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OOIL > SEC Filings for OOIL > Form 10-Q on 15-May-2014All Recent SEC Filings

Show all filings for ORIGINOIL INC

Form 10-Q for ORIGINOIL INC


15-May-2014

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

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

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

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

Algae Harvesting

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

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.


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Aquaculture Water Cleanup

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

Organic Waste Remediation (still in prototype phase)

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

Business Model for All Applications

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

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

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

Recent Developments

On January 8, 2014, we announced that we have agreed to supply our water ? management solutions to a new East Asian hydroponics venture backed by Orix Corp., Japan's largest financial services and leasing company.

? On January 21, 2014, we announced that Ennesys recently closed a funding round of 300,000 euros through Wicap Ennesys, a special vehicle created by French crowdfunding site Wiseed, multiplying our seed investment in the joint venture by thirty times.

On January 28, 2014, we announced that we will collaborate with Israel's ? AquaGreen Fish Farms, Ltd to further streamline zero-discharge aquaculture systems for the production of chemical free seafood.

? On February 11, 2014, we announced plans to open a satellite office in the Houston, Texas "Energy Corridor" to be headed by veteran Dow Chemical manager Bill Charneski who has been named general manager of our Petro unit and will divide his time between the Los Angeles headquarters and the new office.

On March 5, 2014, we announced that the National Algae Association (NAA) has ? selected our entry-level algae harvester for its model demonstration site, which features best-of-breed algae production systems in permanent operation.

On April 15, 2014, we announced that we recently agreed to a collaborative ? exchange of equipment and information with the Catalina Sea Ranch, the first offshore shellfish ranch in U.S. Federal waters.

? On April 22, 2014, we announced a series of showcases to demonstrate the successful removal of frac flowback and produced water pollutants with the P1000 demonstration-scale unit. The roadshow will begin in May on Colorado's Western Slope and continue on to Texas and California.

On April 30, 2014, we announced that weekly demonstrations of our algae ? harvesting process at Houston's National Algae Association (NAA) are popular draws for new algae producers now investing in commercial-scale algae production systems.

On May 7, 2014, we announced that we intend to pursue growth through ? acquisition of one or more service companies with proven ability to treat frac flowback and produced water in the oil and gas industry.

? On May 14, 2014, we announced plans to launch a product line that can treat frack water from end to end. This product, CLEAN-FRAC™, is based on our P1000 platform, which is designed to process 1000 barrels per day of frac flowback and produced water.

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.


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Revenue Recognition

We recognize revenue when services are performed, and at the time of shipment of products, provided that evidence of an arrangement exists, title and risk of loss have passed to the customer, fees are fixed or determinable, and collection of the related receivable is reasonably assured.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the accompanying financial statements. Significant estimates made in preparing these financial statements include the estimate of useful lives of property and equipment, the deferred tax valuation allowance, and the fair value of stock options, warrants, convertible notes and common stock for services. Actual results could differ from those estimates.

Fair Value of Financial Instruments

Fair value of financial instruments requires disclosure of the fair value information, whether or not recognized in the balance sheet, where it is practicable to estimate that value. As of March 31, 2014, 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, 2014, and no pronouncements believed by management to have a material impact on the Company's present or future financial statements.

Results of Operation

Results of Operations for the three months ended March 31, 2014 compared to the three months ended March 31, 2013.

Revenue and Cost of Sales

Revenue for the three months ended March 31, 2014 and 2013 was $159,410 and $0, respectively. Cost of sales for the three months ended March 31, 2014 and 2013 were $105,970 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 contractor 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 $542,023 to $1,265,851 for the three months ended March 31, 2014, compared to $723,828 for the three months ended March 31, 2013. The increase in SG&A expenses was due primarily to an increase in investor relations and marketing of $377,347 of which $216,920 of the increase was non-cash for shares issued for services, an increase in non-cash stock compensation expense of $29,253, professional fees of $57,033, outside services of $63,306, with an overall increase in SG&A of $15,084.

Research and Development Cost

Research and development ("R&D") cost increased by $34,072 to $246,847 for the three months ended March 31, 2014, compared to $212,775 for the three months ended March 31, 2013. The increase in overall R&D costs was primarily due to an increase in material supplies and testing for algae appliances and fracking research.

Other Income and (Expense)

Other income and (expense) increased by $1,061,605 to ($2,769,130) for the three months ended March 31, 2014, compared to ($1,707,525) for the three months ended March 31, 2013. The increase was the result of an increase in non-cash accounts associated with the fair value of the derivatives in the amount of $1,271,948 and an increase in interest expense of $154,197, offset by a decrease in commitment fees of $358,187 and a gain on investment of $6,353.


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Net Loss

Our net loss increased by $1,584,768 to $4,232,244 for the three months ended March 31, 2014, compared to a net loss of $2,647,476 for the three months ended March 31, 2014. The majority of the increase in net loss was due to an increase in other income and expenses in the amount of $1,061,605 and SG&A expenses of $542,023. 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 three months ended March 31, 2014, we did not generate significant revenue, incurred a net loss of $4,232,244 and cash used in operations of $1,159,896. As of March 31, 2014, we had a working capital deficiency of $4,152,689 and a shareholders' deficit of $4,069,807. These factors, among others raise substantial doubt about the Company's ability to continue as a going concern. Our independent auditors, in their report on our audited financial statements for the year ended December 31, 2013 expressed substantial doubt about our ability to continue as a going concern. The ability of us to continue as a going concern and appropriateness of using the going concern basis is dependent upon, among other things, additional cash infusion. We have obtained funds from our shareholders in the three months ended March 31, 2014, and have standing purchase orders and open invoices with customers. Management believes this funding will continue from our current investors and has also obtained funding from new investors. Management believes the existing shareholders, the prospective new investors and future revenue will provide the additional cash needed to meet our obligations as they become due, and will allow the development of our core business operations.

At March 31, 2014 and December 31, 2013, we had cash of $994,682 and $821,448, respectively and working capital deficit of $4,152,689 and $1,535,766, respectively. The increase in working capital deficit was due primarily to an increase in non-cash derivative liabilities, accounts receivable, work-in-process, and accounts payable, with a decrease in prepaid expenses, other assets, accrued expenses and deferred income.

During the first quarter of 2014, we raised an aggregate of $885,000 in an offering of unsecured convertible notes. Our ability to continue as a going concern is dependent upon raising capital from financing transactions and future revenue.

Net cash used in operating activities was $1,159,896 for the three months ended March 31, 2014, compared to $739,910 for the prior period ended March 31, 2013. The increase of $419,986 in cash used in operating activities was due to the net decrease in prepaid expenses, work in process, accounts payable and deferred income, with an 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 $1,870 for the three months ended March 31, 2014, as compared to $52,055 for the prior period ended March 31, 2013. The net decrease in cash used in investing activities was due to a decrease in patent expenditures and research equipment, with an increase in the purchase of fixed assets, and the partial sale of an investment compared to the prior period.

Net cash flows provided by financing activities was $1,335,000 for the three months ended March 31, 2014, as compared to $542,533 for the prior period ended March 31, 2013. The increase in cash provided by financing activities was due to an increase in debt financing with the issuance of convertible notes. 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 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.


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We have estimated our current average burn, and believe that we have assets to ensure that we can function without liquidation over the next 9 months, due to our cash on hand, 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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