beacon equity research analyst: victor sula, phd

BEACON EQUITY RESEARCHAnalyst: Victor Sula, PhDInitial Report September 15th, 2008

OriginOil Inc. 5645 West Adams BlvdLos Angeles CA 90016 Phone: (323) 939-6645Fax: (424) 203-2035E-mail: [email protected] Website: www.originoil.com

Company IntroductionMarket Data

SymbolExchangesCurrent PriceRatingOutstanding SharesMarket Cap.Average 3-m Volume

Source: Yahoo Finance

OOILOTC BB

$0.42Speculative Buy

143.4 million$60.2million

86,060

OOIL daily 9/12/2008

volume

0.50

0.45

0.40

0.35

1

0.5

0

Mill

ions

OriginOil Inc. (OOIL) is developing a portfolio of new technologies for producing oil from algae, a next-generation biofuels feedstock that can yield 30 times more energy per acre than crops such as soybeans. The biofuel produced by the OriginOil System can replace petroleum in var-ious applications such as diesel, gasoline, jet fuel, plastics and solvents. In addition, by-products of algae oil extraction can be used for fertil-izer and animal feed. By displacing fossil fuel use, OOIL’s process also helps producers garner saleable carbon credits. The OriginOil System can be operated as a stand-alone production system or connected in a parallel network. OOIL’s proprietary industrial process is supported by intellectual property assets which include five patent filings and one international Patent Cooperation Treaty (PCT) filing.

Efficiently producing oil from algae in a closed system requires cultivating an algal strain with high lipid content and a rapid growth rate, which in turn depends on the right combination of water, sunlight, nutrients and carbon di-oxide. In addition, algae organisms are protected by a tough cell wall that must be cracked to extract the oil. This is normally an energy-intensive process. OOIL has successfully developed a safe, cost-effective and energy-efficient cultivation and extraction system. The cultivation system, known as the Helix BioReactor™, is designed to increase and optimize photosynthetic growth of algae. This system is now used in OOIL’s laboratory prototypes, and is being expanded for use in its pilot and full-scale production systems. To solve the tough cell wall problem in the extraction phase, the Company has developed

Jul Aug Sep

Please carefully read risks and disclaimer section at the end of this report

Analyst: Victor Sula, PhDInitial Report September 15th, 2008

OriginOil Inc. (OOIL) 2

the Quantum Fracturing™ process, which uses ultrasound from intense fluid fracturing to break down algae cells much in the same way a high-frequency sound wave breaks glass. Combined with the use of tuned low-power microwave radiation, this process maximizes oil yield while expending the minimal amount of energy.

Since the Company’s shares began trading on the OTCBB market in late April, OOIL has garnered consider-able media attention. The Company was discussed in Forbes.Com, and both the Los Angeles Business Journal and Biodiesel Magazine had stories on OriginOil in their August issues. A lengthy article in the trade magazine Chem.Info reported in depth on OriginOil in its September issue. In addition, CEO Riggs Eckelberry recent-ly discussed the Company in an interview that aired on the CEO Radio Network. OOIL made its first public presentation July 17 to a standing-room-only audience at the National Algae Association (NAA) conference in Woodlands, Texas. On August 14 and 15, OOIL was publicly introduced to state officials at the Green Tech Expo in Los Angeles, held in conjunction with the Border Governors Conference. California Governor Arnold Schwar-zenegger and California EPA Secretary Linda Adams showed a keen interest in the technology and discussed the energy opportunities associated with algae-to-oil technologies with CEO Eckelberry and OOIL co-founder Nicholas Eckelberry.

Investment Highlights

Strong outlook for biofuels market

Clean energy technologies have advanced significantly in recent years and now offer a viable alternative to tra-ditional “dirty” energy resources. While oil and natural gas prices remain volatile and nuclear and coal-based energy remain vulnerable to environmental and safety concerns, clean energy is becoming increasingly price-competitive with traditional energy resources.

According to Clean Edge research, the global biofuel market will grow from $15.7 billion in 2005 to $52.5 billion by 2015. Emerging Markets Online estimates that U.S. biodiesel consumption grew from 25 million gallons in 2004 to 750 million gallons in 2007. Despite this rapid growth, the U.S. biodiesel market must grow significantly




to reach levels comparable to its European counterparts. In Europe, biodiesel represents 2% of total on-road transportation fuel consumption and is expected to reach 6% by 2010. In the U.S., biodiesel accounted for less than 0.5% of all petro-diesel on-road consumption in 2005 .

Algae is the ideal feedstock for renewable biofuels

Compared with other biofuels, algae are higher-yield, producing 30-100 times more energy per acre than terres-trial crops. The algae biomass remaining after the oil is extracted is itself a valuable source of diesel and jet fuel, and can also be converted to electricity, fed to cattle as a protein supplement or fermented into ethanol. Other advantages of algae as a feedstock include the following:

- Algae are the fastest growing plants in the world and can be grown year round, unlike seasonal crops;- Algae produces much more bio-oil per acre than traditional biofuel crops; - Unlike other energy crops, the entire biomass produced from algae can be used;- Algae remove CO2 from the air as they grow; and- Because it can be produced industrially in closed systems, algae won’t compete with food crops.

Rising vegetable oil prices encourage deployment of algae-to-biofuel technology

Rising soybean prices are dampening the growth prospects of the biofuel industry, which relies heavily on veg-etable oils to make biodiesel fuel. High vegetable oil prices make the end-product too expensive to compete with conventional diesel fuel. The market price for soybean oil has more than doubled since the beginning of 2007.

OOIL may benefit from this scenario since its proprietary algae-based technology eliminates the high price of vegetable oil from the equation, adds significantly more energy value from the non-oil biomass, and makes the fuel production process much more efficient, and thus scalable, through the OriginOil System. By investing in an OriginOil algae production system, end-users such as biodiesel refiners can achieve independence from the commodity markets.

OOIL has a complete algae growth and oil extraction technology

OOIL’s OriginOil System is a complete algae growth and oil extraction process that employs a portfolio of pro-prietary technologies, including Quantum Fracturing™ and the Helix BioReactor™, to enable continuous oil production.

Quantum Fracturing™, the Company’s patent-pending technology based on the science of mass transfer and fluid fracturing, addresses and overcomes the challenges associated with cultivating algae for oil. In Quantum Fracturing, water, carbon dioxide and other nutrients are fractured at very high pressure, creating a slurry of micron-sized bubbles which are then injected into the algae culture contained in a low-pressure bioreactor.

The Helix BioReactor™ process is an advanced algae growth system that can grow multiple layers of algae bio-mass around-the-clock. OOIL has also developed a solvent-free algae oil extraction process that doesn’t require chemical solvents.

1

1 http://www.emerging-markets.com/biodiesel/default.asp




Partnerships to capitalize on Certified Emission Reduction credits

The Company has developed a go-to-market business model which involves working with partners to develop product applications, then distributing product through geographic partners who can provide local manufac-turing, installation and support services.

OOIL is also developing partnerships to exploit opportunities driven by CO2 availability. There are many pro-ducers of carbon dioxide such as coal-fired power plants, refineries and manufacturing facilities interested in recycling CO2 from their smokestacks or kiln operations. Such CO2 emissions could be diverted directly into an OriginOil System to feed the algae, displacing fossil fuel use. This displacement represents value in the form of CER credits (carbon credits) in jurisdictions where the Kyoto Protocol is enforced, and voluntary credits (VCS) in countries such as the United States where the Protocol is not implemented today.

Business Model

OOIL’s is developing revolutionary technologies for growing mass quantities of algae and then transforming its oils and biomass into commercially viable biofuels.

The Company’s science and engineering team has developed proprietary processes for the cultivation of algae within a closed bioreactor. Its system maximizes the yield of algae biomass and oil and minimizes production costs though a controlled environment that can be standardized and replicated, regardless of weather or geogra-phy. The system also dramatically reduces the area required for cultivation and, unlike conventional crops such as soy, palm and corn, doesn’t require significant arable land. As a bonus, most of the water used in the process can be re-used. OOIL’s system employs five patent-pending technologies, two of which are trademarked: Quan-tum FracturingTM and the Helix BioReactorTM.

The Company doesn’t plan to produce and market algae-based oil or fuel, but rather plans to market its Origi-nOil Base Module for pilot and small-scale deployments. OOIL and its partners will also provide installation support services and remote management services. Base Modules have a small footprint and fit in a 40’ shipping container platform. Larger systems will be built on a project or co-venture basis.

OOIL also plans to license its technology to fuel refiners, chemical and oil companies, as well as enter into part-nerships with biofuels producers and support organizations. Technology licensing agreements with oil and gas industry customers will include services such as consultation, training, certification and technical support.

Since algae based fuel displaces fossil fuels, customers utilizing OOIL’s system may also generate revenue from carbon credits. The biomass remaining after oil is extracted – between 40% and 80% of an algae cell - can be converted into nitrogen-fixing biofertilizers, ethanol, methanol, hydrogen, or, through the Fischer-Tropsch (FT) process, into middle distillates such as diesel and jet fuel.

OOIL is building a significant portfolio of intellectual property related to algae farming and oil extraction. The Company has five patent applications pending:




- Quantum Fracturing™, a process that works at the microscopic level to unlock biological and chemical properties and facilitate total, instantaneous distribution of CO2 and nutrients to the algae culture with minimal disruption.

- Helix BioReactor™, an advanced algae growth system that can grow multiple layers of algae biomass around-the-clock by optimizing light delivery.

- Modular and Scalable Growth System, a system to enhance and optimize algae growth through hori-zontal and vertical “stacking” of multiple Helix BioReactors into an integrated network of fully automated, portable, and remotely monitored growth units.

- Lysing and Extraction System for Microorganisms, an energy-efficient method for extracting oil from algae using tuned microwaves and Quantum FracturingTM without the need for chemical solvents.

- Algae Catalyzer, a process related to on-site conversion and sequestration of algae biomass for electric-ity, with CO2 recovery to minimize carbon requirements and cogeneration to maximize available energy.

Corporate strategy

The Company will work with vertical partners to develop product applications and geographic partners who can provide local manufacturing, installation and support services. These partners include:

- Bio-diesel refineries where algae oil can be processed into biodiesel via standard transesterification;- Anaerobic digestion systems (manure-to-energy) where algae mass can be digested into methane; and- Waste water treatment plants (waste-to-energy) where algae mass is digested into methane.

OOIL is also developing partnerships to exploit applications driven by CO2 availability. Many producers of carbon dioxide such as coal-fired power plants, refineries or manufacturing facilities would be interested in a technology that allows them to recycle CO2 emissions into a usable product for feeding algae so as to displace fossil fuel use. By doing so, these producers can qualify for Certified Emission Reduction credits, also known as carbon credits.

OOIL’s growth strategy focuses on:

- Developing strong partnerships with biofuels and energy systems integrators;- Recruiting regional partners for local market development, distribution of vertical applications, local service and support;- Licensing technology to algae fuel companies to improve industry-wide productivity (the so-called “OriginOil Inside”); and- Teaming up with carbon credits organizations to earn certifications for OOIL`s technologies and systems.




Algae Biofuels Overview

Algae offer the world’s best solution for a perpetually renewable source of biofuel. Compared with other biofu-els, algae are higher-yielding, producing 30 to 100 times more energy per acre than terrestrial crops. Depending on the algae specie and growing location/conditions, algae can produce between 20% and 60% of lipids/oils by weight. In addition, the biomass left over after oil-pressing can be fed to cattle as a protein supplement, fer-mented into ethanol, converted into natural gas or liquid fuels, or used for power generation. Below is a chart showing oil yield per acre for various biofuels feedstocks.

Gallons of oil per acre per year

Source; www.oakhavenpc.org/cultivating_algae.htm

Feedstock

CornSoybeansSafflowerSunflowerRapeseedOil PalmMicro Algae

Gallons

1848831021276355000-15000

Algae’s higher yields can be attributed to high growth rate due to a relatively simple cellular structure, a lipid-rich composition and a rapid reproduction rate, which is often calculated in hours instead of days. The only required inputs are land, sunlight, water, carbon dioxide (potential for carbon credits) and nutrients. Since the whole organism converts sunlight into oil, algae can produce more oil in an area the size of a two-car garage than an entire football field of soybeans.

Algae offer numerous other advantages compared to other biofuel feedstocks:

- Algae are the fastest-growing plants in the world and can be grown year round, unlike seasonal crops;- Produce much more bio-oil per acre than traditional biodiesel crops; - Unlike other energy crops, the entire biomass produced from algae can be used;- Algae remove CO2 from the air as they grow; air- Algae can be grown on marginal land and won’t compete with food crops.

OOIL Technology




OOIL Technology

The OriginOil System is a complete algae growth and oil extraction system. It employs a portfolio of proprietary technologies, including Quantum Fracturing™ and the Helix BioReactor™, to enable a continuous oil-produc-tion process.

The OriginOil System

C02

Minerals

Water

Quantum Fracturing™ Unit

Low Intensity High Intensity

Micronized Nutrients Proprietary Catalysts

Algae Stock

Water

Incubation

Incubation Tank

Growth ExtractionLight Source

Bioreactor Network

Ultrasonic Fracturing Tank

Mechanical Extraction

Water Recycling

Algae Oil

Algae Mass

EthanolFeed

Materials

Algae Culture Mature Algae Broken Algae

Source; Company’s presentations.

When the stock is ready for production, a proportional amount of algae starter is introduced into a production tank. Algae mass, through mitosis or division, will double, triple or divide up to 16 times within a 24-48 hour period, creating clusters of families. This colony expansion, or log, is proportional to space, light availability, temperature and nutrients. The growth tank utilizes a series of Helix BioReactors in lieu of sunlight, which drive production levels beyond that of an open pond or other algae cultivation scheme.

Innovative BioReactor features include a rotating vertical shaft with low energy lights strategically arranged in a helix pattern, which results in a theoretically unlimited number of growth layers. In a natural pond, the sun illuminates only one growth plane and only to about half an inch below the surface. Lights in the bioreactor are frequency-tuned for optimal photosynthetic absorption by algae cells. The Helix BioReactor enables multiple vertical growth layers and a smaller installation footprint, as opposed to larger footprint requirements of other systems.




The bioreactor`s helix-shaped design The carbon dioxide observation tube

Source; Company’s presentations.

Algae Cell

Algae Cell

Algae Cell

Algae Cell

Algae Cell

Enhanced Contact Interface for Optimal Nutrient Absorption

Minerals

C02

Micro-Bubbles

The Quantum Fracturing process takes place at the microscopic level where water, carbon dioxide and other nutrients are fractured at very high pressures to create a slurry of micron-sized bubbles. These bubbles are then injected into the algae culture waiting in a lower-pressure growth vessel, or bioreactor. This process results in instantaneous distribution of nutrients to every algae cell without disruption or aeration that could damage the plant. The pressure differentials between the two zones increase contact and exchange between the micronized nutrients and the algae cells in the Helix BioReactor.

The OriginOil System then sends algae biomass through a shielded wave guide system where it receives low-wattage, frequency-tuned microwave bursts that disrupt the cell walls. Quantum fracturing is applied to the pre-cracked cells to complete the oil extraction.

Algae Slurry From Helix BioReactor

Low power Tamed Microwaves

Microwave pre-cracks cell walls

Extraction Subsystem

Stage 1

Stage 2

Stage 3

Algae Oil

Algae Mass




Once the algae mature, 90% are transferred for har-vesting. The “green” water is purified and returned to the growth tank. The remaining 10% of algae are allowed to expand into the Helix BioReactor, and the process is repeated. This high-growth mode is called OriginOil Cascading Production™.

Helix BioReactor


90%

10%

OriginOil Base Module

The OriginOil Base Module is contained in a 40’ x 8’ shipping container. It is a complete, modular, stackable, portable, self-sufficient, adaptable, fully remote-manageable, algae production system.

2500 gallon Grow Tank




40’ x 8’ shipping container

Algae Oil

Algae Mass

Extraction, Recycling

and Control Systems

In addition, the system enables horizontal and vertical “stacking” of multiple Helix BioReactors™ into an inte-grated network of fully automated, portable, and remotely monitored growth units. By using a modular design, OOIL can connect a large number of Helix BioReactors to a small number of extraction units, thus achieving economies of scale and higher production of algae oil


Helix BioReactor

Helix BioReactor

Helix BioReactor

Helix BioReactor

Algae Oil

Algae Mass

Algae Oil

Algae Mass

Self-containedAlgae Production System

NetworkProduction System

Scalable Output




Industry Outlook

Biofuel market

The recent rise in oil and gas prices coupled with increased awareness of environmental issues has enhanced interest in biofuels. All the world’s countries are evaluating the potential of biofuels to supply cheaper, renew-able and more eco-friendly fuels. Brazil has been converting sugar cane into ethanol for decades. Biodiesel made from palm oil and other crops is widely available in Europe.

In theory, biofuel can be produced from any carbon source and a variety of materials derived from plants are already used to create biofuels. There are two common strategies for producing biofuels. One is to grow crops high in sugar (sugar cane, sugar beet and sweet sorghum) or starch (corn/maize), and through the process of fermentation, produce ethanol. The second strategy involves growing plants that naturally produce vegetable oil like soybean, oil palm, algae and jatropha.

The world leaders in biofuel development and use are Brazil, the United States, France, Sweden and Germany. The value of the world biofuel market is expected to increase more than 12.3% annually through 2017. According to Clean Edge research, the global biofuel market will grow from $15.7 billion in 2005 to $52.5 billion by 2015.The global ethanol market is forecast to reach 27 billion gallons by year-end 2014 . Experts predict U.S. ethanol pro-duction will dominate the global market. Brazil is the world’s second largest ethanol producer with production levels forecast to rise 6.5% annually through 2017. The global biodiesel market is predicted to exceed 37 billion gallons by 2016, growing at a 42% average annual rate.

Ethanol focus

The U.S. biofuel industry includes about 200 companies with combined annual revenues of about $3 billion . The industry is growing at a rate of 25% to 50% per year. The United States produces biodiesel (the largest user is the U.S. Army) and ethanol fuel. In 2007, U.S. ethanol production capacity soared by nearly two billion gallons to an annualized rate of more than 6.5 billion gallons, a 32% increase from the 4.9 billion gallons produced in 2006. Essentially all ethanol fuel currently produced in the U.S. is produced from corn; however, cellulosic ethanol demand is expected to grow through 2017.

2

2 www.reportlinker.com/p089576/Global-Biofuel-Market-Analysis.html3 www.fuji-keizai.com/e/report/biodiesel_e.html4 www.marketresearch.com/product/display.asp?productid=1831874&SID=35994826-425808013-4574689995 www.ethanolrfa.org/objects/pdf/outlook/RFA_Outlook_2008.pdf

3

4

5


5



U.S. ethanol production, millions of gallons

Source;www.ethanolrfa.org/industry/statistics/

7,000

6,000

5,000

4,000

3,000

2,000

1,000

02000 2001 2002 2003 2004 2005 2006 2007

1,6301,770

2,3102,800

3,4003,904

4,855

6,500

The U.S. ethanol industry grew from 50 bio-refineries operating in 17 states in 1999 to 134 bio-refineries operat-ing in 26 states last year. In 2008, an estimated 4 billion gallons of ethanol production capacity will come on-line from 68 bio-refineries under construction or expanding. Once all of this new construction is complete, the U.S. ethanol industry will be able to supply more than 13 billion gallons of ethanol, representing nearly 10% of the nation’s gasoline demand.

According to the Renewable Fuel Association, ethanol is blended into more than 50% of the gasoline sold in the United States today. Most of this fuel is E10 (a blend of 10% ethanol and 90% gasoline). Ethanol is blended into every gallon of gasoline sold in California, Minnesota, Missouri, Texas, and along the Eastern Seaboard from Washington, D.C. to Boston. Ford, DaimlerChrysler and GM are producing “flexible-fuel” cars, trucks and mini-vans that can use gasoline and ethanol blends ranging from pure gasoline up to 85% ethanol (E85). In mid-2006, there were approximately six million E85-compatible vehicles on U.S. roads .

The U.S. Department of Energy established the National Renewable Energy Laboratory in 1974. In 1994, the U.S. Congress passed the Energy Policy Act. Newer legislation was passed in 2005 to promote renewable fuels. In 2007, President Bush signed into law the Energy Independence and Security Act (EISA). Central to this legisla-tion was an expansion of the Renewable Fuels Standard (RFS), first enacted into law as part of the Energy Policy Act of 2005. The RFS expansion requires American fuel refiners to produce at least 36 billion gallons of biofuel in 2022. This is nearly a five-fold increase over current levels.

Biodiesel focus

Although Europe currently represents 90% of global biodiesel consumption and production, the United States is ramping up production at a faster rate than Europe. The United States has emerged as the world’s fastest-grow-ing biodiesel market; it grew from 25 million gallons in 2004 to 250 million gallons in 2006. Biodiesel production doubled in 2007 to more than 450 billion gallons. Total biodiesel sales in the United States amounted to 1% of all petro-diesel on-road consumption in 2006.6 http://images1.americanprogress.org/il80web20037/americanenergynow/AmericanEnergy.pdf

6




U.S. ethanol production, millions of gallons

Source: www.ethanolrfa.org/industry/statistics/

500450400350300250200150100

500

1999 2000 2001 2002 2003 2004 2005 2006 2007

0.5

An estimated 171 companies have invested hundreds of millions of dollars in biodiesel production plants and are actively marketing biodiesel. The annual production capacity of these plants is estimated at 2.24 billion gal-lons. Sixty companies have plants under construction and scheduled for completion over the next 12-18 months. An additional three plants are expanding existing operations. Their combined capacity, if realized, would add another 1.23 billion gallons per year of biodiesel production .

At present, there is a biodiesel tax incentive in the U.S. which takes the form of a federal tax credit. The credit equates to a one penny per percent of biodiesel in a fuel blend made from agricultural products like vegetable oils, and one-half penny per percent for recycled oils. A study by the United States Department of Agriculture (USDA) estimated that this incentive will increase demand for biodiesel to at least 124 million gallons per year .

Petroleum market

The price of a barrel of benchmark WTI crude recently closed around $104 as traders bet that Hurricane Ike would miss critical Gulf Coast oil installations and OPEC signaled its intent to cut production. Crude oil prices has dropped about $45, or 30%, since surging to a record $147.27 per barrel on July 11th, mainly due to weaken-ing U.S. and European economies and a rising dollar, which has gained 12% against the euro since April 23rd. Many analysts see a price floor for crude oil at levels as low as $80 or $100 per barrel.

2 5 20 2515

75

250

450

7 www.biodiesel.org/pdf_files/fuelfactsheets/Production_Capacity.pdf8 www.enderllc.com/downloads/EnderBiodieselMarketProspectus.pdf

7

8


8



Source: www.wtrg.com/daily/clfclose.gif

9 www.eia.doe.gov/emeu/steo/pub/contents.html

NYMEX Crude Oil FuturesClose (Front Month)

$160

$140

$120

$100

$80

$60

$ / B

arre

l

09/0

4/20

07

11/0

1/20

07

01/0

3/20

08

07/0

2/20

08

03/0

5/20

08

05/0

5/20

08

07/0

3/20

08

09/0

4/20

08

$103.26

CloseSep 4, 2007 - Sep 4, 2008

Nationally, falling oil prices are dragging down the price of both gasoline and diesel fuel. According to the Ener-gy Information Administration (EIA), weekly prices of regular-grade gasoline, which peaked at $4.11 per gallon on July 14, averaged $3.81 per gallon the week of August 11, a decrease of 30 cents. Diesel fuel fell from $4.76 per gallon on July 14 to $4.35 on August 11, a drop of 41 cents. Gasoline prices have fallen more than 43 cents from record high average prices of $4.11 reported by AAA on July 17, but are still 95 cents above last year’s Septem-ber prices. Average 2008 retail gasoline and diesel prices are forecast at $3.61 and $4.09 per gallon, respectively, compared with prices of $2.81 for gasoline and $2.88 for diesel in 2007. Gasoline and diesel prices are expected to average $3.88 and $4.26 per gallon, respectively, in 2009 .

Oil seed crop prices

Biodiesel refiners are challenged by rising commodity prices and vegetable oil prices are climbing. The raw ma-terial alone can cost more than $4 a gallon, which is slightly more than the wholesale price of refined, regular diesel. Without a federal subsidy (the federal government gives subsidies of 50 cents per gallon for used oil and animal fat and $1 a gallon for fresh oil), most biodiesel manufacturers would lose money.

9




Another important issue for biodiesel companies is capital costs. Plant costs can range between $0.80 and $1.25 per gallon of installed capacity, which further reduces the competitiveness of biodiesel. Because of high soybean oil prices and rising capital costs, construction of several biodiesel plants has halted. Higher vegetable oil prices make the end-product too expensive relative to regular diesel.

Despite these concerns, large companies continue to be attracted to the biodiesel market by rising demand and increasingly stringent emissions requirements which are increasing refining costs for conventional diesel fuel. OOIL may be a major beneficiary of current trends since its proprietary algae technology addresses both the is-sues of rising prices for vegetable oil and high capital costs.

Soybean oil (BO, CBOT) weekly price chart, cents/lb

Source: http://futures.tradingcharts.com/chart/SO/W?1196190901

70.0065.0060.0055.0050.0045.0040.0035.0030.0025.00

60.00

300000.0

O 2007 A J O 2008 A J

Volume 305426.00 Open Interest 259282.00

RSI 37.44 20.00 80.00

09/05/2008 C=48.18 -5.22 O=51.00 H=52.05 L=47.75 Mov Avg 3 lines

Financial Analysis

Income statement

The Company is developing a technology for producing biofuels from algae through a cost-effective, high-speed manufacturing process. OOIL plans to generate revenues from licensing fees and supporting its technology for fuel refiners and chemical and oil company customers.

To date, OOIL has generated no revenues.


Financial Analysis



The Company’s operating expenses consisted mainly of salaries and professional fees, technology testing and research, and the costs associated with registering for a public share offering in the first six months of 2008 and totaled $508,479.

Liquidity and capital resources

As of June 30, 2008, OOIL had $731,180 in working capital, down from $1.2 million on December 31, 2007. This decline is attributable to ongoing costs for developing its technology. Operating funds have been obtained through share sales.

Income statement, $

Source: SEC Filings

H1 2007

Revenue

General and administrative expenses

Research & development

Depreciation & amortization expense

Total operating expenses

Operating income

Total other income/(expense)

Net loss

-

842,022

123,215

568

965,805

-965,805

28,475

-937,330

H1 2008

-

396,127

111,784

568

508,479

-508,479

17,240

-491,239

% chg

-

-53%

-9%

0%

-47%

N/m

N/m

N/m

Balance sheet $

31-Dec-07

Cash and cash equivalents

Total Current Assets

Total Other Assets

Total assets

Total liabilities

Total shareholders’ equity

Accumulated deficit

1,267,670

1,267,670

8,678

1,276,348

30,041

1,246,307

-446,091

30-Jun-08

739,043

749,043

17,678

772,931

17,863

755,068

-937,330

Source: SEC Filings

OOIL will likely require significant financing to bring its technology to market. However there is no assurance that additional financing will be available to the Company on favorable terms, if at all. The Company plans to raise additional capital through equity sales.




Valuation Considerations

OOIL is in the early stages of developing its technology for producing biofuels from algae. Although the Com-pany is likely several years from commercializing its technology and generating meaningful revenues, its tech-nology holds significant promise - the potential payoff may be enormous.

According to Clean Edge research, the global biofuels market will grow from $15.7 billion in 2005 to $52.5 billion by 2015. In addition, the renewable energy industry is receiving strong support from the U.S. government. The Senate recently passed a revised energy bill designed to cut U.S. dependence on foreign oil by imposing the big-gest increase in fuel-efficiency standards in 32 years. The energy bill mandates a six-fold increase in the amount of renewable fuels used for blending to 36 billion gallons annually by 2022.

A number of publicly-traded companies are developing competing technologies that use algae as feedstock for the production of renewable fuel. However, most of these companies are also in an early-development stage and years away from generating revenues. The lack of valuation data available for this peer group makes estimating a fair market value for OOIL shares difficult.

Comparative analysis

Source: Yahoo Finance. *CNQR not included in 2008 average P/E calculation

Company nameSeptember 11, 2008

Ticker Symbol

SharePrice, $

Mrkt. Cap. $ Mn

VCTPFGSPIPSUDNNFC

OOIL

Valcent Products Inc. Green Star Products Inc.PetroSun Inc.Nanoforce Inc.

OriginOil, Inc.

0.510.040.12

0.003

0.42

25.113.94.12.9

60.2

02.4n/an/a

0

Revenue, $ Mn, ttm

-0.350.00n/an/a

-0.01

EPS, $, ttm

n/m5.79n/an/a

n/m

P/S, ttm

n/mn/mn/an/a

n/m

P/E, ttm

In addition to pure-play biofuels companies, major oil producers such as Chevron and Royal Dutch Shell are financing emerging technologies for extracting biofuel from algae.

Solazyme has signed a biodiesel feedstock development and testing agreement with Chevron Technology Ven-tures, a division Chevron (NYSE: CVX). Financial terms of the agreement were not disclosed. This was not Chev-ron’s first venture into algae-based biofuel. Last year, Chevron announced an agreement to work with the U.S. Department of Energy’s National Renewable Energy Laboratory to produce transportation fuels from algae.

Royal Dutch Shell plc and HR BioPetroleum have established a joint venture called Cellana and are building a pilot facility in Hawaii to grow marine algae and extract oil for conversion into biofuels. Cellana represents the next step in Shell’s ongoing effort to develop a new generation of biofuels using sustainable, non-food raw ma-terials. Construction of a demonstration facility has begun on the Kona coast of the Big Island of Hawaii. Shell plans to expand the 2.5-hectare (269,000 square foot) pilot project to a 1,000-hectare facility after two years and later to a full-scale 20,000-hectare commercial production plant.




Shell intends to target the EU market with its biofuels production. The EU has a goal of 5.75% biofuels content in all fuel used for transportation by 2010 and 10% by 2020.

OOIL is well-positioned in the emerging biofuels market because of the advantages of its technology. The Com-pany has developed a complete algae growth and oil extraction system that enables a continuous oil-producing industrial process and addresses the challenges that have limited the prospects for algae-based biofuels until now.

The Company’s operating plan over the next 12 months calls for developing a marketing prototype and dem-onstrating its OriginOil System to potential licensees and business partners. The planned prototype will consist of two primary subsystems: (1) a growth tank where nutrients, light and carbon dioxide are periodically intro-duced to facilitate the growth of a microalgae culture; and (2) an extraction tank where algae mass from the growth tank is pumped in and cracked to extract algae oil. The completed prototype will demonstrate the end-to-end cycle of growing algae and extracting oil.

OOIL plans to license its technology to fuel refiners, chemical and oil companies and other customers, thus generating licensing and servicing revenue. Once the technology potential is proven the Company will be able to pursue licensing opportunities. In addition, OOIL plans to build standardized base modules fitting on a 40’ shipping container platform for trial and entry-level applications. Larger systems will be built on a project or co-venture basis. This business model ensures that OOIL’s technology can be deployed worldwide in a quick and efficient manner.

Robust demand for clean technologies, the Company’s steady progress in advancing its biofuels technology and the significant revenue stream likely to result from royalties and licensing fees as the technology is commercial-ized lend credence to OOIL’s outlook for a large, growing income streams over the medium-term.

As the fuel-versus-food debate continues to rage, oil from algae becomes an increasingly attractive alternative to oil from soybeans or ethanol from corn. As a result, we are initiating coverage of OOIL with a Speculative Buy rating.




Limited operating history

OOIL was formed in June 2007 and is developing a new technology that has not yet gained market acceptance. The Company’s development-stage status and the risks and uncertainties associated with early-stage companies raise questions about its ability to successfully commercialize this technology.

Additional capital required to continue operations

The Company will require external financing to complete its technology development and pursue licensing op-portunities. If OOIL fails to obtain sufficient capital, implementation of its business plan could stall.

Technology is not commercialized

While the Company has made significant progress developing its algae-to-biofuel conversion technology, un-certainties exist regarding its ability to complete research and prove its technology. OOIL may burn significant amounts of cash refining its technology without deriving meaningful economic benefits.

Potential dilution to existing shareholders

OOIL will require substantial working capital to further develop its business. The Company plans to rely mainly on equity financing. Equity sales may further dilute the proportionate equity interest and voting power of cur-rent shareholders.

Intense competition

The market for alternative fuels is highly competitive and the cost of retaining qualified engineers, chemists and other key employees is rising. Moreover, if production capacity in the industry increases faster than demand, selling prices could fall. Increases in the supply of alternative fuels as well as falling oil prices could negatively affect demand for algae-based biofuel and impact the competitive position of OOIL’s technology.

There are a number of other companies producing algae for fuel feedstock. These include PetroAlgae, Infinifuel, Valcent Products, Aquaflow Bionomic, Livefuels, Solazyme, Enhanced Biofuels & Technologies (EBT), Veridium, PetroSun, GS AgriFuels, A2BE Carbon Capture, Algoil, GreenFuel Technologies, Solix Biofuels, Texas Clean Fu-els, BioKing (NL) and Eco-Erg (PT). There is no assurance that OOIL’s technology will produce more efficiently or cost-effectively than competitor technologies.

Investment Risks Management




Management

T Riggs Eckelberry is the co-inventor of the Company’s technology, and is a veteran in the alternative energy sector. In 2007, he developed and launched OriginOil. Prior to that, he served as president and COO of CyberDefender Corporation from 2005 to 2006, and was instrumental in building the com-pany, helping it achieve initial funding and gaining a public listing in 2006. Eckelberry previously founded and served as president of TechTransform, a technology consulting firm. He specialized in high-tech launches and turn-arounds, and led the turnaround of YellowPages.com in 2004, resulting in its sale for $100 million to SBC/BellSouth. In 2003, he helped make Panda Soft-ware a key player in the U.S. market as general manager of its U.S. business. During the high-tech boom of the 1990s, he was responsible for the global brand success of the software product, CleanSweep. As chief operating officer of MicroHouse Technologies, he drove record sales and a modernization of that company’s technology, culminating in its successful sale to Earthweb. As vice president of marketing for venture-backed TriVida, he was a key member of the team that commercialized the company’s technology and sold it to Be-Free Inc. (now part of ValueClick: VCLK).

T Riggs Eckelberry Chief Executive Officer and President

Nicholas Eckelberry, a director as well as the Company’s director of develop-ment, is the lead inventor of OOIL’s technology. He has been a technology inventor and entrepreneur for more than 30 years. In mid-2007, he began de-veloping OriginOil’s intellectual property. From 2005 to 2006, he was president of APS Inc., the research and development arm of Mag Power Ltd. In 2003, he developed, tested and began marketing Nano-Cal, a product line based on a unique biological form of calcium. The product line was expanded commer-cially in 2006. In 1978, he personally drove the adoption of a technology for in-ear sound monitoring.

Nicholas Eckelberry Director

Ivan Ivankovich has more than 20 years of financial and operations experi-ence. From 2006 to the present, Ivankovich served as a consultant and advisor to several technology companies. From 2005 to 2006, he served as the man-aging director of VisionPoint Capital, a boutique investment bank, advising clients in the middle market. From 2003 to 2005, he served as the CFO of Yel-lowPages.com, an online directory of national and local merchants. Prior to YellowPages.com, from 2001 to 2003, he served as vice president of portfolio operations for Platinum Equity, a global acquisition firm where he managed certain of its portfolio companies. He has also served as a senior financial ex-ecutive for venture-backed companies such as HealthAllies and TriVida Cor-poration, which was acquired by Befree Inc. (now part of ValueClick: VCLK). Ivankovich began his career with Ernst & Young in its audit practice in Los Angeles. A certified public accountant and a member of the California Society of CPAs, he earned his Bachelor of Art in business economics with an empha-sis in accounting from the University of California, Santa Barbara.

Ivan Ivankovich Director




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Victor Sula, Ph.D. - Senior Analyst Victor Sula, Ph.D. has held the position of Senior Analyst with several independent investment research firms since 2004. Prior to 2004, Mr. Sula held Senior Fi-nancial Consultant positions within the World Bank sponsored Agency for Restructuring and Enterprise Assistance and TACIS sponsored Center for Productivity and Competitiveness of Moldova, where he was involved in corporate reorganization and liquidation. He is also employed as Associate Professor at the Academy of Economic Studies of Moldova. Mr. Sula earned his Ph.D. degree in 2001 and bachelor’s degree in Finance in 1997 from the Academy of Economic Studies of Moldova. Mr. Sula is currently a level III candidate in the CFA program.

beacon equity research analyst: victor sula, phd

Documents

originoil system

extraction system

cultivation system

ooils process

closed system

algae cells

algae organisms

oil yield