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OOIL > SEC Filings for OOIL > Form 10-Q on 14-Aug-2014All Recent SEC Filings

Show all filings for ORIGINOIL INC

Form 10-Q for ORIGINOIL INC


14-Aug-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.

? On May 21, 2014, we announced that Burgan One Commercia Establishment (BG-1) has signed a non-exclusive licensing agreement to design, manufacture and distribute water treatment products that incorporate OriginOil technology for the oil & gas and other waste treatment markets in the Middle East.


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? On May 29, 2014, our board of directors authorized the issuance of 1,000 shares of Series A Preferred Stock our Chief Executive Officer and Director, T. Riggs Eckelberry. The shares were subsequently issued following the filing of the Certificate of Designation for the Series A Preferred Stock on June 3, 2014. The shares have super-majority voting rights with respect to a shareholder vote increasing our authorized share capital.

? On June 4, 2014, we announced that CLEAN-FRACTM 1000, our new demonstration-scale frac water treatment system, was shown to successfully remove oil and contaminants at a showcase for media, public officials and prospective customers.

? On June 11, 2014, we announced that we recently demonstrated our ability to match laboratory performance in the field when we operated at a 1000 barrel per day capacity on contaminated water from a salt water disposal well in Western Colorado.

? On June 16, 2014, we and TriSep Corporation, announced that our EWS, combined with TriSep's iSep™ ultrafiltration (UF) membranes, effectively removes nearly all oil, turbidity, and bacteria, providing a full solution for drillers to efficiently recycle water flowing back from fracking and production.

? On June 24, 2014, we announced that E3 Services and Solutions, LLC (E3), an acquirer and integrator of industrial technologies in fuel, food and health sectors, has agreed to license EWS for integration in systems designed to reclaim water from hydraulic fracturing and industrial operations.

? On July 2, 2014, we demonstrated the very low energy cost of our Electro Water Separation™ (EWS) technology in treating frac flowback and produced water during large-scale testing at a salt water disposal well in Western Colorado.

? On July 5, 2014, our board of directors dismissed Weinberg & Company, PA as our independent registered public accounting firm and appointed Liggett Vogt & Webb, PA as our new independent registered public accounting firm.

On July 10, 2014, we announced that in company testing, EWS was found to ? efficiently generate chlorine dioxide (CLO2), an important pre-treatment step for frac flowback and produced water and other applications.

? On July 15, 2014, we announced that Pearl H20, an affiliate of PACE and our first licensee, installed a commercial scale 1200 bbl/day Pearl Blue™ treatment system last month for demonstration and began a performance testing phase for treating frac flowback and produced water from the Monterey shale formation.

? On August 7, 2014, we announced the publication of independent laboratory results verifying dramatic effectiveness in treating flowback water at a rate greater than 1,000 barrels per day from a disposal site in Western Colorado.

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, 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 June 30, 2014, the amounts reported for cash, prepaid expenses, accounts payable and accrued expenses approximate the fair value because of their short maturities.


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Recently Issued Accounting Pronouncements

Management reviewed accounting pronouncements issued during the three months ended June 30, 2014, and adopted certain pronouncements, which are disclosed in the notes to the financial statements.

Results of Operation

Results of Operations for the three months ended June 30, 2014 compared to the three months ended June 30, 2013.

Revenue and Cost of Sales

Revenue for the three months ended June 30, 2014 and 2013 was $0 and $100,000, respectively. Cost of sales for the three months ended June 30, 2014 and 2013 were $0 and $30,644, respectively.

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 $1,498,391 to $2,435,225 for the three months ended June 30, 2014, compared to $936,834 for the three months ended June 30, 2013. The increase in SG&A expenses was due primarily to an increase in marketing and advertising expense of $675,179 of which $501,545 of the increase was non-cash for shares issued for services, professional fees of $79,981, outside services of $770,194 for non-cash shares issued for services, offset by a decrease in salaries of $18,023, non-cash stock compensation expense of $2,338 and overall decrease in other SG&A expenses of $6,603.

Research and Development Cost

Research and development ("R&D") cost increased by $8,014 to $232,590 for the three months ended June 30, 2014, compared to $224,576 for the three months ended June 30, 2013. The increase in overall R&D costs was primarily due to an increase in material supplies and testing for EWS appliances and fracking research.

Other Income and (Expense)

Other income and (expense) increased by $278,493 to ($2,479,937) for the three months ended June 30, 2014, compared to ($2,201,444) for the three months ended June 30, 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 $343,250, amortization of debt discount in the amount of $300,607, and an increase in interest expense of $22,573, offset by a decrease in commitment fees of $387,937.

Net Loss

Our net loss increased by $1,854,962 to $5,151,867 for the three months ended June 30, 2014, compared to a net loss of $3,296,905 for the three months ended June 30, 2014. The majority of the increase in net loss was due to an increase in other income and expenses in the amount of $278,493 and SG&A expenses of $1,507,112, with a decrease in gross profit of $69,356. 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.

Results of Operations for the six months ended June 30, 2014 compared to the six months ended June 30, 2013.

Revenue and Cost of Sales

Revenue for the six months ended June 30, 2014 and 2013 was $159,410 and $100,000, respectively. Cost of sales for the six months ended June 30, 2014 and 2013 were $105,970 and $30,644, 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 $2,040,415 to $3,701,076 for the six months ended June 30, 2014, compared to $1,660,661 for the six months ended June 30, 2013. The increase in SG&A expenses was due primarily to an increase in marketing and advertising expense of $981,887 of which $728,520 of the increase was non-cash for shares issued for services, an increase in non-cash stock compensation expense of $120,498, professional fees of $137,015, outside services of $830,915 non-cash shares issued for services, with an overall decrease in other SG&A of $29,900.


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Research and Development Cost

Research and development ("R&D") cost increased by $42,086 to $479,437 for the six months ended June 30, 2014, compared to $437,351 for the six months ended June 30, 2013. The increase in overall R&D costs was primarily due to an increase in material supplies and testing for EWS appliances and fracking research.

Other Income and (Expense)

Other income and (expense) increased by $1,340,098 to ($5,249,067) for the six months ended June 30, 2014, compared to ($3,908,969) for the six months ended June 30, 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 $1,615,198, gain on investment of $6,353, amortization of debt discount of $469,388 and an increase in interest expense of $7,989, offset by a decrease in commitment fees of $746,124.

Net Loss

Our net loss increased by $3,439,731 to $9,384,111 for the six months ended June 30, 2014, compared to a net loss of $5,944,380 for the six months ended June 30, 2013. The majority of the increase in net loss was due to an increase in other income and expenses in the amount of $1,340,098 and SG&A expenses of $2,083,717, with a decrease in gross profit of $15,916. 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 we are unable to continue as a going concern. During the six months ended June 30, 2014, we did not generate significant revenue, incurred a net loss of $9,384,111 and cash used in operations of $2,429,457. As of June 30, 2014, we had a working capital deficiency of $7,162,007 and a shareholders' deficit of $7,032,810. These factors, among others raise substantial doubt about our 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 six months ended June 30, 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 June 30, 2014 and December 31, 2013, we had cash of $652,594 and $821,448, respectively and working capital deficit of $7,032,810 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 six months of 2014, we raised an aggregate of $1,515,000 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 $2,429,457 for the six months ended June 30, 2014, compared to $1,592,680 for the prior period ended June 30, 2013. The increase of $836,777 in cash used in operating activities was due to the net decrease in accounts receivable, prepaid expenses, other assets, accrued expenses, and deferred income, with an increase in work in process, accounts payable, and net loss due to an increase in non-cash accounts associated with the derivatives. Currently operating costs exceed revenue because sales are not yet significant.

Net cash flows used in investing activities was $4,397 for the six months ended June 30, 2014, as compared to $83,737 for the prior period ended June 30, 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.


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Net cash flows provided by financing activities was $2,265,000 for the six months ended June 30, 2014, as compared to $2,907,542 for the prior period ended June 30, 2013. The decrease in cash provided by financing activities was due to a decrease in equity financing offset by 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.

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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