ORIGINCLEAR, INC. - FORM 10-Q

Attached files

file	filename
EX-31.1 - EXHIBIT 31.1 - ORIGINCLEAR, INC.	ex311.htm
EX-32.1 - EXHIBIT 32.1 - ORIGINCLEAR, INC.	ex321.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

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

FOR THE QUARTERLY PERIOD ENDED: June 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 August 17, 2012 was 12,733,895.

Table of Contents

TABLE OF CONTENTS

		Page
PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.		3
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.		15
Item 3. Quantitative and Qualitative Disclosures About Market Risk.		19
Item 4. Controls and Procedures.		19

PART II - OTHER INFORMATION

Item 1. Legal Proceedings.		20
Item 1A. Risk Factors.		20
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.		20
Item 3. Defaults Upon Senior Securities.		20
Item 4. Mine Safety Disclosures.		20
Item 5. Other Information.		20
Item 6. Exhibits.		20

SIGNATURES		21

Table of Contents

PART I - FINANCIAL INFORMATION

ORIGINOIL, INC.

BALANCE SHEETS

	June 30, 2012			December 31, 2011
	(Unaudited)
ASSETS

CURRENT ASSETS
Cash	$	84,403		$	197,868
Accounts receivable		15,000			-
Work in process		-			248,443
Prepaid expenses		629,027			300,102
Other receivables		2,850			17,977

TOTAL CURRENT ASSETS		731,280			764,390

PROPERTY & EQUIPMENT
Machinery & equipment		30,992			30,992
Furniture & fixtures		27,056			27,056
Computer equipment		28,824			28,824
Leasehold improvements		94,914			94,914
		181,786			181,786
Less accumulated depreciation		(133,224	)		(126,422	)

NET PROPERTY & EQUIPMENT		48,562			55,364

OTHER ASSETS
Investment		20,000			20,000
Patents		255,508			180,380
Trademark		4,467			4,467
Security deposit		9,650			9,650

TOTAL OTHER ASSETS		289,625			214,497

TOTAL ASSETS	$	1,069,467		$	1,034,251


LIABILITIES AND SHAREHOLDERS' DEFICIT

CURRENT LIABILITIES
Accounts payable	$	282,702		$	342,369
Accrued expenses		100,163			124,417
Deferred income		-			313,163
Derivative liability, warrants		281,533			641,900
Convertible debenture		-			397,213
Unsecured notes payable, net of discount of $1,259,626		571,202			13,483

TOTAL LIABILITIES		1,235,600			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
11,436,334 and 7,694,505 shares issued and outstanding		1,144			770
Additional paid in capital		21,837,464			16,198,019
Common stock subscription payable		52,000			-
Deficit accumulated during the development stage		(22,056,741	)		(16,997,083	)

TOTAL SHAREHOLDERS' DEFICIT		(166,133	)		(798,294	)

TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT	$	1,069,467		$	1,034,251

The accompanying notes are an integral part of these financial statements

Table of Contents

ORIGINOIL, INC.

STATEMENTS OF OPERATIONS

(Unaudited)



	Three Months Ended						Six Months Ended
	June 30, 2012			June 30, 2011			June 30, 2012			June 30, 2011

Sales	$	15,000		$	40,500		$	553,163		$	142,500

Cost of Goods Sold		21,272			-			407,363			-

Gross Profit		(6,272	)		40,500			145,800			142,500

Operating Expenses
Selling and general and administrative expenses		1,495,352			771,915			2,599,784			1,488,297
Research and development		300,473			195,989			551,188			390,433

Total Operating Expenses		1,795,825			967,904			3,150,972			1,878,730

Loss before Depreciation and Amortization		(1,802,097	)		(927,404	)		(3,005,172	)		(1,736,230	)

Depreciation & amortization expense		(7,432	)		2,343			6,802			4,900

Loss from Operations before Other Income/(Expenses)		(1,794,665	)		(929,747	)		(3,011,974	)		(1,741,130	)

OTHER INCOME/(EXPENSE)
Interest income		-			1			-			1
Foreign exchange loss		(1,045	)		-			(2,227	)		-
Gain/(Loss) on derivative		111,234			-			(45,412	)		-
Conversion of debentures		(838,728	)		-			(838,728	)		-
Amortization of debt discount		(657,441	)		-			(1,001,702	)		-
Penalties		-			-			-			(2,384	)
Interest expense		(90,621	)		-			(159,615	)		(537	)

TOTAL OTHER INCOME/(EXPENSES)		(1,476,601	)		1			(2,047,684	)		(2,920	)


NET LOSS	$	(3,271,266	)	$	(929,746	)	$	(5,059,658	)	$	(1,744,050	)

BASIC LOSS PER SHARE	$	(0.33	)	$	(0.14	)	$	(0.56	)	$	(0.26	)

WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING
BASIC AND DILUTED		9,980,303			6,794,747			9,087,248			6,583,507

The accompanying notes are an integral part of these financial statements

Table of Contents

ORIGINOIL, INC.

STATEMENT OF SHAREHOLDERS' DEFICIT

												Deficit
												Accumulated
									Additional			during the
	Preferred stock				Common stock				Paid-in			Development
	Shares		Amount		Shares		Amount		Capital			Stage			Total
Balance at December 31, 2011		-	$	-		7,694,505	$	770	$	16,198,019		$	(16,997,083	)	$	(798,294	)

Common stock issued for conversion of debt
(prices per share of $0.65 and $1.75) (unaudited)		-		-		1,241,929		124		841,073			-			841,197

Common stock issued for conversion of interest payable on debt
(price per share $1.75) (unaudited)		-		-		6,551		1		9,891			-			9,892

Common stock issued for services at fair value
(price per share between $1.01 -$1.75) (unaudited)		-		-		859,835		86		1,276,975			-			1,277,061

Common stock issued for accounts payable at fair value (unaudited)		-		-		24,001		2		41,998			-			42,000

Common stock issued with unsecured subordinated debt at fair value (unaudited)		-		-		1,411,351		141		(141	)		-			-

Common stock issued for incentive fee (unaudited)		-		-		9,670		1		6,285			-			6,286

Cashless exercise of common stock purchase warrants (unaudited)		-		-		188,492		19		(19	)		-			-

Common stock subscription payable (unaudited)		-		-		-		-		52,000			-			52,000

Write down of fair value of debenture converted (unaudited)		-		-		-		-		1,238,220			-			1,238,220

Original issue discount (unaudited)		-		-		-		-		92,662			-			92,662

Beneficial conversion feature & debt discount on promissory notes (unaudited)		-		-		-		-		1,579,578			-			1,579,578

Options and warrant compensation expense (unaudited)		-		-		-		-		554,420			-			554,420

Stock issuance cost (unaudited)		-		-		-		-		(1,497	)		-			(1,497	)

Net loss for the period ended June 30, 2012 (unaudited)		-		-		-		-		-			(5,059,658	)		(5,059,658	)

Balance at June 30, 2012 (unaudited)		-	$	-		11,436,334	$	1,144	$	21,889,464		$	(22,056,741	)	$	(166,133	)

The accompanying notes are an integral part of these financial statements

Table of Contents

ORIGINIOIL, INC.

STATEMENTS OF CASHFLOWS

	Six Months Ended
	June 30, 2012			June 30, 2011
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(5,059,658	)	$	(1,744,050	)
Adjustment to reconcile net loss to net cash
used in operating activities
Depreciation & amortization		6,802			4,900
Common stock and warrants issued for services		907,483			151,250
Stock compensation expense		554,420			344,403
Loss on change in valuation of derivative liability		45,412			-
Amortization of debt discount		1,001,702			-
Loss on conversion of debentures		838,728
Common stock issued for settlement of debt		21,000
Original issue discount amortized as interest		92,662			-
Common stock issued for interest payable		9,892			-
Changes in Assets and Liabilities
(Increase) Decrease in:
Accounts receivable		(15,000	)		-
Prepaid expenses		47,466			15,392
Work in progress		248,443			-
Other receivables		15,127			350
Deposits		-			-
Increase (Decrease) in:
Accounts payable		(45,480	)		(28,828	)
Accrued expenses		(24,254	)		30,244
Deferred income		(313,163	)		788
Other payable		-			(8,461	)

NET CASH USED IN OPERATING ACTIVITIES		(1,668,418	)		(1,234,012	)


CASH FLOWS USED FROM INVESTING ACTIVITIES:
Purchase of investment		-			(20,000	)
Patent expenditures		(75,128	)		(20,271	)

NET CASH USED IN INVESTING ACTIVITIES		(75,128	)		(40,271	)


CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from unsecured notes payable		1,579,578			-
Proceeds from subscription payable		52,000			60,446
Proceeds for issuance of common stock, net of stock issuance cost		(1,497	)		1,225,139

NET CASH PROVIDED BY FINANCING ACTIVITIES		1,630,081			1,285,585

NET INCREASE/(DECREASE) IN CASH		(113,465	)		11,302

CASH BEGINNING OF PERIOD		197,868			238,424

CASH END OF PERIOD	$	84,403		$	249,726

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid	$	5,262		$	537
Taxes paid	$	-		$	-

SUPPLEMENTAL DISCLOSURES OF NON CASH TRANSACTIONS
During the period ended June 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, and 188,492 shares of common stock were issued through a cashless exercise
for stock purchase warrants. During the six months ended June 30, 2011, the Company issued 62,718 shares of common stock
through a cashless exercise for stock purchase warrants.

The accompanying notes are an integral part of these financial statements

Table of Contents

ORIGINOIL, INC.

NOTES TO FINANCIAL STATEMENTS

JUNE 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 six months ended June 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 six months ended June 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 six months ended June 30, 2012, as the inclusion of any potential shares would have had an anti-dilutive effect due to the Company generating a loss.

Table of Contents

ORIGINOIL, INC.

NOTES TO FINANCIAL STATEMENTS

JUNE 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 June 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 June 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	$	281,533	$	-	$	-	$	281,533
Unsecured promissory notes, net of discounts	$	571,202	$	-	$	-		571,202
Total liabilities measured at fair value	$	852,735	$	-	$	-	$	852,735

Table of Contents

ORIGINOIL, INC.

NOTES TO FINANCIAL STATEMENTS

JUNE 30, 2012

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Recently Issued Accounting Pronouncements

Management reviewed accounting pronouncements issued during the three months ended June 30, 2012, and the following pronouncements were adopted:

The Company adopted ASC 840 "Accounting for Operating and Capital leases". This pronouncement addresses the accounting for operating and capital leases. If the Company is leasing an asset that is recorded as an operating lease the Company must disclose the future minimum lease payments for the next five years, as well as the terms of any purchase, escalation, or renewal options. If an asset lease is being recorded as a capital lease, then the Company should present the same information, as well as the amount of depreciation already recorded for these assets. The adoption of this pronouncement did not have a material effect on the financial statements of the Company.

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 six months ended June 30, 2012, the Company issued 859,835 shares of common stock at fair value for services that ranged in prices from $1.01 to $1.75 with a fair value of $1,298,061; issued 12,001 shares of common stock for settlement of accounts payable in the amount of $21,000, and also issued an additional 12,001 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 188,492 shares of common stock through a cashless exercise of stock purchase warrants in the amount of 317,464; issued 6,551 shares of common stock at fair value of $9,892 for interest due on the convertible debentures; received funds for a subscription payable in the amount of $52,000 to purchase 80,000 shares of common stock at a price of $0.65 together with one (1) year warrants to purchase 80,000 shares of common stock and three (3) year warrants to purchase an aggregate of 80,000 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 (10th) 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 (10th) anniversary from the effective date of this option.

During the six months ended June 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 $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

Table of Contents

ORIGINOIL, INC.

NOTES TO FINANCIAL STATEMENTS

JUNE 30, 2012

4.	STOCK OPTIONS AND WARRANTS (Continued)

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

	6/30/2012
			Weighted
	Number		average
	of		exercise
	Options		price
Outstanding, beginning of period		351,130	$	6.14
Granted		4,000		1.70
Exercised		-		-
Forfeited/Expired		-		-
Outstanding, end of period		355,130	$	6.09
Exercisable at the end of period		109,230	$	4.02
Weighted average fair value of
options granted during the period			$	0.87

The weighted average remaining contractual life of options outstanding issued under the 2009 Plan as of June 30, 2012 was as follows:

						Weighted
						Average
		Stock		Stock		Remaining
Exercisable		Options		Options		Contractual
Prices		Outstanding		Exercisable		Life (years)
$	6.90		209		84		1.00
$	9.60		6,250		2,853		1.00
$	9.60		20,000		14,130		2.18
$	8.40		3,334		2,276		2.27
$	9.00		15,000		10,166		2.29
$	6.90		15,002		7,933		2.89
$	7.20		1,667		739		3.23
$	4.50		33,334		13,368		3.40
$	6.00		33,000		10,534		3.48
$	6.90		100,000		26,130		3.71
$	4.20		13,334		2,356		4.05
$	4.80		100,000		16,610		4.09
$	5.15		10,000		1,555		4.13
$	1.70		4,000		496		4.26
			355,130		109,230

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 six months ended June 30, 2012, included compensation expense for the stock-based payment awards granted prior to, but not yet vested, as of June 30, 2012 based on the grant date fair value estimated, and compensation expense for the stock-based payment awards granted subsequent to June 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 six months ended June 30, 2012 and 2011 is $174,820 and $344,403, respectively.

Warrants

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

Risk free interest rate		1.17% - 2.5	%
Stock volatility factor		63.04% - 257.10	%
Weighted average expected option life	5 years
Expected dividend yield	None

Table of Contents

ORIGINOIL, INC.

NOTES TO FINANCIAL STATEMENTS

JUNE 30, 2012

4.	STOCK OPTIONS AND WARRANTS (Continued)


	6/30/2012
			Weighted
			average
			exercise
	Options		price
Outstanding -beginning of period		836,189	$	4.20
Granted		260,000		0.65
Exercised		-		-
Forfeited		-		-
Outstanding - end of period		1,096,189	$	3.36

At June 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		256,672		256,672		2.00
$	10.20		28,335		28,335		2.13
$	9.00		9,168		9,168		2.32
$	8.70		3,334		3,334		2.37
$	8.40		667		667		2.58
$	8.70		5,000		5,000		2.91
$	7.20		33,334		33,334		2.98
$	5.70		7,335		7,335		3.10
$	4.50		3,334		3,334		3.21
$	4.20		8,334		8,334		3.23
$	4.20		33,334		33,334		3.25
$	3.60		8,334		8,334		3.33
$	4.50		33,334		33,334		3.40
$	4.20		13,335		13,335		3.42
$	6.00		166,668		166,668		3.48
$	6.00		33,334		33,334		3.50
$	6.30		8,334		8,334		3.72
$	5.70		4,001		4,001		3.75
$	6.90		33,334		33,334		3.96
$	6.90		33,334		33,334		4.21
$	1.90		80,000		80,000		4.27
$	6.90		33,334		33,334		4.46
$	1.47		260,000		260,000		4.82
			1,096,189		1,096,189

During the six months ended June 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 six months ended June 30, 2012 and 2011, were $379,600 and $27,500, respectively.

During the six months ended June 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, an investor was granted warrants to purchase 160,000 shares of common stock associated with a subscription payable for $80,000. The stock purchase warrants outstanding during the six months ended June 30, 2012, was 2,360,487 of which 317,464 were exercised through a cashless exercise to purchase 188,492 shares of common stock during the period. The number of outstanding stock purchase warrants to purchase shares of common stock as of June 30, 2012, was 2,043,023, of which 946,834 investor stock purchase warrants are not included in the table above.

Table of Contents

ORIGINOIL, INC.

NOTES TO FINANCIAL STATEMENTS

JUNE 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 were due and payable on July 11, 2012. The debentures may be converted at any time at the option of the investors into shares of common stock at a conversion price of $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 bear interest at the rate of 5% per annum increasing to 18% in the event of default. Interest is payable quarterly in cash and/or, if certain equity conditions have been met, in shares of our common stock at an interest conversion rate equal to the lesser of $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 are exercisable for an aggregate of 392,170 shares of common stock at the option of the holder for a period of five years at an exercise price of $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 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 $45,412 in interest expense for the six months ended June 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		0.72	%
Stock volatility factor		70.94	%
Weighted average expected option life	5 years
Expected dividend yield	None

The value of the derivative liability at June 30, 2012 was $281,533.

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.

Table of Contents

ORIGINOIL, INC.

NOTES TO FINANCIAL STATEMENTS

JUNE 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 six months ended June 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 June 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.

November Notes

As of June 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 June 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 June 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

Table of Contents

ORIGINOIL, INC.

NOTES TO FINANCIAL STATEMENTS

JUNE 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 increases to 15% if the Note is 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.

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 July 10, 2012, the Company issued 33,334 shares of common stock at fair value of $32,667 for services performed by an outside consultant.

On July 11, 2012, the Company issued 15,946 shares of common stock through a cashless exercise of 39,217 stock purchase warrants.

On July 13, 2012, the Company issued 7,692 shares of common stock at fair value of $7,846 for services performed by an outside consultant.

On July 23, 2012, the Company issued 100,000 shares of common stock at fair value of $65,000 for services performed by an outside consultant.

On July 30, 2012, the Company issued 50,000 shares of common stock at fair value of $61,500 for services performed by an outside consultant. In addition, warrants to purchase 100,002 shares of common stock of the Company held by an affiliate of the consultant were cancelled.

On July 30, 2012, the Company issued 37,319 shares of common stock through a cashless exercise of 78,434 stock purchase warrants.

On July 30, 2012, the Company issued 28,571 shares of common stock at fair value of $50,000 for services performed by an outside consultant.

Between July 1, 2012 and August 17, 2012, the Company has received funds in the amount of $614,050 to purchase 944,699 shares of common stock through a private placement, together with one (1) year warrants to purchase an aggregate of 944,699 shares of common stock, three (3) year warrants to purchase an aggregate of 692,312 shares of its common stock and five (5) year warrants to purchase an aggregate of 615,388 shares of common stock. Each warrant is exercisable at a price per share of $0.65.

Table of Contents

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

Table of Contents

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.

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.

Table of Contents

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 June 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 June 30, 2012, and the following pronouncements were adopted during the period.

The Company adopted ASC 840 "Accounting for Operating and Capital leases". This pronouncement addresses the accounting for operating and capital leases. If the Company is leasing an asset that is recorded as an operating lease, the Company must disclose the future minimum lease payments for the next five years, as well as the terms of any purchase, escalation, or renewal options. If an asset lease is being recorded as a capital lease, then the Company should present the same information, as well as the amount of depreciation already recorded for these assets. The adoption of this pronouncement did not have a material effect on the financial statements of the Company.

Results of Operation

Results of Operations for the three and six months ended June 30, 2012 compared to the three and six months ended June 30, 2011.

	Three Months Ended				Six Months Ended
	June 30, 2012 (Unaudited)		June 30, 2011 (Unaudited)		June 30, 2012 (Unaudited)		June 30, 2011 (Unaudited)
Revenue	$	15,000	$	40,500	$	553,163	$	142,500

Operating Expenses	$	1,795,825	$	967,904	$	3,153,757	$	1,878,730

Loss from Operations before Other Income/(Expense)	$	(1,794,665)	$	(929,747)	$	(3,014,759)	$	(1,741,130)

Other Income/(Expense)	$	(1,476,601)	$	1	$	(2,044,899)	$	(2,920)

Net Loss	$	(3,271,266)	$	(929,746)	$	(5,059,658)	$	(1,744,050)

Revenue and Cost of Sales

Revenue for the three months ended June 30, 2012 and 2011 was $15,000 and $40,500, respectively. Cost of sales for the three months ended June 30, 2012 and 2011 were $21,272 and $0, respectively.

Revenue for the six months ended June 30, 2012 and 2011 was $553,163 and $142,500, respectively. Cost of sales for the six months ended June 30, 2012 and 2011 were $407,363 and $0, respectively.

To date we have had minimal revenues due to our focus on product development and testing. In addition, we are not focused on immediate sales of equipment but on licensing or private labeling type transactions, which we believe has the potential to yield stronger long term revenue.

Revenues earned were part of purchase orders from MBD Energy for progressively larger algae harvesting equipment. The cost of sales in the current period represents the materials and supplies used to produce the product, and outside consultant fees to test the product.

Table of Contents

Operating Expenses

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

General and administrative expenses increased by $723,437 to $1,495,352 for the three months ended June 30, 2012, compared to $771,915 for the three months ended June 30, 2011. General and administrative expenses increased by $1,114,272 to $2,602,569 for the six months ended June 30, 2012, compared to $1,488,297 for the six months ended June 30, 2011. The increase in general and administrative expenses was due primarily to an increase of $409,882 in professional fees, $319,415 for investor and public relations of which $137,736 was a non-cash expense, $210,017 for non-cash stock compensation expense, and $174,958 increase in overall G&A expenses.

Research and development cost increased by $104,484 to $300,473 for the three months ended June 30, 2012, compared to $195,989 for the three months ended June 30, 2011. Research and development cost increased by $163,755 to $554,188 for the six months ended June 30, 2012, compared to $390,433 for the six months ended June 30, 2011. The increase in research and development costs was primarily due to an increase in salaries, consultant fees and outside services for algae appliances and fracking research.

Net Loss

Our net loss increased by $(2,341,520) to $(3,271,266) for the three months ended June 30, 2012, compared to $(929,746) for the three months ended June 30, 2011. Our net loss increased by $(3,315,608) to $(5,059,657) for the six months ended June 30, 2012, compared to $(1,744.050) for the six months ended June 30, 2011. The majority of the increase is due to accounting for net change in non-cash amortization of the debt discount and loss derivative valuation in the amount of $1,596,158, and increase in stock and warrant compensation of $210,017, plus the overall increase in the operating expenses. 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 June 30, 2012 and December 31, 2011, we had cash of $84,403 and $197,868, respectively and working capital deficit of $(504,320) and $(1,068,155), respectively. This decrease in working capital deficit was due primarily to a decrease in convertible debt. During the first two quarters of 2012, we raised an aggregate of $1,631,578 in an offering of unsecured convertible notes, a subscription payable, and securities exchange agreement. Since, July 1, 2012 through August 17, 2012 we raised $614,050 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 $(1,668,418) for the six months ended June 30, 2012, compared to $(1,234,012) for the prior period June 30, 2011. The increase of $(434,406) in cash used in operating activities was due to a decrease in prepaid expenses, work in progress, accounts payable, accrued expenses and deferred income. The net loss includes non-cash expenses of depreciation, stock issued for services, amortization of debenture discount, gain on change in derivative, and stock compensation expense. Currently operating costs exceed revenue because sales are not yet significant.

Net cash flows used in investing activities was $(75,128) for the six months ended June 30, 2012, as compared to $(40,271) for the prior period June 30, 2011. The increase in cash used in investing activities was due to an increase in expenditures for intangible assets in the current period associated with patent expenditures.

Net cash flows provided by financing activities was $1,630,081 for the six months ended June 30, 2012, as compared to $1,285,585 for the prior period June 30, 2011. The increase in cash provided by financing activities was due to an increase in debt and 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.

Table of Contents

We have estimated our current average burn, and believe that we have assets to ensure that we can function without liquidation over the next six 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 June 30, 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Table of Contents

PART II

Item 1. Legal Proceedings.

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

Item 1A. Risk Factors.

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

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

None that were not previously disclosed.

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.

Item 6. Exhibits.

Exhibit Number		Description of Exhibit

31.1		Certification by Chief Executive Officer and Chief Financial Officer, required by Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act.

32.1		Certification by Chief Executive Officer and Chief Financial Officer, required by Rule 13a-14(b) or Rule 15d-14(b) of the Exchange Act and Section 1350 of Chapter 63 of Title 18 of the United States Code.

Pursuant to Rule 405(a)(2) of Regulation S-T, the Company will furnish the XBRL Interactive Data Files with detailed footnote tagging as Exhibit 101 in an amendment to this Form 10-Q within the permitted 30-day grace period granted for the first quarterly period in which detailed footnote tagging is required.

Table of Contents

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)
		August 20, 2012

Attached files

ORIGINCLEAR, INC. Reports

Also read