Summary of ORIGINOIL INC - Yahoo! Finance

Item 2. Management's Discussion and Analysis or Plan of Operation.

This Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as "may," "will," "should," "expect," "plan," "anticipate," "believe," "estimate," "predict," "potential" or "continue," the negative of such terms, or other comparable terminology. These statements are only predictions. Actual events or results may differ materially from those in the forward-looking statements as a result of various important factors. Although we believe that the expectations reflected in the forward-looking statements are reasonable, such should not be regarded as a representation by OriginOil, Inc., or any other person, that such forward-looking statements will be achieved. The business and operations of OriginOil, Inc. and its subsidiaries are subject to substantial risks, which increase the uncertainty inherent in the forward-looking statements contained in this Report.

The following discussion and analysis should be read in conjunction with the Consolidated Financial Statements and related notes included elsewhere in this Report.

Overview

The Company is currently developing a technology to produce a bio-fuel from algae through a cost-effective, high-speed manufacturing process to replace petroleum in various applications such as diesel, gasoline, jet fuel, plastics and solvents. Algae, unlike other bio-fuel feedstock such as corn and sugarcane, does not destroy vital farmlands and rainforests, disrupt global food supplies and create new environmental problems.

The Company's business model is based on licensing this technology to customers such as fuel refiners, chemical and oil companies. The Company is not in the business of producing and marketing oil or fuel, based on algae, as an end product.

A host of factors, including rising oil prices, global warming, and the rapid industrialization of China and India, have greatly increased the demand for a renewable alternative to petroleum. With new technology, algae can be grown economically to replace petroleum.

There are three primary challenges in cultivating algae for oil:

· Algae growth is dependent on a calm fluid environment; it does not like agitation. One of the primary challenges is how to optimally introduce carbon dioxide (CO2) and nutrients needed by the growing algae culture without disrupting or over-aerating it.

· Algae requires light as a source of energy to fuel its growth and oil production facilities. Algae cultivation systems need to distribute light cost-effectively and evenly within the algae culture.

· Algae organisms are protected by a tough cell wall. That wall must be cracked - normally an energy-expensive process - to extract the oil. The challenge is to maximize oil yield by cracking as many of the algae cells as possible with the smallest amount of energy.

To meet these challenges, the Company is developing a portfolio of proprietary technologies, including Quantum Fracturing™ and the Helix BioReactor™.

Quantum Fracturing

Quantum Fracturing, the Company's patent-pending technology, based on the science of mass transfer and fluid fracturing, addresses, and overcomes, all three challenges above. It works at the microscopic level to unlock many biological and chemical properties that massively enhance the efficiency of algae production and oil extraction.

In Quantum Fracturing, water, carbon dioxide and other nutrients are fractured at very high pressure to create a slurry of micron-sized bubbles, which is then injected into the algae culture awaiting it in a lower-pressure growth vessel, the bioreactor. This process can theoretically achieve total and instantaneous distribution of nutrients to every algae cell in the culture without fluid disruption or aeration. The pressure differentials between the two zones substantially increase contact and exchange between the micronized nutrients and the algae cells.

Helix BioReactor

The heart of the Company's system is the Helix BioReactor, an advanced algae growth system that can grow multiple layers of algae biomass around-the-clock with daily harvest. In a natural pond, the sun only illuminates one layer of algae growth, down to about half an inch below the surface. In contrast, the Helix Bioreactor features a rotating vertical shaft with very low energy lights arranged in a helix or spiral pattern, which results in a theoretically unlimited number of layers. Additionally, each lighting element is engineered to produce specific light waves and frequencies for optimal algae growth.

The helix structure also serves as the BioReactor's nutrient delivery system, through which the Quantum Fractured nutrients, including CO2, is evenly delivered to the entire algae culture, monitored and tuned for optimum growth.

Solvent-Free Extraction Process

Algae walls, which encase the oil, are resilient and difficult to break down, and the process of cracking algae cells to release the oil, known as lysing, has long represented a big challenge for the algae-to-oil industry. Mechanical methods to do so are energy-intensive and often ineffective; commonly-used chemical solvents such as benzene, ether or hexane are toxic and require careful handling. Such practices increase operating costs and make it harder to site algae production systems.

The Company has developed a new algae oil extraction process that does not use chemical solvents. Algae biomass is first sent through a shielded wave guide system where it receives low-wattage, frequency-tuned microwave bursts that break the cell walls. Quantum Fracturing is then applied to the now pre-cracked cells to complete the oil extraction with ease. This unique approach makes low-energy and environmentally-safe algae oil production a reality.

Modular and Scalable System

To reach the production levels necessary to realistically replace petroleum as an energy source, an algae growth system must be fully scalable. The Company's system to enhance and optimize algae growth allows both horizontal and vertical "stacking" of many Helix BioReactors into an integrated network of fully automated, portable, and remotely monitored growth units.

Further, by the use of such modular design, a large number of Helix BioReactors can be connected to a small number of extraction units to achieve both economies of scale and full industrialization of algae production.

The Company's business model is based on licensing this technology to customers such as fuel refiners, chemical and oil companies. The technologies we will use to transform algae into a new form of oil, however, have never been utilized on a commercial basis.

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

The Company will 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. To date, the Company has had no revenues and is in the development stage.

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

SFAS No. 107, "Disclosures About 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 December 31, 2007, the amounts reported for cash, accounts receivable, accounts payable, accrued interest and other expenses, and notes payable approximate the fair value because of their short maturities.

Recently Issued Accounting Pronouncements

In December 2004, the Financial Accounting Standards Board issued two FASB Staff Positions - FSP FAS 109-1, Application of FASB Statement 109 "Accounting for Income Taxes" to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004, and FSP FAS 109-2 Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004. Neither of these affected the Company as it does not participate in the related activities.

In May 2005, the FASB issued FASB Statement No. 154, "Accounting Changes and Error Corrections." This new standard replaces APB Opinion No. 20, "Accounting Changes, and FASB Statement No. 3, Reporting Accounting Changes in Interim Financial Statements," and represents another step in the FASB's goal to converge its standards with those issued by the IASB. Among other changes, Statement 154 requires that a voluntary change in accounting principle be applied retrospectively with all prior period financial statements presented on the new accounting principle, unless it is impracticable to do so. Statement 154 also provides that (1) a change in method of depreciating or amortizing a long-lived non-financial asset be accounted for as a change in estimate
(prospectively) that was effected by a change in accounting principle, and (2)
correction of errors in previously issued financial statements should be termed a "restatement." The new standard is effective for accounting changes and correction of errors made in fiscal years beginning after December 15, 2005. Early adoption of this standard is permitted for accounting changes and correction of errors made in fiscal years beginning after June 1, 2005. The Company has evaluated the impact of the adoption of Statement 154 and does not believe the impact will be significant to the Company's overall results of operations or financial position

As of December 31, 2007, the Company adopted Financial Accounting Standards No.
123 (revised 2004), "Share-Based Payment" (FAS) No. 123R, that addresses the accounting for share-based payment transactions in which an enterprise receives employee services in exchange for either equity instruments of the enterprise or liabilities that are based on the fair value of the enterprise's equity instruments or that may be settled by the issuance of such equity instruments. The statement eliminates the ability to account for share-based compensation transactions, as we formerly did, using the intrinsic value method as prescribed by Accounting Principles Board, or APB, Opinion No. 25, "Accounting for Stock Issued to Employees," and generally requires that such transactions be accounted for using a fair-value-based method and recognized as expenses in our statement of income. The adoption of (FAS) No. 123R by the Company had no material impact on the statement of income.

Results of Operations

Revenues

Currently the Company is in its development stage and has no revenues for the three months and six months ended June 30, 2008. We were incorporated in the State of Nevada on June 1, 2007.

Operating Expenses

General and Administrative Expenses

General and administrative ("G&A") expenses for the three months and six months ended June 30, 2008 were $228,997 and $396,127, respectively. The G&A expenses consist primarily of salaries and professional fees.

Research and Development Cost

Research and development ("R&D") cost for the three months and six months ended June 30, 2008 were $73,361 and $111,784, respectively. The R&D costs consist primarily of testing and research of product development.

Net Loss

Our net loss for the three months and six months ended June 30, 2008 was $296,421 and $491,239 respectively. This is due to continuing operations of the company, technology development, and the costs associated with registering the company for its public offering.

Liquidity and Capital Resources

As of June 30, 2008, we had $731,180 of working capital as compared to $1,237,629 from inception (June 1, 2007) through December 31, 2007. This decrease in working capital was due primarily to ongoing costs of developing the company and preparing its technologies for market.

Net cash used in operating activities was $521,849 for the six months ended June 30, 2008, as compared to $419,353 from inception (June 1, 2007) through December 31, 2007. The Company is in the development stage and has generated no revenues.

Net cash used in investing activities was $6,778 for the six months ended June 30, 2008, as compared to $0 from inception (June 1, 2007) through December 31, 2007. The Company purchased small equipment.

Net cash flows provided from financing activities was $0 for the six months ended June 30, 2008, as compared to $1,687,023 from inception (June 1, 2007) through December 31, 2007. There was no equity financing, or loans from shareholders.

We require substantial working capital to fund our business. We cannot predict whether additional financing will be available to us on favorable terms when required, or at all. Since our inception, we have experienced negative cash flow from operations and expect to experience significant negative cash flow from operations in the future.

We plan on raising additional capital through the sale of additional common stock. Our common stock is quoted on the Over the Counter Bulletin Board under the symbol "OOIL".

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.