UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q
 
(Mark One)

 
x
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
FOR THE QUARTERLY PERIOD ENDED:  September 30, 2012

 
¨
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 16, 2012 was 17,267,714.
 
 
 
 
EXPLANATORY NOTE
 
Registrant is filing this report on Form 10-Q after November 14, 2012, in reliance upon Release No. 68224 of the Securities and Exchange Commission, by reason of Registrant’s inability to meet the November 14, 2012 filing deadline for this report due to Hurricane Sandy and its aftermath. The Registrant was unable to file the Form 10-Q on a timely basis because the Company’s EDGAR service provider, which is located in Manhattan, was impacted by Hurricane Sandy and was delayed in preparing the Interactive Data Files filed as an exhibit thereto.
 
 
TABLE OF CONTENTS
 
 
 
 
 
PART I - FINANCIAL INFORMATION
 
ORIGINOIL, INC.
BALANCE SHEETS
 
 
   
September 30, 2012
   
December 31, 2011
 
   
(Unaudited)
       
ASSETS
           
             
CURRENT ASSETS
           
   Cash
 
$
98,612
   
$
197,868
 
   Accounts receivable
   
80,726
     
-
 
   Work in process
   
28,785
     
248,443
 
   Prepaid expenses
   
408,321
     
300,102
 
   Other receivables
   
2,550
     
17,977
 
                 
                        TOTAL CURRENT ASSETS
   
618,994
     
764,390
 
                 
PROPERTY & EQUIPMENT
               
   Machinery & equipment
   
30,992
     
30,992
 
   Furniture & fixtures
   
27,056
     
27,056
 
   Computer equipment
   
28,824
     
28,824
 
   Manufactured equipment
   
12,500
     
-
 
   Leasehold improvements
   
94,914
     
94,914
 
     
194,286
     
181,786
 
     Less accumulated depreciation
   
(136,625
)
   
(126,422
)
                 
                     NET PROPERTY & EQUIPMENT
   
57,661
     
55,364
 
                 
OTHER ASSETS
               
   Investment
   
20,000
     
20,000
 
   Patents
   
277,469
     
180,380
 
   Trademark
   
4,467
     
4,467
 
   Security deposit
   
9,650
     
9,650
 
                 
                        TOTAL OTHER ASSETS
   
311,586
     
214,497
 
                 
                        TOTAL ASSETS
 
$
988,241
   
$
1,034,251
 
                 
                 
LIABILITIES AND SHAREHOLDERS' DEFICIT
               
                 
CURRENT LIABILITIES
               
   Accounts payable
 
$
241,658
   
$
342,369
 
   Accrued expenses
   
167,166
     
124,417
 
   Deferred income
   
35,000
     
313,163
 
   Derivative liability, warrants
   
123,957
     
641,900
 
   Convertible debenture
   
-
     
397,213
 
   Unsecured notes payable, net of discount of $800,105
   
1,030,722
     
13,483
 
                 
                       TOTAL LIABILITIES
   
1,598,503
     
1,832,545
 
                 
SHAREHOLDERS' DEFICIT
               
   Preferred stock, $0.0001 par value;
               
   25,000,000 authorized preferred shares
   
-
     
-
 
   Common stock, $0.0001 par value;
               
   250,000,000 authorized common shares
               
   12,977,153 and 7,694,505 shares issued and outstanding
   
1,298
     
770
 
   Additional paid in capital
   
23,357,176
     
16,198,019
 
   Common stock subscription payable
   
10,400
     
-
 
   Deficit accumulated during the development stage
   
(23,979,136
)
   
(16,997,083
)
                 
                      TOTAL SHAREHOLDERS' DEFICIT
   
(610,262
)
   
(798,294
)
                 
                      TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT
 
$
988,241
   
$
1,034,251
 
                 
 
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, 2012
   
September 30, 2011
   
September 30, 2012
   
September 30, 2011
 
                         
Sales
 
$
30,726
   
$
-
   
$
583,889
   
$
142,500
 
                                 
Cost of Goods Sold
   
13,543
     
-
     
420,906
     
-
 
                                 
Gross Profit
   
17,183
     
-
     
162,983
     
142,500
 
                                 
Operating Expenses
                               
    Selling and general and administrative expenses
   
1,310,532
     
1,141,494
     
3,910,316
     
2,629,791
 
    Research and development
   
152,978
     
333,484
     
704,166
     
723,917
 
                                 
                Total Operating Expenses
   
1,463,510
     
1,474,978
     
4,614,482
     
3,353,708
 
                                 
Loss before Depreciation and Amortization
   
(1,446,327
)
   
(1,474,978
)
   
(4,451,499
)
   
(3,211,208
)
                                 
    Depreciation & amortization expense
   
3,401
     
3,202
     
10,203
     
8,102
 
                                 
Loss from Operations before Other Income/(Expenses)
   
(1,449,728
)
   
(1,478,180
)
   
(4,461,702
)
   
(3,219,310
)
                                 
OTHER INCOME/(EXPENSE)
                               
    Interest income
   
-
     
-
     
-
     
1
 
    Foreign exchange loss
   
(611
)
   
-
     
(2,838
)
   
-
 
    Gain/(Loss) on derivative
   
30,696
     
462,643
     
(14,716
)
   
462,643
 
    Loss on conversion of debentures
   
-
     
-
     
(838,728
)
   
-
 
    Penalties
   
-
     
-
     
-
     
(2,384
)
    Interest expense
   
(502,752
)
   
(457,285
)
   
(1,664,069
)
   
(457,822
)
                                 
              TOTAL OTHER INCOME/(EXPENSES)
   
(472,667
)
   
5,358
     
(2,520,351
)
   
2,438
 
                                 
                                 
         NET LOSS
 
$
(1,922,395
)
 
$
(1,472,822
)
 
$
(6,982,053
)
 
$
(3,216,872
)
                                 
BASIC LOSS PER SHARE
 
$
(0.16
)
 
$
(0.22
)
 
$
(0.69
)
 
$
(0.49
)
                                 
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING
                         
      BASIC AND DILUTED
   
12,211,940
     
6,794,747
     
10,136,415
     
6,583,507
 
                                 
 
The accompanying notes are an integral part of these financial statements
 
 
 
 
ORIGINOIL, INC.
STATEMENT OF SHAREHOLDERS' DEFICIT
 
                                       
Deficit
 
                                       
Accumulated
 
                           
Additional
         
during the
 
   
Preferred stock
         
Common stock
         
Paid-in
   
Subscription
   
Development
 
   
Shares
   
Amount
   
Shares
   
Amount
   
Capital
   
Payable
   
Stage
 
Balance at December 31, 2011
    -     $ -       7,694,505     $ 770     $ 16,198,019     $ -     $ (16,997,083 )
                                                         
Common stock issued for cash and subscriptions payable
                                                       
(prices per share of $0.65 and $1.75) (unaudited)
    -       -       1,230,766       123       799,870       -       -  
                                                         
Common stock issued for conversion of debt
                                                       
(prices per share of $0.65 and $1.75) (unaudited)
    -       -       1,241,929       124       841,073       -       -  
                                                         
Common stock issued for conversion of interest payable on debt
                                                       
(price per share $1.75)  (unaudited)
    -       -       6,551       1       9,891       -       -  
                                                         
Common stock issued for services at fair value
                                                       
(price per share  between $0.98 -$1.75) (unaudited)
    -       -       1,096,099       110       1,545,760       -       -  
                                                         
Common stock issued for accounts payable at fair value (unaudited)
    -       -       12,001       1       20,999       -       -  
                                                         
Common stock issued for incentive fee at fair value (unaudited)
    -       -       12,000       1       20,999       -       -  
                                                         
Common stock issued with unsecured subordinated debt at fair value (unaudited)
    -       -       1,411,351       141       (141 )     -       -  
                                                         
Common stock issued for incentive fee for debt (unaudited)
    -       -       9,670       1       6,285       -       -  
                                                         
Cashless exercise of  common stock purchase warrants (unaudited)
    -       -       262,281       26       (26 )     -       -  
                                                         
Common stock subscription payable
    -       -       -       -       -       10,400       -  
                                                         
Write down of fair value of warrants converted (unaudited)
    -       -       -       -       1,365,100       -       -  
                                                         
Original issue discount (unaudited)
    -       -       -       -       92,662       -       -  
                                                         
Beneficial conversion feature & debt discount on promissory notes (unaudited)
    -       -       -       -       1,579,578       -       -  
                                                         
Options and warrant compensation expense  (unaudited)
    -       -       -       -       878,604       -       -  
                                                         
Stock issuance cost (unaudited)
    -       -       -       -       (1,497 )     -       -  
                                                         
Net loss for the nine months ended September 30, 2012 (unaudited)
    -       -       -       -       -       -       (6,982,053 )
                                                         
Balance at September 30, 2012 (unaudited)
    -     $ -       12,977,153     $ 1,298     $ 23,357,176     $ 10,400     $ (23,979,136 )
                                                         
 
 
 
The accompanying notes are an integral part of these financial statements
 
 
 
 
ORIGINOIL, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
 
 
   
Nine Months Ended
 
   
September 30, 2012
   
September 30, 2011
 
CASH FLOWS FROM OPERATING ACTIVITIES:
           
    Net loss
 
$
(6,982,053
)
 
$
(3,216,872
)
    Adjustment to reconcile net loss to net cash
               
       used in operating activities
               
    Depreciation & amortization
   
10,203
     
8,102
 
    Common stock and warrants issued for services
   
934,943
     
151,250
 
    Stock compensation expense
   
878,604
     
539,519
 
    (Gain)/Loss on change in valuation of derivative liability
   
14,715
     
(462,643
)
    Amortization of debt discount recognized as interest expense
   
1,461,223
     
444,247
 
    Loss on conversion of debentures
   
838,728
     
-
 
    Common stock issued for incentive fees
   
21,000
     
-
 
    Original issue discount amortized as interest
   
92,662
     
-
 
    Common stock issued for interest expense
   
9,892
     
4,564
 
  Changes in Assets and Liabilities
               
    (Increase) Decrease in:
               
    Accounts receivable
   
(80,726
)
   
(37,500
)
    Prepaid expenses
   
536,981
     
(148,418
)
    Work in progress
   
219,658
     
(136,473
)
    Other receivables
   
15,427
     
8,135
 
    Increase (Decrease) in:
               
    Accounts payable
   
(86,524
)
   
76,241
 
    Accrued expenses
   
15,289
     
31,124
 
     Deferred income
   
(278,163
)
   
350,663
 
    Other payable
   
-
     
(8,461
)
                 
NET CASH USED IN OPERATING ACTIVITIES
   
(2, 378,141
)
   
(2,396,522
)
                 
                 
CASH FLOWS USED FROM INVESTING ACTIVITIES:
               
    Research equipment
   
(12,500
)
   
-
 
    Purchase of investment
   
-
     
(20,000
)
    Purchase of fixed assets
   
-
     
(26,411
)
Patent expenditures
   
(97,089
)
   
(67,785
)
                 
NET CASH USED IN INVESTING ACTIVITIES
   
(109,589
)
   
(114,196
)
                 
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
    Proceeds from unsecured notes payable
   
1,579,578
     
1,000,000
 
Proceeds for issuance of common stock and subscription payable, net of stock issuance cost        808,896      
2,584,175
 
                 
NET CASH PROVIDED BY FINANCING ACTIVITIES
   
2,388,474
     
3,584,175
 
                 
NET INCREASE/(DECREASE) IN CASH
   
(99,256
)
   
1,073,457
 
                 
CASH BEGINNING OF PERIOD
   
197,868
     
238,424
 
                 
CASH END OF PERIOD
 
$
98,612
 
 
$
1,311,881
 
                 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
 
   Interest paid
 
$
5,262
   
$
537
 
   Taxes paid
 
$
-
   
$
-
 
                 
SUPPLEMENTAL DISCLOSURES OF NON CASH TRANSACTIONS
 
During the nine months September 30, 2012, the Company issued 1,241,929 shares of common stock for the convertible debenture at
 
fair value of $841,197, plus 6,551 shares of common stock for interest paid in the amount of $9,892; 1,411,351 shares of common
 
stock were issued upfront with promissory notes; 262,281 shares of common stock were issued through a cashless exercise
 
for 474,333 stock purchase warrants. During the nine months ended September 30, 2011, the Company issued 98,043 shares of common stock
 
for convertible debentures in the amount of $235,300. Also, the Company issued 62,718 shares of common stock for 95,238 common stock
 
   purchase warrants.
               
 
The accompanying notes are an integral part of these financial statements
 
 
 
 
ORIGINOIL, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2012
 
 
 
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, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012.  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, 2011.

Going Concern
The accompanying 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 financial statements do not reflect any adjustments that might result if the Company is unable to continue as a going concern.  The Company does not generate significant revenue, and has negative cash flows from operations, which raise substantial doubt about the Company’s ability to continue as a going concern.  The ability of the Company to continue as a going concern and appropriateness of using the going concern basis is dependent upon, among other things, additional cash infusion.  The Company has obtained funds from its shareholders in the nine months ended September 30, 2012, and has standing purchase orders from a principal customer. Management believes this funding will continue from its’ current investors and has also obtained funding from new investors. Management believes the existing shareholders and the prospective new investors will provide the additional cash needed to meet the Company’s obligations as they become due, and will allow the development of its core business operations.
 
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, 2012, 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, 2012
 
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, 2012, 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, 2012:
 
   
Total
   
(Level 1)
   
(Level 2)
   
(Level 3)
 
                         
Assets
 
$
20,000
   
$
-
   
$
-
   
$
20,000
 
                                 
Total assets measured at fair value
 
$
20,000
   
$
-
   
$
-
   
$
20,000
 
                                 
Liabilities
                               
                                 
Derivative Liability
 
$
123,957
   
$
-
   
$
-
   
$
123,957
 
Unsecured promissory notes, net of discounts
 
$
1,030,722
   
$
-
   
$
-
     
1,030,722
 
Total liabilities measured at fair value
 
$
1,154,679
   
$
-
   
$
-
   
$
1,154,679
 
 
Reclassification
Amortization of debt discount for the nine months ended September 30, 2012 and 2011, respectively, was reclassified as interest expense.

Recently Issued Accounting Pronouncements
Management reviewed accounting pronouncements issued during the three months ended September 30, 2012, and the no pronouncements were adopted during the period.
 
 

 
 
ORIGINOIL, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2012
 
 
3.
CAPITAL STOCK

As of June 30, 2012, the Company increased the total number of authorized shares of common stock to 250,000,000 shares and increased the total number of authorized shares of preferred stock to 25,000,000 shares.

During the nine months ended September 30, 2012, the Company issued 1,096,099 shares of common stock at fair value for services that ranged in prices from $0.98 to $1.75 with a fair value of $1,545,870; issued 12,001 shares of common stock for settlement of accounts payable in the amount of $21,000, and also issued an additional 12,000 shares with a fair value of $21,000 associated with the settlement of the debt; issued 1,241,929 shares of common stock in exchange for cancellation of the convertible debentures in the aggregate amount of $841,197, and also issued an additional 9,670 shares of common stock at a fair value of $6,286, associated with the conversion of a convertible debenture; issued 262,281 shares of common stock for stock through a cashless exercise of 493,943 stock purchase warrants; issued 6,551 shares of common stock at fair value of $9,892 for interest due on the convertible debentures; received proceeds for issuance of common stock and subscription payable in the amount of $799,993 to purchase 1,230,766 shares of common stock at a price of $0.65 together with one (1) year warrants to purchase an aggregate of 1,220,766 shares of common stock and three (3) year warrants to purchase an aggregate of 849,311 shares of common stock, plus five (5) year warrants to purchase an aggregate of 615,388 shares of common stock. In addition the Company issued unsecured promissory notes in the aggregate principal amount of $1,669,828 and issued at fair value 1,411,351 shares of common stock associated with the notes.

4. 
STOCK OPTIONS AND WARRANTS

The Board of Directors adopted the OriginOil, Inc., 2009 Incentive Stock Option 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 (10 th ) anniversary from the effective date of this option.

On May 25, 2012, the Board of Directors adopted the OriginOil, Inc., 2012 Incentive Stock Option 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 One Million (1,000,000) 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 (10 th ) anniversary from the effective date of this option.

During the nine months ended September 30, 2012, the Company granted 4,000 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 of  $1.70 per share.
 
   
Risk free interest rate
 0.87%
Stock volatility factor
70.25%
Weighted average expected option life
5 years
Expected dividend yield
None
   
 

 
 
 
ORIGINOIL, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2012
 
4. 
STOCK OPTIONS AND WARRANTS (Continued)

A summary of the Company’s stock option activity and related information follows:
 
   
9/30/2012
 
         
Weighted
 
   
Number
   
average
 
   
of
   
exercise
 
   
Options
   
price
 
Outstanding, beginning of period
   
351,130
   
$
6.14
 
Granted
   
4,000
     
1.70
 
Exercised
   
-
     
-
 
Forfeited/Expired
   
(269,836
)
   
6.40
 
Outstanding, end of period
   
85,294
   
$
5.12
 
Exercisable at the end of period
   
31,670
   
$
5.28
 
Weighted average fair value of
               
  options granted during the period
         
$
1.70
 
                 
 
The weighted average remaining contractual life of options outstanding issued under the 2009 Incentive Stock Option Plan as of September 30, 2012 was as follows:
 
                 
Weighted
 
                 
Average
 
     
Stock
   
Stock
   
Remaining
 
Exercisable
   
Options
   
Options
   
Contractual
 
Prices
   
Outstanding
   
Exercisable
   
Life (years)
 
$
6.90
     
209
     
84
     
0.75
 
$
9.60
     
6,250
     
2,853
     
0.75
 
$
7.20
     
1,667
     
844
     
2.98
 
$
4.50
     
33,334
     
15,451
     
3.15
 
$
6.00
     
16,500
     
6,306
     
3.23
 
$
4.20
     
13,334
     
3,197
     
3.79
 
$
5.15
     
10,000
     
2,185
     
3.88
 
$
1.70
     
4,000
     
750
     
4.01
 
         
85,294
     
31,670
         
                             
 
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 nine months ended September 30, 2012, included compensation expense for the stock-based payment awards granted prior to, but not yet vested, as of September 30, 2012 based on the grant date fair value estimated, and compensation expense for the stock-based payment awards granted subsequent to September 30, 2012, 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 operations during the nine months ended September 30, 2012 and 2011 is $199,404 and $291,012, respectively.
 
Warrants
A summary of the Company’s warrant activity and related information follows:
 
   
Risk free interest rate
0.73% - 2.5%
Stock volatility factor
63.04% - 257.10%
Weighted average expected option life
5 years
Expected dividend yield
None


 
 
 
ORIGINOIL, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2012

4. 
STOCK OPTIONS AND WARRANTS (Continued)
 
 
   
9/30/2012
 
         
Weighted
 
         
average
 
         
exercise
 
   
Options
   
price
 
Outstanding -beginning of period
   
836,188
   
$
4.20
 
Granted
   
540,000
     
1. 04
 
Exercised
   
-
     
-
 
Forfeited
   
(100,002
)
   
7.50
 
Outstanding - end of period
   
1,276,186
   
$
4.29
 
 
At September 30, 2012, the weighted average remaining contractual life of warrants outstanding:
 
                 
Weighted
 
                 
Average
 
                 
Remaining
 
Exercisable
   
Warrants
   
Warrants
   
Contractual
 
Prices
   
Outstanding
   
Exercisable
   
Life (years)
 
$
9.30
     
223,338
     
223,338
     
1.75
 
$
10.20
     
28,335
     
28,335
     
1.88
 
$
9.00
     
9,168
     
9,168
     
2.06
 
$
8.70
     
3,334
     
3,334
     
2.12
 
$
8.40
     
667
     
667
     
2.33
 
$
8.70
     
5,000
     
5,000
     
2.66
 
$
5.70
     
7,334
     
7,334
     
2.84
 
$
4.50
     
3,334
     
3,334
     
2.95
 
$
4.20
     
8,334
     
8,334
     
2.98
 
$
4.20
     
33,334
     
33,334
     
2.99
 
$
3.60
     
8,334
     
8,334
     
3.08
 
$
4.50
     
33,334
     
33,334
     
3.15
 
$
4.20
     
13,335
     
13,335
     
3.16
 
$
6.00
     
133,334
     
133,334
     
3.23
 
$
6.00
     
33,334
     
33,334
     
3.24
 
$
6.30
     
8,334
     
8,334
     
3.47
 
$
5.70
     
4,001
     
4,001
     
3.50
 
$
6.90
     
33,334
     
33,334
     
3.71
 
$
6.90
     
33,334
     
33,334
     
3.96
 
$
1.90
     
80,000
     
80,000
     
4.01
 
$
6.90
     
33,334
     
33,334
     
4.21
 
$
1.47
     
260,000
     
260,000
     
4.57
 
$
0.65
     
280,000
     
280,000
     
4.86
 
         
1,276,186
     
1,276,186
         

During the nine months ended September 30, 2012, the Company granted 260,000 stock purchase warrants for services to purchase shares of common stock. The Company recognized warrant compensation for services in the statement of operations for the nine months ended September 30, 2012 and 2011, were $679,200 and $248,507, respectively.

During the nine months ended September 30, 2012, the Company granted to an investor 153,846 warrants to purchase an aggregate of 153,846 shares of common stock associated with a promissory note in the amount of $100,000. Also, during the period ended September 30, 2012 through a private placement, the Company issued 2,685,465 common stock purchase warrants with the purchase of 1,230,766 shares of common stock for proceeds received and a subscription payable of $799,993. During the nine months ended September 30, 2012, 493,943 purchase warrants were exercised through a cashless exercise to purchase 262,281 shares of common stock, and 317,435 purchase warrants were forfeited or cancelled. The number of outstanding stock purchase warrants to purchase shares of common stock as of September 30, 2012, was 1,276,186 for services, and 3,295,802 for investor stock purchase warrants for a total of 4,571,988.

 
 
ORIGINOIL, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2012

5.
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 had an aggregate principal amount of $1,176,500, and became due and payable on July 11, 2012. The debentures were convertible at any time at the option of the investors into shares of common stock at a conversion price of $1.75 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 bore 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 $1.75 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 outstanding as of September 30, 2012 are exercisable for an aggregate of 215,692 shares of common stock at the option of the holder for a period of five years at an exercise price of $0.65 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.

On May 18, 2012, the debentures’ remaining principal amount of $841,197 was converted into 1,241,929 shares of common stock, with payments of interest in both cash and common stock consisting of $5,262 and issuance of 6,551 of common stock at a fair value of $9,892.

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 was converted during the period and resulted in the recognition of $443,984 in interest expense for the nine months ended September 30, 2012.

The derivative liability is adjusted periodically according to the Company’s stock price fluctuations. At the time of conversion of the warrants, any remaining derivative liability associated with the warrants will be charged to additional paid-in capital.  For purpose of determining the fair market value of the derivative liability for the warrants,  the Company used Black Scholes option valuation model. The significant assumptions used in the Black Scholes valuation of the derivative are as follows:
 
Risk free interest rate
0.62% - 0.73%
Stock volatility factor
70.21% - 72.36%
Weighted average expected option life
5 years
Expected dividend yield
None
 
 The value of the derivative liability at September 30, 2012 was $123,957.

6.
OBLIGATIONS UNDER CAPITAL LEASE

 
On March 1, 2012, the Company entered into a short term capital lease for a six month period with an option to purchase the equipment at the end of the lease. The total cost of the asset is $65,000, which includes a fee of $5,000 that will be paid at the end of the lease. The monthly rental payment is $5,000 per month plus tax. A deposit of $10,000 was paid for first and last month rent. Since the lease is less than a year there are no future payments to disclose and no imputed interest necessary to reduce the minimum lease payments to present value. On May 31, 2012 the equipment was returned to the vendor and the deposit was applied to rental of the equipment for the three months. The capital lease was reclassified as an operating lease and a $16,750 expense was recorded as rental of equipment in the statement of operations.

 
 
 
ORIGINOIL, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2012

7. 
UNSECURED CONVERTIBLE PROMISSORY NOTES

During November 2011, the Company issued unsecured convertible promissory notes in the aggregate principal amount of $32,500 (the “November Notes”). During December 2011, the Company issued unsecured convertible promissory notes in the aggregate principal amount of $218,750 (the “December Notes”). As a result of an exchange, $20,000 in principal amounts of the November Notes was exchanged for like principal amounts of the December Notes. During the nine months ended September 30, 2012, the Company issued unsecured convertible promissory notes in the aggregate principal amounts of $1,479,578 (the “January Notes”). As a result of a further exchange, $190,250 in principal amounts of the December Notes was exchanged for like principal amounts of the January Notes. Accordingly, as of September 30, 2012, there were November Notes in the aggregate principal amount of $12,500 outstanding, December Notes in the aggregate principal amount of $48,500 outstanding, January Notes in the aggregate principal amount of $1,669,828 outstanding. During the month of November 2012, holders of the November, December and January Notes converted an aggregate principal amount of $1,438,326, plus unpaid accrued interest of $74,762 for 3,457,840 shares of common stock of the Company.

November Notes

As of September 30, 2012, the November Notes have an aggregate principal amount of $12,500 with a five-year term and are convertible into shares of common stock of the Company at a conversion price of $2.40 per share.  Interest on the November Notes is calculated each quarter on the aggregate unconverted outstanding principal amount of the note, and is payable at the per annum rate of two (2) shares of common stock for each $100 outstanding principal of the note. If the market price per share is less than $2.40 then the interest will be paid in cash at 4.8% of the outstanding principal note. Interest is payable quarterly, upon redemption and/or at maturity.

December Notes

As of September 30, 2012, the December Notes have an aggregate principal amount of $48,500 with a one-year term and are convertible into shares of common stock of the Company at a conversion price of $1.75 per share. Also, the December Notes have detachable three (3) year warrants to purchase 55,429 shares of common stock.  The December Notes accrue interest at 8% per annum and is payable on the conversion date and/or at maturity. The December Notes are also redeemable by us, at the investor’s option, at maturity at a redemption price of 112% of the outstanding principal plus accrued and unpaid interest.
  
The December Notes were originally issued with detachable three (3) year warrants to purchase an aggregate of 272,282 shares of common stock at an exercise price of $1.75 (the “December Warrants”), and 216,853 were subsequently exchanged for 133,005 shares of common stock. The detachable warrants were evaluated for purposes of classification under ASC 480-10, “Distinguishing Liabilities from Equity” (pre-Codification SFAS150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity). The warrants did not embody any of the conditions for liability classification under the ASC 480-10 context. The warrants were then evaluated under ASC 815, and were accounted for under the equity classification. The proceeds were then allocated based on the relative fair value of the instruments.

January Notes
 
As of September 30, 2012, the January Notes have an aggregate principal amount of $1,669,828 with a one-year term and are convertible into shares of common stock of the Company at a conversion price of $1.75 per share. In addition, the Company issued upfront shares of common stock in the amount of 1,411,351, which includes the amount from the December exchange during the period. In the event the note is converted in full prior to maturity, the holder is entitled to one additional share of common stock for each share converted. The January Notes accrue interest at 8% per annum and are payable on the conversion date and/or at maturity. The January Notes are also redeemable by the Company, at the holder’s option, at maturity at a redemption price of 112% of the outstanding principal plus accrued and unpaid interest.

The Company evaluated the three notes for a beneficial conversion feature and accounted for the notes under ASC 815 (Statement 133, EITF Issue 07-5, and EITF Issue 00-19). The instrument was not stated at fair value, and could not be settled partially or wholly in cash. The beneficial conversion feature is equal to the difference between the Company’s market price of its common stock on the measurement date and the effective conversion price multiplied by the number of shares the holder is entitled to upon conversion

The notes were issued with a discount, which is amortized over the life of the note. The Company recorded amortization of the debt discount of $974,140 in interest expense for the nine months ended September 30, 2012.
 
 
 
ORIGINOIL, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2012

8. 
SECURITES PURCHASE AGREEMENT

On June 20, 2012, the Company entered into a securities purchase agreement with an investor providing for the issuance of a promissory note (the “Note”) in an aggregate principal amount of $400,000 and warrants to purchase an aggregate of up 615,384 shares of the Company’s common stock for an aggregate purchase price of $100,000 in a private placement. At closing, which took place simultaneously with execution of the securities purchase agreement, the Company issued the Note with an outstanding principal sum of $100,000 together with a warrant to purchase 153,846 shares of the Company’s common stock.

Under the terms of the securities purchase agreement, the investor has the option to purchase an additional $300,000 in principal under the Note and receive further warrants to purchase an aggregate of up to 461,538 shares of the Company’s common stock.

The Note matures six months from the date of each purchase made under the Note, and bears interest at a rate of 10% per annum, which increased to 15% when the Note was not repaid by September 18, 2012. The Note may be converted into shares of the Company’s common stock at a conversion price of $0.65. The warrants may be exercised at any time for a period of six years from the date of issuance at an exercise price of $0.65.

The notes were issued with a discount, which is amortized over the life of the note. The Company recorded amortization of the debt discount of $28,333 in interest expense for the nine months ended September 30, 2012.
 
9.
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 1, 2012, the Company issued 15,384 shares of common stock at fair value of $14,614 for services performed by outside consultants.

 
On October 11, 2012, the Company entered into a securities purchase agreement for the sale of a 10% convertible promissory note in the aggregate principal amount of $199,998 with a 25% Original Issue Discount (OID) of $49,998. For net proceeds of $150,000. The note is convertible into shares of common stock of the Company at a conversion price of $0.65 per share. All conversions shall be cashless. The note matures ninety (90) days from the effective date unless extended.  A one-time interest charge of $20,000 will be applied to the principal sum.

 
On October 15, 2012, the Company issued 24,359 shares of common stock at fair value of $19,731 for services performed by outside consultants.

 
On October 18, 2012, the Board of Directors approved the issuance of 20,000 common stock purchase warrants to two consultants for services per their agreements.

 
On October 24, 2012, the Company issued 172,462 shares of common stock at a price of $0.65 per share, through a private placement for cash and a subscription payable of $101,700, together with one (1) year warrants to purchase an aggregate of 172,462 shares of common stock, three (3) year warrants to purchase an aggregate of 78,000 shares of its common stock. Each warrant is exercisable at a price per share of $0.65.

 
On November 1, 2012, holders of convertible notes, known in the Company’s filings with the SEC as the “November Notes”, “December Notes”, and ‘January Notes”, in the aggregate outstanding principal amount of $1,375,826, converted all outstanding principal and accrued and unpaid interest of $71,514 into an aggregate of 3,308,240 shares of common stock of the Company. Subdequently, three holders of the January Notes converted an additional aggregate outstanding principal amount of $62,500, plus unpaid accrued interest of $2,948 into an aggregate of 149,600 shares of common stock of the Company.
 
On November 1, 2012, the Board of directors approved the issuance of 50,000 shares of common stock purchase warrants to a consultant for advisory services per the agreement.

 
On November 7, 2012, the Company issued 384,618 shares of common stock at a price of $0.65 per share, through a private placement for cash of $250,000, together with one (1) year warrants to purchase an aggregate of 384,618 shares of common stock, three (3) year warrants to purchase an aggregate of 462,618 shares of its common stock and five (5) year warrants to purchase an aggregate of 307,694 shares of common stock. Each warrant is exercisable at a price per share of $0.65.

 
On November 12, 2012, the Company issued 43,589 shares of common stock at fair value of $37,487 for consultant fees.
 
On November 15, 2012, the Company issued 192,309 shares of common stock at a price of $0.65 per share, through a private placement for cash of $125,000, together with one (1) year warrants to purchase an aggregate of 192,309 shares of common stock, three (3) year warrants to purchase an aggregate of 153,847 shares of its common stock, and five (5) year warrants to purchase an aggregate of 153,847 shares of its common stock. Each warrant is exercisable at a price per share of $0.65.
 
On November 16, 2012, the Board of Directors approved a securities purchase agreement for the sale of a 10% convertible promissory note in the aggregate principal amount of $199,998 with a 25% Original Issue Discount (OID) of $49,998, for net proceeds of $150,000. The note is convertible into shares of common stock of the Company at a conversion price of $0.65 per share. All conversions shall be cashless. The note matures ninety (90) days from the effective date unless extended. A one-time interest charge of $20,000 will be applied to the principal sum.
 
On November 16, 2012, the Board of Directors approved the issuance of 380,000 stock options to three employees under the Company’s 2012 Incentive Stock Option Plan (the “Plan”). The stock options vest over four (4) years and can be exercised over a ten (10) year period. Also, approved were 100,000 five (5) year common stock purchase warrants to two employees per their agreements.
 
 
 

 
 
 

 
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
This Form 10-Q contains forward-looking statements that are subject to a number of risks and uncertainties, many of which are beyond our control, which may include statements about our:
 
 
●
business strategy;
     
 
●
financial strategy;
     
 
●
intellectual property;
     
 
●
production;
     
 
●
future operating results; and
     
 
●
plans, objectives, expectations and intentions contained in this report that are not historical.
 
All statements, other than statements of historical fact included in this report, regarding our strategy, intellectual property, future operations, financial position, estimated revenues and losses, projected costs, prospects, plans and objectives of management are forward-looking statements. When used in this report, the words “could,” “believe,” “anticipate,” “intend,” “estimate,” “expect,” “project” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain such identifying words. All forward-looking statements speak only as of the date of this report. You should not place undue reliance on these forward-looking statements. Although we believe that our plans, intentions and expectations reflected in or suggested by the forward-looking statements we make in this report are reasonable, we can give no assurance that these plans, intentions or expectations will be achieved.  These statements may be found under “Management's Discussion and Analysis of Financial Condition and Results of Operations,” as well as in this report generally.  Actual events or results may differ materially from those discussed in forward-looking statements as a result of various factors.  In light of these risks and uncertainties, there can be no assurance that the forward-looking statements contained in this filing will in fact occur.
 
Organizational History
 
OriginOil, Inc. (“we”, “us”, “our”, the “Company” or “OriginOil”) was incorporated on June 1, 2007 under the laws of the State of Nevada.  We have only been engaged in our current and proposed business operations since June 2007, and to date, we have been primarily involved in research and development activities.  Our principal offices are located at 5645 West Adams Blvd., Los Angeles, California 90016. Our telephone number is (323) 939-6645. Our website address is www.originoil.com.   Our website and the information contained on our website are not incorporated into this quarterly report.
 
Overview of Business
 
OriginOil has developed an energy production process for harvesting algae and cleaning up oil and gas water.  Operating at the first stage of extraction, this high-speed and chemical-free process can be embedded in other systems to improve performance.  Originally invented to solve the biggest problem in algae production, it is now finding demand in oil and gas fracking and production water cleanup, an immediate and fast-growing market that desperately needs clean technology solutions.  OriginOil is a pure technology company.  We are neither a producer nor a service company.  We intend to embed our technology into the systems others build and sell, through joint ventures, private labeling and licensing agreements.

Algae Harvesting Application

The OriginOil System is designed to control the harvesting of algae, and intended to result in a concentrate which can be either converted by other companies into bio-oil, bio-gas or bio-carbon for refining into fuel and chemicals, or further separated into lipids and biomass for processing by other companies into valuable products.

Oil and Gas Water Cleanup Application

When applied to the oil and gas industry, OriginOil’s process is used continuously to remove oils, suspended solids, insoluble organics and bacteria from produced or ‘frac flowback’ water. Testing has shown that OriginOil’s process can reduce Total Organic Carbon (TOC) by as much as 98% in the first pass.

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 developing sales distribution networks or engaging in volume manufacturing.

We have only been engaged in our current and proposed business operations since June 2007. While continuing to engage in research and development, we have begun to make our first licensing agreements.
 
Recent Developments
 
 
●
On January 13, 2012, we announced that we plan to co-develop an integrated system with the U.S. Department of Energy’s Idaho National Laboratory for direct conversion of raw algae into a renewable crude oil that can be used by existing petroleum refineries.
 
 
●
On February 3, 2012, we announced that Algae producer Aquaviridis, Inc. has signed a commercial agreement with us to help develop the multi-phase algae production rollout at its Mexicali, Mexico site, a potential model for algae sites throughout the North American Free Trade Agreement (NAFTA) region, with a focus on desert areas of the American Southwest and Mexico.
 
 
●
On February 7, 2012, we announced that we demonstrated our low-energy Algae Appliance™ to industry executives from a workshop hosted by the National Algae Association at the University of Southern California.
 
 
●
On February 15, 2012, we announced that we have named Melbourne-based Frontline Engineering Australia as our first certified support partner worldwide.
 
 
●
On February 24, 2012, we announced a new company study indicating for the first time that algae producers worldwide can now make transportation fuels cost-effectively themselves.
 
 
●
On March 8, 2012, we announced that we received a firm order from Ennesys to supply a test scale version of our Algae Appliance™ harvester, and our Quantum Fracturing™ CO2 feeding technology for a test of urban algae production near Paris, France. The purchase order for the initial purchase totals $30,000 to be paid in full within ninety (90) days.
 
 
 
 
●
On March 23, 2012, we announced the introduction of the evaluation-sized Algae Appliance Model 4, a new entry-level, low-cost algae harvester that we believe will make it easier, faster and cheaper for producers and researchers to try and buy our proprietary harvesting technology. Driven by what we believe to be a major design breakthrough, the new price point of the Algae Appliance™ Model 4 is expected to greatly accelerate adoption of OriginOil’s chemical-free, continuous-flow, very low-energy system.
     
  ●
On April 18, 2012, we announced that our technology developed for algae harvesting has shown promise in reclaiming hydraulic fracturing flowback water.
     
  ●
On April 25, 2012, we announced that in recent independent third-party testing our algae harvesting process was able to remove 98% of hydrocarbons from a sample of West Texas oil well ‘frac flowback’ water in the first stage alone.
     
  ●
On May 3, 2012, we announced that we intend to collaborate with Algasol Renewables on the development of an integrated algae growth and harvesting system.
     
  ●
On May 9, 2012, we announced that we signed a memorandum of understanding with California-based PACE to collaborate with oil field operators in Texas and elsewhere to improve petroleum recovery and water cleaning for re-use at well sites, using a process we originally developed for algae harvesting.
     
  ●
On May 23, 2012, we announced that we filed, among other things, three patents with the United States Patent & Trademark Office including two patents describing our unique technology for processing solids in solution.
     
  ●
On June 7, 2012, we announced that we are gearing up for the commercial roll out of our oil and gas wastewater clean-up systems and have selected Los Angeles-based Clean Water Technology to manufacture the company’s systems.
     
  ●
On June 8, 2012, our Board of Directors appointed Anthony Fidaleo as a director.
     
  ●
On June 20, 2012, we announced that we have found that our platform technology which separates solids from liquids in a single pass, without the use of chemicals, has multiple market implications beyond the algae industry.
     
  ●
On July 11, 2012, we announced that we have shipped the first production model of our Algae Appliance™ harvester to Paris-based Ennesys, our urban algae joint venture
     
  ●
On July 19, 2012 we announced the formation of a dedicated business unit to aggressively market our continuous-flow, high efficiency and chemical-free technology for frack water cleanup and petroleum recovery.
     
  ●
On July 25, 2012, we announced that we have received purchase orders for two test scale units from the United States Department of Energy’s Idaho National Labs under our research agreement.
     
  ●
On August 30, 2012, we announced that a Japanese research partner plans to employ our algae harvesting technology for an ambitious algae biofuels program to provide renewable fuels and help eliminate radioactive materials.
     
  ●
On September 12, 2012, we announced that we intend to license our proprietary CLEAN-FRAC™ process under private label to firms offering oil and gas water treatment solutions, in a first deployment of the “Powered by OriginOil™” brand.
     
  ●
On September 25, 2012, we filed a filed a complaint in the US District Court Central District of California against MBD Energy Limited (“MBD”) to protect our intellectual property asserting among, other things, breach of contract, conversion, fraudulent non-disclosure and unfair competition by MBD.
     
  ●
On October 9, 2012, we announced that we received our first international patent for our algae harvesting technology from the Australian patent office.
     
  ●
On October 17, 2012, we announced that we entered into an OEM Agreement with Pearl H20, LLC our first agreement to license our proprietary CLEAN-FRAC™ process with oil and gas water treatment.
 
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, 2012, 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, 2012, and no pronouncements were adopted during the period.
 
 
 
 
Results of Operation
 
Results of Operations for the three and nine months ended September 30, 2012 compared to the three and nine months ended September 30, 2011.
              
Revenue and Cost of Sales

Revenue for the three months ended September 30, 2012 and 2011 was $30,726 and $0, respectively. Cost of sales for the three months ended September 30, 2012 and 2011 were $13,543 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 consultant fees for equipment production.

Revenue for the nine months ended September 30, 2012 and 2011 was $583,889 and $142,500, respectively. Cost of sales for the nine months ended September 30, 2012 and 2011 were $420,906 and $0, respectively. The increase in revenue and cost of sales was due to an increase in equipment sold and the related material supplies and consultant 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 $169,038 to $1,310,532 for the three months ended September 30, 2012, compared to $1,141,494 for the three months ended September 30, 2011. The increase in SG&A expenses was due primarily to a net increase in non-cash stock compensation in the amount of $129,068, and the net change of $237,802 for investor relations and public relations, of which $368,398 was a non-cash expense, plus an overall decrease in other SG&A expenses of $(197,832).

SG&A expenses increased by $1,280,525 to $3,910,316 for the nine months ended September 30, 2012, compared to $2,629,791 for the nine months ended September 30, 2011. The increase in SG&A expenses was due primarily to an increase of $322,604 in professional fees, $739,770 for investor and public relations of which $855,198 was a non-cash expense, $339,085 for non-cash stock compensation expense, and a decrease of $(120,934) in overall SG&Aexpenses.

  Reseach and Development Cost

Research and development (“R&D”) cost decreased by $(180,506) to $152,978 for the three months ended September 30, 2012, compared to $333,484 for the three months ended September 30, 2011. The decrease in R&D cost was due to a decrease in employee salaries, outside services, and consulting fees related to R&D associated activities. 

R&D cost decreased by $(19,751) to $704,166 for the nine months ended September 30, 2012, compared to $723,917 for the nine months ended September 30, 2011.   The decrease in overall R&D costs was primarily due to a decrease in employee salaries and outside services for algae appliances and fracking research.
  
Net Loss
 
Our net loss increased by $(449,573) to $(1,922,395) for the three months ended September 30, 2012, compared to $(1,472,822) for the three months ended September 30, 2011. The increase in net loss was primarily due to the net change in non-cash stock compensation cost of $129,068, investor relations and public relations of $368,398, a decrease in change in derivative valuation of $(446,919), plus an overall increase in operating expenses of $399,026.

Our net loss increased by $(3,765,181) to $(6,982,053) for the nine months ended September 30, 2012, compared to $(3,216,872) for the nine months ended September 30, 2011. The majority of the increase is due to accounting for the net change in non-cash amortization of the debt discount, and loss derivative valuation in the amount of $2,333,063, an increase in non-cash stock and warrant compensation of $339,085, and investor relations of $739,770, plus the overall increase in the operating expenses of $353,263. 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, 2012 and December 31, 2011, we had cash of $98,612 and $197,868, respectively and working capital deficit of $(979,509) and $(1,068,155), respectively.  This decrease in working capital deficit was due primarily to a decrease in convertible debt and deferred income. During the first two quarters of 2012, we raised an aggregate of $152,000 in an offering of unsecured convertible notes, a subscription payable, and securities exchange agreement. Since, July 1, 2012 through November 15, 2012 we raised $1,437,093 in an offering of shares of our common stock and warrants.  The opinion of our independent registered public accounting firm on our audited financial statements as of and for the year ended December 31, 2011 contains an explanatory paragraph regarding substantial doubt about our ability to continue as a going concern.   Our ability to continue as a going concern is dependent upon raising capital from financing transactions.
 
Net cash used in operating activities was $(2,378,141) for the nine months ended September 30, 2012, compared to $(2,396,522) for the prior period September 30, 2011. The decrease of $(18,381) in cash used in operating activities was due to the net decrease in prepaid expenses, work in progress, accounts payable and deferred income, plus the 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 $(109,089) for the nine months ended September 30, 2012, as compared to $(114,196) for the prior period September 30, 2011. The net decrease in cash used in investing activities was due to a decrease in expenditures for the purchase of investments and fixed assets, with an increase in patent expenditures and research equipment.

Net cash flows provided by financing activities was $2,388,474 for the nine months ended September 30, 2012, as compared to $3,584,175 for the prior period September 30, 2011. The decrease in cash provided by financing activities was due to an decrease in equity financing. To date we have principally financed our operations through the sale of our common stock and the issuance of debt.
  
We do not have any material commitments for capital expenditures during the next twelve months.  Although our proceeds from our offering of shares of common stock and warrants together with revenue from operations are currently sufficient to fund our operating expenses, we will need to raise additional funds in the future so that we can expand our operations. Therefore our future operations are dependent on our ability to secure additional financing.  Financing transactions may include the issuance of equity or debt securities, obtaining credit facilities, or other financing mechanisms. However, the trading price of our common stock and a downturn in the U.S. equity and debt markets could make it more difficult to obtain financing through the issuance of equity or debt securities. Even if we are able to raise the funds required, it is possible that we could incur unexpected costs and expenses, fail to collect significant amounts owed to us, or experience unexpected cash requirements that would force us to seek alternative financing. Furthermore, if we issue additional equity or debt securities, stockholders may experience additional dilution or the new equity securities may have rights, preferences or privileges senior to those of existing holders of our common stock. The inability to obtain additional capital may restrict our ability to grow and may reduce our ability to continue to conduct business operations. If we are unable to obtain additional financing, we may have to curtail our marketing and development plans and possibly cease our operations.
  
We have estimated our current average burn, and believe that we have assets to ensure that we can function without liquidation over the next nine months, due to our cash on hand, 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 ended September 30, 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
 
 
 
PART II
 
Item 1.  Legal Proceedings.
 
As previously disclosed, MBD was our first pilot customer, who previously purchased from the Company test scale algae processing equipment as well as larger scale units. On September 25, 2012, we filed a complaint in the US District Court Central District of California against MBD Energy Limited (“MBD”) to protect our intellectual property asserting among, other things, breach of contract, conversion, fraudulent non-disclosure and unfair competition by MBD. We are seeking, among other things, injunctive relief, specific performance, monetary damages and attorneys’ fees. We are in discussions with MBD Energy to resolve the matter, and have suspended further actions to enable the discussions to reach a desirable outcome.
 
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.
 
None.
 
Item 3.  Defaults Upon Senior Securities.
 
None.
 
Item 4.  Mine Safety Disclosures

 Not applicable.
 
Item 5.  Other Information.

(a) 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.
 
 
21
 
 
Item 5 Disclosure

Common Stock and Warrant Offering

The following disclosure would have otherwise been filed on Form 8-K under the heading “Item 3.02 Unregistered Sales of Equity Securities”:

As previously reported on July 31, 2012, August 9, 2012, October 12, 2012 and November 7, 2012, OriginOil, Inc. we commenced a private placement offering of up to 4,615,385 shares of common stock together with up to four series of warrants to purchase up to an aggregate of 18,461,540 shares of common stock. Between November 6, 2012 and November 15, 2012, we sold to accredited investors an aggregate of 192,309 shares of our common stock together with one-year warrants to purchase an aggregate of 192,309 shares of our common stock, three-year warrants to purchase an aggregate of 153,847 shares of our common stock and five-year warrants to purchase an aggregate of 153,847 shares of our common stock for aggregate gross proceeds of $125,000. Each of the warrants is exercisable at a price per share of $0.65 subject to adjustment for stock splits, dividends, distributions, recapitalizations and the like.
 
The securities offered will not be and have not been registered under the Securities Act of 1933, as amended (the “Securities Act:”), and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements. This current report shall not constitute an offer to sell or the solicitation of an offer to buy, nor shall there be any sale of these securities in any state in which such offer, solicitation or sale would be unlawful prior to the registration or qualification under the securities laws of any such state.
 
Note Conversion

On November 13, 2012, holders of convertible notes, known in our filings with the SEC as the “January Notes” converted an aggregate outstanding principal amount of $62,500, plus unpaid interest of $2,948 into an aggregate of 149,600 shares of our common stock.
 
The securities above were offered and sold pursuant to an exemption from the registration requirements under Section 4(2) of the Securities Act 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.
 
Warrant Grants

On November 16, 2012, we issued 5-year warrants to purchase an aggregate of 100,000 shares of our common stock to employees exercisable at $0.89 per share.

The securities above were offered and sold pursuant to an exemption from the registration requirements under Section 4(2) of the Securities Act 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.
 
 
22
 

Issuance of Original Issue Discount Convertible Notes

The following disclosure would have otherwise been filed on Form 8-K under the headings Item 1.01 “Entry into a Material Definitive Agreement”, Item 2.03 “Creation of a Direct Financial Obligation or an Obligation under an Off-Balance Sheet Arrangement of a Registrant” and  “Item 3.02 Unregistered Sales of Equity Securities”:

On November 19, 2012, we have agreed to issue Notes to accredited investors in an aggregate principal amount of $199,998 for an aggregate purchase price of $150,000 in a private placement.

The Notes provide for a one-time interest charge of 10% of the aggregate principal amount of the Notes and in an event of default, the Notes bear interest at 25% per annum. The Notes may be converted into shares of our common stock at a conversion price of $0.65 (subject to adjustment for stock splits, dividends, combinations and other similar transactions).

The Notes mature 90 days from the date of issuance. If we do not repay the Notes on maturity, then the maturity date shall be automatically extended for up to three further 30 day periods and an extension fee of 25% of the then outstanding principal, interest and other fees shall be added to the principal amount of the Notes at the end of each 30 day period that the Notes are still outstanding.

The Notes provide that if shares issuable upon conversion of the Notes are not timely delivered then we shall be subject to a penalty of $2,000 per day until share delivery is made. The Notes include customary default provisions related to payment of principal and interest and bankruptcy or creditor assignment.  In addition, it shall constitute an event of default under the Notes if we shall not be DTC eligible or we shall be delinquent in its filings with the SEC.  In the event of default under the Notes, we shall be required to repay an amount in cash equal to the greater of (i) the outstanding principal amount of the Note plus accrued and unpaid interest divided by the then conversion price of the Notes multiplied by our lowest trade price at the time of demand or payment, or (ii) 150% of the outstanding principal amount of the Notes plus accrued and unpaid interest and other fees due thereon.

We also granted to the purchasers of the Notes piggyback registration rights, under which we are required to include all shares issuable upon conversion of the Note in any future registration statement filed by us subject to customary exceptions.

The foregoing is qualified in its entirety by the form of Note attached as Exhibit 10.1, which is incorporated herein by reference.

The securities above were offered and sold pursuant to an exemption from the registration requirements under Section 4(2) of the Securities Act of 1933, as amended (the “Securities Act”) 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 6.  Exhibits.

Exhibit Number
 
Description of Exhibit
     
10.1
 
Form of Convertible Promissory Note (incorporated by reference to the Current Report on Form 8-K filed with the SEC on October 12, 2012)
 
 
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, 2012 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 20, 2012
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
24
 
 
 
 
 
 
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