling and general administrative ("SG&A") expenses increased by $378,728 to $1,689,260 for the three months ended September 30, 2013, compared to $1,310,532 for the three months ended September 30, 2012. The majority of the increase in SG&A expenses was due primarily to an increase in outside services of $353,939, investor and public relations of $152,010, and other G&A expenses of $50,449. The increase was partly offset by an overall decrease in non-cash stock compensation expense of $177,670.

Research and Development Cost

Research and development ("R&D") costs increased by $165,266 to $318,244 for the three months ended September 30, 2013, compared to $152,978 for the three months ended September 30, 2012. The increase in overall R&D costs was primarily due to an increase in building and testing new aquaculture and algae designs and outside services for aquaculture, algae appliances and fracking research.

Other Income and Expenses

Other income and (expenses) decreased by $469,188 to (3,479) for the three months ended September 30, 2013, compared to (472,667) for the three months ended September 30, 2012. The overall decrease was the result of a foreign exchange loss in the amount of $611, interest expense of 254,600, which includes amortization of debt discount and beneficial conversion feature recorded as interest expense. The decrease was partly offset by an increase in gain on extinguishment of derivative liability in the amount of $2,446,467, commitment fees in the amount of $213,229, and net loss on change in fair value of derivative instruments and warrant discount of $1,373,863 and $645,398 respectively. The overall increase in these accounts are the result of debt financing with the issuance of convertible promissory notes.

Net Loss

Our net loss increased by $72,462 to $1,994,857 for the three months ended September 30, 2013, compared to a net loss of $1,922,395 for the three months ended September 30, 2012. The majority of the increase in net loss was due primarily to the increase in operating expenses of $543,994, gross profit of $3,451, depreciation of $1,107, with a decrease in other income and expenses of $469,188. Currently, operating costs exceed revenue because sales are not yet sufficient to cover costs. We cannot assure of when or if revenue will exceed operating costs.


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Results of Operations for the nine months ended September 30, 2013 compared to the nine months ended September 30, 2012.

Revenue and Cost of Sales

Revenue for the nine months ended September 30, 2013 and 2012 was $140,500 and $583,889, respectively. Cost of sales for the nine months ended September 30, 2013 and 2012, was $50,510 and $420,906, respectively. To date we have had minimal revenues due to our focus on product development and testing. In addition, our equipment sales are primarily for trial purposes, intended for licensing or private labeling type transactions, which we believe have the potential to yield stronger long term revenue.

Operating Expenses

Selling and General Administrative Expenses

Selling and general administrative ("SG&A") expenses decreased by $674,146 to $3,349,921 for the nine months ended September 30, 2013, compared to $4,024,067 for the nine months ended September 30, 2012. The majority of the decrease in SG&A expenses was due primarily to the decrease in non-cash stock compensation expense of $655,327, professional fees of $480,443, marketing and investor relations of $87,869, insurance of $31,371, and other G&A expenses of $319. The decrease was partly offset by an increase in outside services of $446,916, payroll expenses of $98,143, shipping of $18,270, and rent of $17,855.

Research and Development Cost

Research and development ("R&D") costs increased by $165,179 to $755,595 for the nine months ended September 30, 2013, compared to $590,416 for the nine months ended September 30, 2012. The increase in overall R&D costs was primarily due to an increase in building and testing new aquaculture and algae designs and outside services for aquaculture, algae appliances and fracking research.

Other Income and Expenses

Other income and (expenses) increased by $1,392,097 to ($3,912,448) for the nine months ended September 30, 2013, compared to ($2,520,351) for the nine months ended September 30, 2012. The increase was the result of an increase in net loss on change in fair value of derivative instruments of $3,529,065, increase in fair value of warrant discount of $645,398, commitment fees in the amount of $997,893, and gain on extinguishment of derivative liability in the amount of $3,149,680, with an offset by decreases in interest expense of $627,739, which includes amortization of debt discount and beneficial conversion feature recorded as interest expense, loss on foreign exchange in the amount of $2,838.. The overall increase is the result of debt financing with the issuance of convertible promissory notes.

Net Loss

Our net loss increased by $957,183 to $7,939,237 for the nine months ended September 30, 2013, compared to a net loss of $6,982,054 for the nine months ended September 30, 2012. The majority of the increase in net loss was due primarily to the increase in other income and expenses in the amount of $1,392,097 and depreciation of $1,060, with a decrease in gross profit of 72,993 operating expenses of $508,967. 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.

The condensed financial statements have been prepared on a going concern basis of accounting, which contemplates continuity of operations, realization of assets and liabilities and commitments in the normal course of business. The accompanying condensed financial statements do not reflect any adjustments that might result if the Company is unable to continue as a going concern. During the nine months ended September 30, 2013, the Company did not generate significant revenue, incurred a net loss of $7,939,237 and cash used in operations of $2,989,484. As of September 30, 2013, the Company had a working capital deficiency of $2,709,557 and a shareholders' deficit of $2,149,051. These factors, among others raise substantial doubt about the Company's ability to continue as a going concern. Our independent auditors, in their report on our audited financial statements for the year ended December 31, 2012 expressed substantial doubt about our ability to continue as a going concern. The ability of the Company to continue as a going concern and appropriateness of using the going concern basis is dependent upon, among other things, additional cash infusion. The Company has obtained funds from its shareholders in the nine months ended September 30, 2013, and has standing purchase orders and open invoices with customers. Management believes this funding will continue from its' current investors and has also obtained funding from new investors. Management believes the existing shareholders, the prospective new investors and future sales will provide the additional cash needed to meet the Company's obligations as they become due, and will allow the development of its core business operations.


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At September 30, 2013 and December 31, 2012, we had cash of $1,298,576 and $507,355, respectively and working capital deficit of $2,558,084 and $936,099 respectively. The increase in working capital deficit was primarily due to the increase in derivative liability and debt financing.

During the first three quarters of 2013, we raised an aggregate of $1,580,000 in an offering of unsecured convertible notes and $2,387,271 in an offering of shares of our common stock and warrants. During the subsequent period, we raised an aggregate of $255,000 for unsecured convertible notes and $38,481 upon the exercise of warrants to purchase shares of our common stock. 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 $2,989,484 for the nine months ended September 30, 2013, compared to $2,378,141 for the prior period September 30, 2012. The increase of $611,343 in cash used in operating activities was primarily due to the net decrease in prepaid expenses, work in process, other receivables, with an increase in 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 nine months ended September 30, 2013 and 2012 were $176,566 and $109,089 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 $3,957,271 for the nine months ended September 30, 2013, as compared to $2,388,474 for the prior period September 30, 2012. The increase in cash provided by financing activities was due to an increase in debt and equity financing. To date we have principally financed our operations through the sale of our common stock and the issuance of debt.

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

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

Off-Balance Sheet Arrangements

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

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