ORIGINCLEAR, INC. - FORM 10-Q - November 14, 2011

Attached files

file	filename
EXCEL - IDEA: XBRL DOCUMENT - ORIGINCLEAR, INC.	Financial_Report.xls
EX-31.1 - EXHIBIT 31.1 - ORIGINCLEAR, INC.	ex311.htm
EX-32.1 - EXHIBIT 32.1 - ORIGINCLEAR, INC.	ex321.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED: September 30, 2011

TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to __________

Commission File Number: ________________

ORIGINOIL, INC.

(Exact name of registrant as specified in its charter)

Nevada		26-0287664
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

5645 West Adams Blvd

Los Angeles, CA 90016

(Address of principal executive offices, Zip Code)

(323) 939-6645

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o	Accelerated filer o
Non-accelerated filer o	Smaller reporting company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No x

The number of shares of registrant’s common stock outstanding, as of November 11, 2011 was 7,592,162.

TABLE OF CONTENTS

		Page
PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.		3
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.		12
Item 3. Quantitative and Qualitative Disclosures About Market Risk.		16
Item 4. Controls and Procedures.		16

PART II - OTHER INFORMATION

Item 1. Legal Proceedings.		17
Item 1A. Risk Factors.		17
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.		17
Item 3. Defaults Upon Senior Securities.		17
Item 4. (Removed and Reserved).		17
Item 5. Other Information.		17
Item 6. Exhibits.		18

SIGNATURES		19

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

ORIGINOIL, INC.

BALANCE SHEETS

	September 30, 2011			December 31, 2010
	(Unaudited)
ASSETS

CURRENT ASSETS
Cash and cash equivalents	$	1,311,881		$	238,424
Accounts receivable		37,500			-
Work in progress		136,473			-
Prepaid expenses		230,857			86,996
Other receivables		5,883			14,018

TOTAL CURRENT ASSETS		1,722,594			339,438

PROPERTY & EQUIPMENT
Machinery and equipment		27,783			1,372
Furniture and fixtures		27,056			27,056
Computer equipment		26,304			26,304
Leasehold improvements		94,914			94,914
		176,057			149,646
Less accumulated depreciation		(123,029	)		(114,927	)

NET PROPERTY & EQUIPMENT		53,028			34,719

OTHER ASSETS
Equity Investment		20,000			-
Patent		152,618			84,833
Trademark		4,467			4,467
Security deposit		9,650			9,650

TOTAL OTHER ASSETS		186,735			98,950

TOTAL ASSETS	$	1,962,357		$	473,107


LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES
Accounts payable	$	127,972		$	56,288
Accrued expenses		78,066			46,942
Deferred income		350,663			-
Derivative liability		476,599			-
Convertible debenture, net of discount		208,947			-
Other payables		-			8,461

TOTAL LIABILITIES		1,242,247			111,691

SHAREHOLDERS' EQUITY
Preferred stock, $0.0001 par value;
1,666,667 authorized preferred shares		-			-
Common stock, $0.0001 par value;
16,666,667 authorized common shares
7,537,160 and 6,153,656 shares issued and outstanding		753			615
Additional paid in capital		15,284,269			11,524,341
Common stock subscription payable		-			184,500
Deficit accumulated during the development stage		(14,564,912	)		(11,348,040	)

TOTAL SHAREHOLDERS' EQUITY		720,110			361,416

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$	1,962,357		$	473,107

The accompanying notes are an integral part of these financial statements

ORIGINOIL, INC.

STATEMENTS OF OPERATIONS

(Unaudited)

	Three Months Ended						Nine Months Ended
	September 30, 2011			September 30, 2010			September 30, 2011			September 30, 2010

Sales	$	-		$	-		$	142,500		$	-

Cost of Goods Sold		-			-			-			-

Gross Profit		-			-			142,500			-

Operating Expenses
Selling, general and administrative expenses		1,141,494			1,139,328			2,629,791			2,255,909
Research and development cost		333,484			192,179			723,917			538,527

Total Operating Expenses		1,474,978			1,331,507			3,353,708			2,794,436

Loss before Depreciation and Amortization		(1,474,978	)		(1,331,507	)		(3,211,208	)		(2,794,436	)

Depreciation and amortization		3,202			15,251			8,102			42,235

Loss from Operatings before Other Income/(Expense)		(1,478,180	)		(1,346,758	)		(3,219,310	)		(2,836,671	)

Other Income/(Expense)
Interest income		-			-			1			6
Dividend income		-			1			-			32
Gain/(Loss) on derivative		462,643			-			462,643			-
Amortization of debt discount		(444,247	)		-			(444,247	)		-
Penalties		-			-			(2,384	)		-
Interest expense		(13,038	)		-			(13,575	)		-

Total Other Income/(Expenses)		5,358			1			2,438			38

Loss before Provision for Taxes		(1,472,822	)		(1,346,757	)		(3,216,872	)		(2,836,633	)

Income taxes		-			-			-			-

Net Loss	$	(1,472,822	)	$	(1,346,757	)	$	(3,216,872	)	$	(2,836,633	)

Basic and Diluted Loss per Share	$	(0.22	)	$	(0.24	)	$	(0.49	)	$	(0.52	)

Weighted-Average Common Shares Outstanding
Basic and Diluted		6,794,747			5,629,903			6,583,507			5,450,185

The accompanying notes are an integral part of these financial statements

ORIGINOIL, INC.

STATEMENT OF SHAREHOLDERS' EQUITY

											Deficit
											Accumulated
					Additional			Common			during the
	Common stock				Paid-in			Stock			Development
	Shares		Amount		Capital			Payable			Stage			Total

Balance at December 31, 2010		6,153,656	$	615	$	11,524,341		$	184,500		$	(11,348,040	)	$	361,416

Share adjustment due to reverse split (unaudited)		126		-		-			-			-			-

Common stock issued for cash and subscription payable
(price per share $2,40) (unaudited)		1,187,382		119		2,849,556			(184,500	)		-			2,665,175

Warrants issued at fair value for marketing services (unaudited)		-		-		12,440			-			-			12,440

Common stock issued for services at fair value (unaudited)		33,333		3		151,247			-			-			151,250

Cashless exercise of warrants (unaudited)		62,718		6		(6	)		-			-			-

Conversion of convertible debentures into common stock
(price per share $2.40) (unaudited)		98,043		10		296,048			-			-			296,058

Common stock issued for interest on convertible debentures
(price per share $2.40) (unaudited)		1,902		-		4,564			-			-			4,564

Options and warrant compensation expense (unaudited)		-		-		539,519			-			-			539,519

Stock issuance cost (unaudited)		-		-		(93,440	)		-			-			(93,440	)

Net loss for the nine months ended September 30, 2011 (unaudited)		-		-		-			-			(3,216,872	)		(3,216,872	)

Balance at September 30, 2011 (unaudited)		7,537,160	$	753	$	15,284,269		$	-		$	(14,564,912	)	$	720,110

The accompanying notes are an integral part of these financial statements

ORIGINOIL, INC.

STATEMENTS OF CASH FLOWS

(Unaudited)

	Nine Months Ended
	September 30, 2011			September 30, 2010
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(3,216,872	)	$	(2,836,633	)
Adjustment to reconcile net loss to net cash
used in operating activities
Depreciation & amortization		8,102			42,235
Common stock issued for services		151,250			210,511
Stock compensation expense		539,519			442,942
Common stock issued for interest expense		4,564			-
Gain on change in valuation of derivative liability		(462,643	)		-
Amortization of debenture discount		444,247			-
Changes in Assets and Liabilities
(Increase) Decrease in:
Accounts receivable		(37,500	)		-
Prepaid expenses		(148,418	)		(16,900	)
Other receivables		8,135			(2,100	)
Work in progress		(136,473	)		(54,005	)
Increase (Decrease) in:
Accounts payable		76,241			17,083
Accrued expenses		31,124			36,145
Deferred income		350,663			13,500
Other payable		(8,461	)		19

NET CASH USED IN OPERATING ACTIVITIES		(2,396,522	)		(2,147,203	)


CASH FLOWS USED FROM INVESTING ACTIVITIES:
Purchase of investment		(20,000	)		-
Patent and trademark expenditures		(67,785	)		(14,197	)
Purchase of fixed assets		(26,411	)		(4,036	)

NET CASH USED IN INVESTING ACTIVITIES		(114,196	)		(18,233	)


CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from convertible debenture		1,000,000			-
Proceeds from common stock subscription payable		-			902,486
Proceeds for issuance of common stock		2,665,175			1,034,122
Stock issuance cost		(81,000	)

NET CASH PROVIDED BY FINANCING ACTIVITIES		3,584,175			1,936,608

NET INCREASE/(DECREASE) IN CASH		1,073,457			(228,828	)

CASH & CASH EQUIVALENTS, BEGINNING OF PERIOD		238,424			356,179

CASH & CASH EQUIVALENTS, END OF PERIOD	$	1,311,881		$	127,351

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid	$	537		$	-
Taxes paid	$	-		$	-

SUPPLEMENTAL DISCLOSURES OF NON-CASH TRANSACTIONS
Cashless exercise of warrants for 62,718 of common stock	$	-		$	-
Common stock issued for subscription payable	$	184,500		$	-
Conversion of convertible debt to common stock	$	296,058		$	-

The accompanying notes are an integral part of these financial statements

ORIGINOIL, INC.

NOTES TO FINANCIAL STATEMENTS

SEPTEMBER 30, 2011

1.	Basis of Presentation

The accompanying unaudited financial statements of OriginOil, Inc. (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all normal recurring adjustments considered necessary for a fair presentation have been included. Operating results for the nine months ended September 30, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011. For further information refer to the financial statements and footnotes thereto included in the Company's Form 10-K for the year ended December 31, 2010.

Certain prior period balances in the financial statements have to be reclassified to conform to the current period presentation.

Liquidity

The Company has estimated its current average burn, and has assets to ensure that it can function without liquidation over the next twelve months, due to its cash on hand, growing revenue, and the Company’s ability to raise money from its investor base. Also, the Company is in the process of working on new purchase orders from new customers. The Company has the ability to continue its operations for the foreseeable future and will be able to realize assets and discharge liabilities in the normal course of operations.

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

This summary of significant accounting policies of the Company is presented to assist in understanding the Company’s financial statements. The financial statements and notes are representations of the Company’s management, which is responsible for their integrity and objectivity. These accounting policies conform to accounting principles generally accepted in the United States of America and have been consistently applied in the preparation of the financial statements.

Revenue Recognition

We recognize revenue upon delivery of equipment, 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. Title to the equipment is transferred to the customer once the last payment is received. We record revenue as it is received, and the equipment has been fully accepted by the customer. Returns are based upon each rent-to-own agreement, and revenue would be adjusted based on a pro-rata basis on the unused months of quarterly payments. Generally, we extend credit to our customers and do not require collateral. We do not ship a product until we have either a purchase agreement or rental agreement signed by the customer with a payment arrangement. This is a critical policy, because we want our accounting to show only sales which has a final payment arrangement.

We also recognize revenue for services associated with the equipment setup, provided it is part of the rent-to-own agreement.

Cash and Cash Equivalent

The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.

Loss per Share Calculations

Loss per Share dictates the calculation of basic earnings per share and diluted earnings per share. Basic earnings per share are computed by dividing income available to common shareholders by the weighted-average number of common shares available. Diluted earnings per share is computed similar to basic earnings per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. No shares for employee options or warrants were used in the calculation of the loss per share as they were all anti-dilutive. The Company’s diluted loss per share is the same as the basic loss per share for the nine months ended September 30, 2011 and 2010, as the inclusion of any potential shares would have had an anti-dilutive effect due to the Company generating a loss.

ORIGINOIL, INC.

NOTES TO FINANCIAL STATEMENTS

SEPTEMBER 30, 2011

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Stock-Based Compensation

Share based payments applies to transactions in which an entity exchanges its equity instruments for goods or services, and also applies to liabilities an entity may incur for goods or services that are to follow a fair value of those equity instruments. We are required to follow a fair value approach using an option-pricing model, such as the Black Scholes option valuation model, at the date of a stock option grant. The deferred compensation calculated under the fair value method was amortized over the respective vesting period of the stock option.

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, 2011, the balances reported for cash, prepaid expenses, accounts payable, accrued expenses, and derivative liability approximate the fair value because of their short maturities.

We adopted ASC Topic 820 (originally issued as SFAS 157, “Fair Value Measurements”) as of January 1, 2008 for financial instruments measured as fair value on a recurring basis. ASC Topic 820 defines fair value, established a framework for measuring fair value in accordance with accounting principles generally accepted in the United States and expands disclosures about fair value measurements.

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC Topic 820 established a three-tier fair value hierarchy which prioritizes the inputs used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). These tiers include:

·	Level 1, defined as observable inputs such as quoted prices for identical instruments in active markets;

·	Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable such as quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active; and

·	Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions, such as valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.

We measure certain financial instruments at fair value on a recurring basis. Assets and liabilities measured at fair value on a recurring basis are as follows at September 30, 2011:

	Total		(Level 1)		(Level 2)		(Level 3)

Assets	$	-	$	-	$	-	$	-

Total assets measured at fair value	$	-	$	-	$	-	$	-

Liabilities

Derivative Liability	$	476,599	$	-	$	-	$	476,599
Convertible Debenture, net of discount		208,947		-		-		208,947
Total liabilities measured at fair value	$	685,546	$	-	$	-	$	685,546

ORIGINOIL, INC.

NOTES TO FINANCIAL STATEMENTS

SEPTEMBER 30, 2011

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Recently Issued Accounting Pronouncements

Management reviewed accounting pronouncements issued during the three month period ended September 30, 2011, and the following pronouncements were adopted:

The Company adopted ASC 815 "Accounting for Derivative Instruments and Hedging Activities". This pronouncement addresses the accounting for derivative instruments including certain derivative instruments embedded in other contracts, and hedging activities. Derivative instruments that meet the definition of assets and liabilities should be reported in the financial statements at fair value, and any gain or loss should be recognized in current earnings. The adoption of this pronouncement did not have a material effect on the financial statements of the Company.

3.	EQUITY INVESTMENT

On April 29, 2011, the Company invested $20,000 for a 22.5% equity ownership in Ennesys SAS, which is an engineering company that will commercialize, design, install and eventually operate, by itself or via subcontractors, complete algae growth systems.

4.	CAPITAL STOCK

On August 11, 2011, the Company effected a one-for-thirty (1:30) reverse split of its authorized and outstanding common stock. All share amounts have been retroactively restated reflecting this reverse split.

During the nine months ended September 30, 2011, the Company issued through a private placement 1,187,382 shares of common stock and subscription payable for $2,665,175 in cash; issued 33,333 shares of common stock for services at a fair value of $151,250; converted $235,300 of the convertible debentures into 98,043 shares of common stock at a conversion price of $2.40. The Company further issued 1,902 shares of common stock for the interest payable of $4,564 associated with the convertible debentures. In addition, there was a cashless exercise of 95,238 warrants into 62,718 shares of common stock. During the nine months ended September 30, 2010, the Company issued 196,752 shares of common stock at a price of $6.60 per share for $1,298,550 in cash and common stock payable; received $200,000 for common stock subscriptions at a price of $2.10 per share to purchase 95,238 shares of common stock; issued 30,303 shares of common stock for services at a price of $6.60 per share at a fair value of $200,000; issued 74,074 shares of common stock at a price of $2.70 per share for cash of $200,000; issued 60,606 shares of common stock subscription payable at a price of $3.30 per share; issued 34,000 shares of common stock for services at a price of $6.60 per share at fair value. Also, the Company received $2,400 in cash for exercisable Class A warrants to purchase 667 shares of common stock at a price of $3.60 per share.

5.	STOCK OPTIONS AND WARRANTS

The Company adopted the OriginiOil, Inc., 2009 Incentive Stock Plan (the “Plan”) for the purposes of granting stock options to its employees and others providing services to the Company, which reserves and sets aside for the granting of options for Five Hundred Thousand (500,000) shares of Common Stock. Options granted under the Plan may be either incentive options or nonqualified options and shall be administered by the Company's Board of Directors ("Board"). Each Option shall be exercisable to the nearest whole share, in installments or otherwise, as the respective option agreements may provide. Notwithstanding any other provision of the Plan or of any option agreement, each Option shall expire on the date specified in the option agreement, which date shall not be later than the tenth (10th) anniversary from the effective date of this option.

During the nine months ended September 30, 2011, the Company granted 100,000 stock options during the period. The stock options vest as follows: 1/48 every 30 days thereafter until the remaining stock options have vested. The stock options are exercisable for a period of five years from the date of grant at an exercise price between $4.20 and $9.60 per share.

	9/30/2011
Risk free interest rate		0.95%-2.04	%
Stock volatility factor		55.16%-271.95	%
Weighted average expected option life	5 years
Expected dividend yield	None

ORIGINOIL, INC.

NOTES TO FINANCIAL STATEMENTS

SEPTEMBER 30, 2011

5.	STOCK OPTIONS AND WARRANTS (Continued)

A summary of the Company’s stock option activity and related information follows:

	9/30/2011
				Weighted
	Number			average
	of			exercise
	Options			price
Outstanding, beginning of period		498,292		$	7.10
Granted		100,000			4.20
Exercised		-			-
Forfeited/Expired		(225,829	)		(6.88	)
Outstanding, end of period		372,463		$	6.45
Exercisable at the end of period		98,249		$	4.01
Weighted average fair value of
options granted during the period				$	4.20

The weighted average remaining contractual life of options outstanding issued under the Plan as of September 30, 2011 was as follows:

						Weighted
						Average
		Stock		Stock		Remaining
Exercisable		Options		Options		Contractual
Prices		Outstanding		Exercisable		Life (years)
$	9.60		6,250		2,853		1.75
$	6.90		209		58		1.75
$	9.60		68,000		35,292		2.93
$	8.40		3,334		1,650		3.03
$	9.00		15,000		7,356		3.05
$	6.90		81,669		27,901		3.64
$	7.20		1,667		426		3.98
$	4.50		33,334		7,117		4.15
$	6.00		63,000		8,267		4.48
$	4.20		100,000		7,329		4.72
			372,463		98,249

Stock-based compensation expense recognized during the period is based on the value of the portion of stock-based payment awards that is ultimately expected to vest. Stock-based compensation expense recognized in the financial statements of operations during the period ended September 30, 2011, included compensation expense for the stock-based payment awards granted prior to, but not yet vested, as of September 30, 2011 based on the grant date fair value estimated, and compensation expense for the stock-based payment awards granted subsequent to September 30, 2011, based on the grant date fair value estimated. We account for forfeitures as they occur. The stock-based compensation expense recognized in the statement of income during the period ended September 30, 2011 and 2010 is $291,012 and $272,942, respectively.

Warrants

During the nine months ended September 30, 2011, the Company granted 79,003 warrants for services. Compensation expense was determined using the Black Scholes pricing model.

	9/30/2011
Risk free interest rate		1.51% - 2.51	%
Stock volatility factor		55.0% - 66.35	%
Weighted average expected option life	5 years
Expected dividend yield	None

ORIGINOIL, INC.

NOTES TO FINANCIAL STATEMENTS

SEPTEMBER 30, 2011

5.	STOCK OPTIONS AND WARRANTS (Continued)

Warrants

A summary of the Company’s warrant activity and related information follows:

	Nine Months Ended
	September 30, 2011
				Weighted
				average
				exercise
	Options			price
Outstanding -beginning of Period		1,273,271		$	4.97
Granted		79,003			3.76
Exercised		(62,718	)		-
Forfeited		(6,667	)		2.10
Outstanding - end of Period		1,282,889		$	4.09

At September 30, 2011, the weighted average remaining contractual life of warrants outstanding:

						Weighted
						Average
						Remaining
Exercisable		Warrants		Warrants		Contractual
Prices		Outstanding		Exercisable		Life (years)
$	7.50		146,740		146,740		2.18
$	9.30		336,673		336,673		2.75
$	10.20		28,335		28,335		2.88
$	9.00		21,669		21,669		3.07
$	9.00		3,334		3,334		3.12
$	8.70		3,334		3,334		3.12
$	8.40		667		667		3.33
$	8.70		5,000		5,000		3.66
$	7.20		33,334		33,334		3.73
$	5.70		7,334		7,334		3.85
$	4.50		3,334		3,334		3.96
$	4.20		8,334		8,334		3.98
$	2.10		95,238		95,238		4.24
$	4.20		33,334		33,334		4.00
$	3.60		8,334		8,334		4.08
$	4.50		33,334		33,334		4.15
$	4.20		13,334		13,334		4.17
$	6.00		166,668		166,668		4.23
$	6.00		33,334		33,334		4.25
$	1.80		222,222		222,222		4.33
$	6.30		8,334		8,334		4.47
$	5.70		4,001		4,001		4.50
$	6.30		33,334		33,334		4.71
$	4.20		33,334		33,334		4.96
			1,282,889		1,282,889

ORIGINOIL, INC.

NOTES TO FINANCIAL STATEMENTS

SEPTEMBER 30, 2011

The warrant compensation expense recognized in the statement of income at fair value during the nine months ended September 30, 2011 and 2010 is $248,507 and $292,800, respectively.

Through a private placement to purchase shares of common stock, the Company offered attached warrants with a cashless option to purchase additional shares of common stock, 95,238 warrants were exercised and converted into 62,718 shares of common stock during the nine months ended September 30, 2011.

6.	CONVERTIBLE DEBENTURE

On July 7, 2011, the Company entered into a securities purchase agreement with certain institutional investors, which closed on July 11, 2011, providing for the issuance of original issue discount convertible debentures and warrants for an aggregate purchase price of $1,000,000. The debentures have an aggregate principal amount of $1,176,500, and will become due and payable on July 11, 2012. The debentures may be converted at any time at the option of the investors into shares of common stock at a conversion price of $2.40 per share, after giving effect to full-ratchet anti-dilution adjustment, a 1 for 30 reverse stock split and subject to further adjustment as set forth therein. The debentures bear interest at the rate of 5% per annum increasing to 18% in the event of default. Interest is payable quarterly in cash and/or, if certain equity conditions have been met, in shares of our common stock at an interest conversion rate equal to the lesser of $2.40 or 90% of the daily volume weighted average price of our common stock in the 20 trading days prior to the date the quarterly interest payment is due (or the date of delivery of the interest conversion shares if such shares are delivered after the date the quarterly interest payment is due). The warrants are exercisable for an aggregate of 392,170 shares of common stock at the option of the holder for a period of five years at an exercise price of $2.40 per share, after giving effect to full-ratchet anti-dilution adjustment, a 1 for 30 reverse stock split and subject to further adjustment as set forth therein. The warrants may be exercised on a cashless basis if after the six month anniversary of the closing date there is no effective registration statement registering the shares underlying the warrants.

ASC Topic 815 provides guidance applicable to the convertible debentures issued by the Company in instances where the number into which a debenture can be converted is not fixed. For example, when a convertible debenture converts at a discount to market based on the stock price on the date of conversion, ASC Topic 815 requires that the embedded conversion option of the convertible debentures be bifurcated from the host contract and recorded at their fair value. In accounting for derivatives under accounting standards, the Company recorded a liability of $1,176,500 representing the estimated present value of the conversion feature considering the historic volatility of the Company’s stock, and a discount representing the imputed interest associated with the embedded derivative. The discount is amortized over the life of the convertible debenture, which resulted in the recognition of $444,247 in interest expense for the period ended September 30, 2011, and the derivative liability is adjusted periodically according to stock price fluctuations. At the time of conversion, any remaining derivative liability will be charged to additional paid-in capital. For purpose of determining the fair market value of the derivative liability, the Company used Black Scholes option valuation model. The significant assumptions used in the Black Scholes valuation of the derivative are as follows:

Stock price on the valuation date	$	4.20
Conversion price for the debentures	$	2.40
Dividend yield		0.00	%
Years to Maturity		1
Rick free rate		0.17	%
Expected volatility		65.75	%

The value of the derivative liability at September 30, 2011 was $476,599.

7.	SUBSEQUENT EVENTS

Management evaluated subsequent events as of the date of the financial statements pursuant to ASC TOPIC 855, and reported the following events:

.	On October 12, 2011, the Company issued 13,333 shares of its common stock in connection with renewing their facilities lease. In consideration of the shares issued the sublease was renewed for an additional five years ending August 31, 2016.

On October 13 and 18, 2011, the Company issued an aggregate of 41,668 shares of the common stock, upon converting $100,003 in principal of the convertible debentures.

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 are currently developing technologies to help companies produce algae using a cost-effective, high-speed manufacturing process to replace petroleum in various applications such as diesel, gasoline, jet fuel, plastics and solvents, in addition to feed, nutritionals and fertilizer. Algae, unlike other bio-fuel feedstock such as corn and sugarcane, do not destroy vital farmlands and rainforests, disrupt global food supplies or create new environmental problems.

We are developing a number of processes in the areas of algae growth and extraction. Based on our initial commercial transactions, we are primarily focused on algae harvesting.

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.

At this early stage, to prove our system for wide-scale distribution and licensing, we must build, sell and support our system to companies developing such algae production systems. On March 28, 2011, we stated our intention to provide other technologies and integration services to early stage customers.

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, based on algae, 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, and to date, we have been primarily involved in research and development activities including the sale of our equipment to companies developing production systems.

Reverse Stock Split

Effective on August 11, 2011, a reverse stock split with a ratio of one-for-thirty, whereby each thirty issued and outstanding shares of common stock was combined into one share of common stock became effective (the “Reverse Split”).

Throughout this Quarterly Report on 10-Q, each instance which refers to a number of shares of our common stock, refers to the number of shares of common stock after giving effect to the Reverse Split, unless otherwise indicated. References to a number of shares of common stock in our historical financial statements for the three and nine month period ended September 30, 2010, and for the year ended December 31, 2010 are reported on a post-Reverse Split basis.

Recent Developments

On January 25, 2011, we announced that MBD Energy Ltd. (“MBD”) had committed to purchase an initial OriginOil extraction unit for piloting at one of Australia’s three largest coal-fired power plants. The total value of the purchase order was $150,000, and the initial payment received was $75,000. The next payments due are as follows: $37,500 upon notification ready to ship, and the balance of $37,500 shall be due upon installation.

On February 14, 2011 we announced that we had agreed to participate in a pilot scale algae project to be funded by the Mexican government. The project is intended to demonstrate industrial algae production, paving the way for substantial investment by the Mexican government in large-scale jet fuels production.

On March 21, 2011, we announced Algae Screen™, a process that keeps algae healthy and productive by selectively eliminating microscopic predators without the use of chemicals. The announcement was associated with our filing of our twelfth patent application, entitled “Enhancing Algae Growth by Reducing Competing Microorganisms in a Growth Medium.”

-	On March 24, 2011, we agreed to retain the patent law firm of Kirton & McConkie, and subsequently ended our relationship with Workman Nydegger.

On March 28, 2011, we announced a new policy of seamless integration with other vendors, recognizing that our strategic customers want to work with the fewest possible vendors. The new policy will apply only to OriginOil’s direct customers, as we plan to pursue distribution agreements with companies that have global sales networks.

-	On April 12, 2011, we announced that a process partner, World Water Works, Inc. of Oklahoma City, Oklahoma, agreed in principle to distribute OriginOil’s dewatering and extraction systems to its global customer base. The agreement covers product integration, manufacturing and joint marketing.

On May 9, 2011, we announced that we formed a co-venture for technology development with BARD Holding, Inc. (“BARD”) of Morrisville, Pensylvania, focusing on BARD’s BA 1000, a patent-pending modular system of Photo BioReactors (PBRs) to cultivate algae at commercial scale, and OriginOil’s harvesting and extraction technology. On 30 April, 2011, we executed a co-venture agreement with BARD, pursuant to which we shall sell equipment and related services to BARD from time to time under the terms of a global cooperation agreement.

On May 11, 2011, we announced our participation in Ennesys SAS, a French joint venture with UK-based Pacific Junction (PJC UK), and that Ennesys is working with large institutions to develop two separate large-scale algae projects in eco-buildings and marine fuels. OriginOil is an equity partner in Ennesys with Pacific Junction, each holding 22.5% of Ennesys. The remaining shares are owned by the Ennesys management team. On April 29, 2011, we paid PJC UK $20,000 for its shares, which PJC UK had reserved for OriginOil at the inception of Ennesys SAS in late 2010. On April 26, 2011, we executed a co-venture agreement with Ennesys, pursuant to which we shall sell equipment and related services to Ennesys from time to time under the terms of a global cooperation agreement.

On May 23, 2011, we announced that we received a firm order for a large-scale extraction system from MBD. Recently, MBD increased the order due to changes in configuration, and issued a purchase order on July 29, 2010. The total value of the purchase order is $850,000 of which $297,500 or 35% was paid on August 5, 2011.

-	On July 27, 2011, we announced that we have selected Pacific Advanced Civil Engineering, Inc. to fast-track the rollout of our Single Step Extraction systems.

-	On August 4, 2011, we announced that we have developed a real-time control network to supervise continuous algae harvesting operations at very large algae productions sites.

On September 1, 2011, we announced that our delegates to the Algae World Australia Conference toured our next-generation algae extraction technology at a university-staffed site in North Queens Land, Australia.

On September 20, 2011, we announced that we will begin to work with the U.S. Department of Energy's Idaho National Laboratory to develop standards for converting biomass, including algae, into biofuels and other products.

On September 29, 2011, we announced that we have identified a new process to increase the efficiency of algae extraction without the use of toxic solvents.

	-	On October 11, 2011, we announced that our first Single Step Extraction™ Production System had been shipped to Australia.

	-	On October 27, 2011, we announced that our recent development of a new harvest pretreatment process was also found to substantially increase the growth rate of algae cultures.

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, 2011, 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, 2011, and no pronouncements were adopted during the period.

Results of Operation

Results of Operations for the three and nine months ended September 30, 2011 compared to the three and nine months ended September 30, 2010.

	Three Months Ended				Nine Months Ended
	September 30, 2011 (Unaudited)		September 30, 2010 (Unaudited)		September 30, 2011 (Unaudited)		September 30, 2010 (Unaudited)
Revenue	$	0	$	0	$	142,500	$	0

Operating Expenses	$	1,474,978	$	1,331,507	$	3,353,708	$	2,794,436

Loss from Operations before Other Income/(Expense)	$	(1,478,180)	$	(1,346,758)	$	(3,219,310)	$	(2,836,671)

Other Income/(Expense)	$	5,358	$	1	$	2,438	$	38

Loss Before Provision For Taxes		(1,472,822)		(1,346,757)		(3,216,872)		(2,836,633)

Income Taxes		0		0		0		0

Net Loss	$	(1,472,822)	$	(1,346,757)	$	(3,216,872)	$	(2,836,633)

Revenue

Revenue for the three months ended September 30, 2011 and 2010 were $0, respectively. Revenue for the nine months ended September 30, 2011 increased to $142,500 as compared to $0 for the nine months ended September 30, 2010. There were no associated costs of goods sold in any of the years represented. We received a deposit of $297,500 associated with a customer purchase order, which was recognized as deferred income on the balance sheet since the test for revenue recognition has not been met.

To date we have had minimal revenues due to our focus on product development and testing. Revenues earned were part of a purchase order from MBD Energy for a single step oil extraction and additional piece of equipment.

Operating Expenses

Operating expenses consist of general and administrative expenses, research and development and depreciation and amortization expense.

General and administrative expenses increased by $2,166 to $1,141,494 for the three months ended September 30, 2011, compared to $1,139,328 for the three months ended September 30, 2010. General and administrative expenses increased by $373,080 to $2,628,989 for the nine months ended September 30, 2011, compared to $2,255,909 for the nine months ended September 30, 2010. The increase in general and administrative expenses was due primarily to an increase in professional fees, and non-cash stock compensation cost.

Research and development cost increased by $141,305 to $333,484 for the three months ended September 30, 2011, compared to $192,179 for the three months ended September 30, 2010. Research and development cost increased by $185,390 to $723,917 for the nine months ended September 30, 2011, compared to $538,527 for the nine months ended September 30, 2010. The increase in research and development costs was primarily due to an increase in salaries, consultant fees and outside services.

Net Loss

Our net loss increased by $126,065 to $1,472,822 for the three months ended September 30, 2011, compared to $1,346,757 for the three months ended September 30, 2010. Our net loss increased by $380,239 to $3,216,872 for the nine months ended September 30, 2011, compared to $2,836,633 for the nine months ended September 30, 2010. The majority of the increase is due to accounting for non-cash stock compensation expense. 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.

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, 2011 and December 31, 2010, we had cash of $1,311,881 and $238,424, respectively and working capital of $480,347 and $227,747, respectively. This increase in working capital was due primarily to equity financing. In July 2011, we issued debentures in an aggregate principal amount of $1,176,500 together with warrants to purchase an aggregate of 392,170 shares of our common stock resulting in gross proceeds of $1,000,000. We sold an aggregate of 578,855 shares of our common stock for aggregate proceeds of $1,389,251 in a private offering that commenced in April 2011 and ended in September, 2011.

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 a recently completed private placement, our ongoing private offering, 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 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.

Net cash used in operating activities was $(2,396,522) for the nine months ended September 30, 2011, compared to $(2,147,203) for the prior period September 30, 2010. The increase of $(249,319) in cash used in operating activities was due to an increase in prepaid expenses, work in progress, accounts payable, deferred income, and derivative liability. The net loss includes non-cash expenses of depreciation, stock issued for services, amortization of debenture discount, gain on change in derivative, and stock compensation expense. Currently operating costs exceed revenue because sales are not yet significant.

Net cash flows used in investing activities was $(114,196) for the nine months ended September 30, 2011, as compared to $(18,233) for the prior period September 30, 2010. The increase in cash used in investing activities was due to an increase in expenditures for tangible and intangible assets, and an increase in investments in the current period.

Net cash flows provided by financing activities was $3,584,175 for the nine months ended September 30, 2011, as compared to $1,936,608 for the prior period September 30, 2010. The increase in cash provided by financing activities was due to equity and debt financing.

We have estimated our current average burn, and believe that we have assets to ensure that we can function without liquidation over the next twelve 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.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

We have adopted and maintain disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that are designed to ensure that information required to be disclosed in our reports under the Exchange Act, is recorded, processed, summarized and reported within the time periods required under the SEC’s rules and forms and that the information is gathered and communicated to our management, including our Chief Executive Officer (Principal Executive Officer and Principal Financial Officer), as appropriate, to allow for timely decisions regarding required disclosure.

As required by SEC Rule 15d-15(b), our Chief Executive Officer and Chief Financial Officer carried out an evaluation under the supervision and with the participation of our management, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 15d-14 as of the end of the period covered by this report. Based on the foregoing evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information required to be included in our periodic SEC filings and to ensure that information required to be disclosed in our periodic SEC filings is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure about our internal control over financial reporting.

Changes in Internal Controls

There have been no changes in our internal control over financial reporting during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II

Item 1. Legal Proceedings.

We are not a party to any pending legal proceeding, nor is our property the subject of a pending legal proceeding, that is not in the ordinary course of business or otherwise material to the financial condition of our business. None of our directors, officers or affiliates is involved in a proceeding adverse to our business or has a material interest adverse to our business.

Item 1A. Risk Factors.

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

During the third quarter ended September 30, 2011, we issued an aggregate of 566,282 shares of common stock at a price of $2.40 for gross proceeds of $1,359,035.

The securities were offered and sold pursuant to an exemption from the registration requirements under Section 4(2) of the Securities Act of 1933, as amended and Rule 506 of Regulation D promulgated thereunder since, among other things, the transactions did not involve a public offering and the securities were acquired for investment purposes only and not with a view to or for sale in connection with any distribution thereof.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. (Removed and Reserved)

Item 5. Other Information.

(a) Form 8-K Information

None.

(b) Director Nomination Procedures

We do not have a standing nominating committee nor are we required to have one. We do not have any established procedures by which security holders may recommend nominees to our Board of Directors, however, any suggestions on directors, and discussions of board nominees in general, is handled by the entire Board of Directors.

Item 6. Exhibits.

Exhibit Number		Description of Exhibit

31.1		Certification by Chief Executive Officer and Chief Financial Officer, required by Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act.
32.1		Certification by Chief Executive Officer and Chief Financial Officer, required by Rule 13a-14(b) or Rule 15d-14(b) of the Exchange Act and Section 1350 of Chapter 63 of Title 18 of the United States Code.
101.INS		XBRL Instance Document.*
101.SCH		XBRL Taxonomy Extension Schema.*
101.CAL		XBRL Taxonomy Extension Calculation Linkbase.*
101.DEF		XBRL Taxonomy Extension Definition Linkbase.*
101.LAB		XBRL Taxonomy Extension Label Linkbase.*
101.PRE		XBRL Extension Presentation Linkbase.*

Attached as Exhibit 101 to this report are the following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2011 formatted in XBRL (eXtensible Business Reporting Language): (i) the Balance Sheets, (ii) the Statement of Operations, (iii) the Statement of Shareholders’ Equity, (iv) the Statement of Cash Flow, and (v) Notes to Financial Statements tagged as blocks of text. The XBRL-related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall not be deemed “filed” or as part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended and is not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of those sections.

SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	ORIGINOIL, INC.

	By:	/s/ T Riggs Eckelberry
		T Riggs Eckelberry
		Chief Executive Officer (Principal Executive Officer)
		and Acting Chief Financial Officer (Principal Accounting and Financial Officer)

		November 14, 2011

Attached files

ORIGINCLEAR, INC. Reports

Also read