Summary of ORIGINOIL INC - Yahoo! Finance

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

This Form 10-K 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," "Business," "Properties," 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, including, without limitation, the risks outlined under "Risk Factors" and matters described in this report generally. 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.

Overview

The Company 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.

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.

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. We are currently developing our technology and a commercial product. We have not generated any revenues from licensing our technology.

Benefits of Algae Oil Production

Cleaner to Produce and Burn

Petroleum contains sulfur and other toxins. It is a heavy pollutant. Drilling operations are highly noxious; crude spills on sea and land are natural catastrophes; and refineries produce heavy pollutants. By contrast, the algae production process generates no toxins - it's a lot like growing grass hydroponically. Oil created using OriginOil technology generates no heavy metals or sulfur when burned, and minimal output of greenhouse gases.

Can Be Produced Close to Point of Demand

Petroleum often travels tens of thousands of miles to reach its destination. This adds cost and gives suppliers a stranglehold on consumers. Using OriginOil technology, fuel can now be produced close to the site of usage and demand - virtually eliminating the transport cost of petroleum. In the future, portable OriginOil Systems may be transported to the point of demand and quickly start producing oil for electricity generation or fuel.

Does Not Compete with Food

The ethanol boom is already having a disastrous effect on food prices. Fast-rising prices of corn have caused havoc in global food supplies and the commodities markets. Using algae as a feedstock avoids creating shortages in food supplies or markets.

Works with Existing Refineries

Unlike other solutions which bypass the existing refining infrastructure, OriginOil's technology enables the production of fully compatible fuels. The petroleum industry has already announced plans to support the refining of biofuels. Of these, algae oil is most like petroleum in structure as it can be readily "cracked" into the lighter components of crude oil such as jet fuel, diesel, gasoline, solvents and plastics.

Works With Existing Gas Stations and Vehicles

Most solutions to the energy problem require massive new infrastructure: hybrids require new cars with toxic batteries; hydrogen cars need a new fuel network; and electric cars need their own recharging stations. By contrast, fuel refined from OriginOil systems can be seamlessly integrated into the current petroleum distribution system.

A Complete Solution to Produce a New Oil

Companies implementing algae oil production systems will need to know that they can generate product consistently at a competitive price. OriginOil's complete, validated industrial process will ensure that these companies can confidently plan and invest in renewable oil production for the long term.

OriginOil's Industrial Process

OriginOil's industrial process, with its patent pending devices and methods, optimizes this environment to help algae cells grow at their natural maximum rate - achieving a doubling of the algae population in as little as a few hours. The process then goes on to control the harvesting and oil extraction cycles in a high-speed, round-the-clock, streamlined industrial production of algae oil. Instead of waiting hundreds of millions years for algae to become oil, OriginOil's breakthrough technology and process can transform algae into oil in a matter of days.

Operating at the Quantum Level

OriginOil's patent-pending technology, Quantum Fracturing, is based on the science of mass transfer and fluid fracturing and addresses some of the challenges of industrializing algae oil production. A quantum is the smallest quantity of some physical property that a system can possess. We use the term to illustrate how we fracture the nutrient delivery environment into very small parts, down to a micron, or a millionth of a meter. Using Quantum Fracturing, water, carbon dioxide and other nutrients are fractured at very high pressure to create a slurry of micron-sized nutrition-bubbles, which is then channeled to the algae culture awaiting it in a lower-pressure growth vessel, the Helix BioReactor™. This process achieves total and instantaneous distribution of nutrients to the algae 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 culture.

OriginOil's system employs Quantum Fracturing in two major stages of algae production. First, at the growth stage where CO2 and nutrients are fractured into a micro-bubble slurry and injected directly into the algae culture for complete contact and nutrient absorption. Second, at the extraction stage, where water and special catalysts are fractured at high ultrasonic intensity, using very little energy, to crack the algae membrane to facilitate extracting its oil content. Quantum Fracturing technology greatly enhances the efficiency of algae production and makes it cost-effective and viable.

The Ultimate Algae Growth Environment

The heart of the OriginOil system is the Helix BioReactor™, an advanced algae growth system that can grow multiple layers of algae biomass around-the-clock with daily harvests. 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 growth 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. This algae growth environment will allow the algae culture to replicate exponentially - doubling the entire colony in as little as a few hours - making for very efficient, low-cost, low-footprint industrial algae production.

Enabling a Distributed Oil Model

To reach the production levels necessary to realistically replace petroleum as an energy source, an algae oil production system must be fully scalable. The OriginOil System is designed to be both modular and scalable. While it can function as a stand-alone oil producing system, it can also be connected in a stacked or parallel network to produce a large number of barrels per day.

OriginOil's patent pending system design facilitates large scale algae production through the 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. Additionally, OriginOil systems can be transported and placed anywhere in the world to operate as fully integrated, round-the-clock oil-producing plants. By enabling distributed oil production, we can help decentralize the oil and energy industry, empowering local energy production in villages, townships, communities, states and countries. Someday we will no longer need to import oil.

Speeding Up the Process Further

OriginOil's Helix BioReactor™ growth vessel adds the time-saving efficiency of combining the incubation vessel and larger tanks into one system. Once the algae matures in the Helix BioReactor™, 90% of the culture is transferred out for extraction, and the remaining 10% 'green' water is purified and returned to the growth tank. That remaining 10% is then allowed to re-expand into the Helix BioReactor™, creating a new batch, and the process is repeated. With this system there is no need to re-incubate each batch: the remaining algae culture is already mature and is ready to re-enter the log phase after each harvest and replenishment of growth environment.

Making the Process Viable

To overcome the final hurdle, and to make the entire algae-to-oil process viable, OriginOil devised a method for energy efficient algae oil extraction and does not use hazardous chemical solvents. Overcoming this final hurdle enables low-energy, environmentally-safe and viable, industrialized algae oil production.

The process of breaking down algae cells to release oil, known as lysing, has long represented a challenge - and a final hurdle - for the algae-to-oil industry. Algae cell walls are difficult to break down. Mechanical methods are energy-intensive and often ineffective. Commonly used chemical solvents such as benzene, ether or hexane are toxic and require special handling. Such practices increase operating costs and make it harder to site algae production systems.

In OriginOil's extraction unit, the flowing algae biomass is first sent through a shielded wave guide system where it receives low-wattage, frequency-tuned microwave bursts, weakening the cell walls. Then, Quantum Fracturing is then applied to these pre-cracked cells to complete the oil extraction. Quantum Fracturing, when used for extraction, creates an ultrasonic effect where the algae cell breaks down much in the same way that a high-frequency sound wave breaks glass.

A Modular Oil Producing System

The OriginOil System is designed to be modular. It can function as a standalone oil producing system, or can be connected in a parallel network to produce a large number of barrels per day output. OriginOil Systems can be placed anywhere to operate as round-the-clock oil-producing plants.

A new oil can be cleanly manufactured in an industrialized process using the OriginOil System. By enabling distributed oil production we can help transform the oil and energy industry from a centralized to a distributed model. The ability to generate clean, carbon-neutral energy anywhere can empower industrialization in villages, townships, communities, states and countries. There will be no need to import oil.

Intellectual Property

Since our business is based on licensing of our technology and not manufacturing oil, it is critical to the Company that it achieves one or more patents. We have filed the following patent applications with the U.S. Patent and Trademark Office:

1. On July 28, 2007, to protect the intellectual property rights for "Algae Growth System for Oil Production". The inventors listed on the patent application are Nicholas Eckelberry and T. Riggs Eckelberry, the Company's founders. The Company is listed as the assignee. We have not received any correspondence from the USPTO, with respect to this patent application.

2. On May 23, 2008, to protect the intellectual property rights for "Apparatus And Method For Optimizing Photosynthetic Growth In a Photo Bioreactor". The inventors listed on the patent application are Steven Shigematsu and Nicholas Eckelberry. The Company is listed as the assignee. We have not received any correspondence from the USPTO, with respect to this patent application.

3. On May 30, 2008, to protect the intellectual property rights for "Modular Portable Photobioreactor System". The inventors listed on the patent application are Steven Shigematsu and Nicholas Eckelberry. The Company is listed as the assignee. We have not received any correspondence from the USPTO, with respect to this patent application.

4. On June 16, 2008, a provisional filing to protect the intellectual property rights for "In-Line Lysing And Extraction System For Microorganisms". The inventors listed on the patent application are Steven Shigematsu and Nicholas Eckelberry. The Company is listed as the assignee. We have not received any correspondence from the USPTO, with respect to this patent application.

5. On July 16, 2008, a provisional filing to protect the intellectual property rights for "Renewable Carbon Sequestering Method Of Producing Pollution Free Electricity". The inventor listed on the patent application is Steven Shigematsu. The Company is listed as the assignee. We have not received any correspondence from the USPTO, with respect to this patent application.

6. On January 6, 2009, a provisional filing to protect the intellectual property rights for "Apparatus And Method For Optimizing Photosynthetic Growth In A Photobioreactor". The inventor listed on the patent application is Nicholas Eckelberry. The Company is listed as the assignee. We have not received any correspondence from the USPTO, with respect to this patent application.

7. On April 17, 2009, a provisional filing to protect the intellectual property rights for "Device and Method for Separation, Cell Lysing and Flocculation of Algae From Water". The inventor listed on the patent application is Nicholas Eckelberry. The Company is listed as the assignee. We have not received any correspondence from the USPTO, with respect to this patent application.

8. On July 13, 2009, a provisional filing to protect the intellectual property rights for "Algae Growth Lighting and Control System". The inventors listed on the patent application are Scott Fraser, Vikram Pattarkine, Ralph Anderson and Nicholas Eckelberry. The Company is listed as the assignee. We have not received any correspondence from the USPTO, with respect to this patent application.

9. On July 26, 2009, a provisional filing to protect the intellectual property rights for "Procedure For Extraction Of Lipids From Algae Without Cell Sacrifice". The inventors listed on the patent application are Paul Reep and Scott Fraser. The Company is listed as the assignee. We have not received any correspondence from the USPTO, with respect to this patent application.

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 April 2009, the FASB issued FSP FAS 157-4, "Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly." This FSP provides additional guidance for estimating fair value in accordance with FASB Statement No. 157, Fair Value Measurements, when the volume and level of activity for the asset or liability have significantly decreased. This FSP also includes guidance on identifying circumstances that indicate a transaction is not orderly. This FSP emphasizes that even if there has been a significant decrease in the volume and level of activity for the asset or liability and regardless of the valuation technique(s) used, the objective of a fair value measurement remains the same. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. FSP FAS 157-4 is effective for interim and annual reporting periods ending after June 15, 2009, and is applied prospectively. We do not believe that the implementation of this standard will have a material impact on our financial statements.

In April 2009, the FASB issued FSP FAS 107-1 and APB 28-1, "Interim Disclosures about Fair Value of Financial Instruments". This FSP amends FASB Statement No. 107, "Disclosures about Fair Value of Financial Instruments" to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. This FSP also amends APB Opinion No. 28, Interim Financial Reporting, to require those disclosures in summarized financial information at interim reporting periods. FSP FAS 107-1 and APB 28-1 are effective for interim and annual reporting periods ending after June 15, 2009. We do not believe that the implementation of this standard will have a material impact on our financial statements.

In April 2009, the FASB issued FSP FAS 115-2 and FAS 124-2, "Recognition and Presentation of Other-Than-Temporary Impairments". This FSP amends the other-than-temporary impairment guidance for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments in the financial statements. The most significant change the FSP brings is a revision to the amount of other-than-temporary loss of a debt security recorded in earnings. FSP FAS 115-2 and FAS 124-2 are effective for interim and annual reporting periods ending after June 15, 2009. We do not believe that the implementation of this standard will have a material impact on our financial statements.

In November of 2008, the SEC released a proposed roadmap regarding the potential use by U.S. issuers of financial statements prepared in accordance with International Financial Reporting Standards ("IFRS"). IFRS is a comprehensive series of accounting standards published by the International Accounting Standards Board ("IASB"). Under the proposed roadmap, the Company may be required in fiscal 2015 to prepare financial statements in accordance with IFRS. However, the SEC will make a determination in 2011 regarding the mandatory adoption of IFRS. We are currently assessing the impact that this potential change would have on our consolidated financial statements, and we will continue to monitor the development of the potential implementation of IFRS.

In March 2009, FASB unanimously voted for the FASB "Accounting Standards Codification" (the "Codification") to be effective beginning on July 1, 2009. Other than resolving certain minor inconsistencies in current United States Generally Accepted Accounting Principles ("GAAP"), the Codification is not supposed to change GAAP, but is intended to make it easier to find and research GAAP applicable to particular transactions or specific accounting issues. The Codification is a new structure which takes accounting pronouncements and organizes them by approximately ninety accounting topics. Once approved, the Codification will be the single source of authoritative U.S. GAAP. All guidance included in the Codification will be considered authoritative at that time, even guidance that comes from what is currently deemed to be a non-authoritative section of a standard. Once the Codification becomes effective, all non-grandfathered, non-SEC accounting literature not included in the Codification will become non-authoritative.

Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force ("EITF"), the American Institute of Certified Public Accountants ("AICPA"), and the SEC did not or are not believed by us to have a material impact on our present or future financial statements.

The Company has adopted all recently issued accounting pronouncements. The adoption of the accounting pronouncements, including those not yet effective, is not anticipated to have a material effect on the financial position or results of operations of the Company.

Results of Operations for the three and six months ended June 30, 2009 compared to the three and six months ended June 30, 2008.

Revenues

Currently the Company is in its development stage and has no revenues.

Operating Expenses

Selling and Marketing Expenses

Selling and marketing Expenses ("S&M") expenses increased by $143,634 or 253% to $200,365 for the three months ended June 30, 2009, compared to the prior period. S&M increased by $253,420 or 447% to $310,151 for the six months ended June 30, 2009, compared to the prior period. The S&M expenses increased due to an increase in marketing exposure.

General and Administrative Expenses

General and administrative ("G&A") expenses increased by $297,325 or 173% to $469,591 for the three months ended June 30, 2009, compared to the prior period. G&A expenses increased $546,404 or 161% to $885,800 for the six months ended June 30, 2009, compared to the prior period. The G&A expenses consist primarily of salaries, professional fees and renting of a new space.

Research and Development Cost

Research and development ("R&D") cost increased by $17,334 or 24% to $90,695 for the three months ended June 30, 2009, compared to the prior period. R&D cost increased by $110,128 or 99% to $221,912 for the six months ended June 30, 2009, as compared to the prior period. R&D costs consist primarily of testing and research of product development.

Net Loss

Our net loss increased by $(478,110) or 161% to $(774,531) for the three months ended June 30, 2009, compared to the prior period. Net loss increased by $(953,805) or 194% to $(1,445,044) for the six months ended June 30, 2009, compared to the prior period. This increase is due to continuing operations of the company, technology development, and market exposure. Currently the Company is in its development stage and had no revenues.

Liquidity and Capital Resources

As of June 30, 2009, we had $350,202 of working capital as compared to $731,180 for the prior period. This decrease of $380,978 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 $1,440,092 for the six months ended June 30, 2009, compared to $521,849 for the prior period. The Company is in the development stage and has generated no revenues.

Net cash used in investing activities was $10,493 for the six months ended June 30, 2009, compared to $6,778 for the prior period. The increase of cash used by investing activities was due primarily to the purchase of small equipment, and patent expense.

Net cash flows provided from financing activities was $1,251,350 for the six months ended June 30, 2009, as compared to $0 for the prior period. There was an increase in cash provided from financing activities due to equity financing.

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. During the six months ended June 30, 2009, the Company issued 4,521,000 shares of common stock at a price of $0.20 per share for cash of $904,200; also, the Company received $1,151,350 in common stock subscriptions to purchase 5,756,750 shares of common stock through a private placement.

In August 2007, we completed a private placement for up to 28,000,000 shares of common stock of the Company for an aggregate sum of $0.4 million. In November 2007, we completed a private placement for 14,180,050 shares of common stock for an aggregate sum of $1.4 million. In November 2008, we completed a private . . .