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BLGO > SEC Filings for BLGO > Form 10-Q on 14-Nov-2012All Recent SEC Filings

Show all filings for BIOLARGO, INC.

Form 10-Q for BIOLARGO, INC.


14-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations

This Quarterly Report on Form 10-Q of BioLargo, Inc. (the "Company") contains forward-looking statements. These forward-looking statements include predictions regarding, among other things:

· our business plan;

· the commercial viability of our technology and products incorporating our technology;

· the effects of competitive factors on our technology and products incorporating our technology;

· expenses we will incur in operating our business;

· our ability to end persistent operating losses and generate positive cash flow and operating income;

· our ability to identify potential applications of our technology in industries other than the animal health industry and to bring viable products to market in such industries;

· the application of our technology in the food and beverage industry;

· the willingness of other companies to incorporate our technology into new or existing products or services and provide continued support for such products or services;

· the ability of our licensees to successfully produce, advertise and market products incorporating our technology;

· the continued success and viability of our licensees holding the exclusive right to exploit our technology in particular fields;

· the sufficiency of our liquidity and working capital;

· our ability to finance product field testing, hiring of personnel, required regulatory approvals, and needed patent applications;

· continued availability and affordability of resources used in our technology and the production of our products and services; and

· whether we are able to complete additional capital or debt financings in order to continue to fund operations and continue as a going concern.

You can identify these and other forward-looking statements by the use of words such as "may", "will", "expects", "anticipates", "believes", "estimates", "continues", or the negative of such terms, or other comparable terminology. Forward-looking statements also include the assumptions underlying or relating to any of the foregoing statements.

Such statements, which include statements concerning future revenue sources and concentrations, selling, general and administrative expenses, research and development expenses, capital resources, additional financings and additional losses, are subject to risks and uncertainties, including, but not limited to, those discussed elsewhere in this Form 10-Q, that could cause actual results to differ materially from those projected.

Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under the heading "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2011. Unless otherwise expressly stated herein, all statements, including forward-looking statements, set forth in this Form 10-Q are as of September 30, 2012, unless expressly stated otherwise, and we undertake no duty to update this information.

As used in this Report, the term Company refers to BioLargo, Inc., a Delaware corporation, and its wholly-owned subsidiaries, BioLargo Life Technologies, Inc., a California corporation, Odor-No-More, Inc., a California corporation, and Clyra Medical Technologies, Inc., a California corporation.


The following discussion and analysis should be read in conjunction with our unaudited condensed consolidated financial statements and the related notes to the consolidated financial statements included elsewhere in this report.

Overview

By leveraging our suite of patented and patent-pending intellectual property, which we refer to as the BioLargo technology, our business strategy is to harness and deliver nature's best disinfectant - iodine - in a safe, efficient, environmentally sensitive and cost-effective manner. The centerpiece of our BioLargo technology is CupriDyne®, which works by combining minerals with water from any source and delivering "free-iodine" on demand, in controlled dosages, in order to balance efficacy of disinfectant or odor control performance with concerns about toxicity.

Our BioLargo technology delivers "Nature's Best Solution®" - iodine - to an array of problems, including odor and moisture control, disinfection, wound healing and contaminated water. Our technology enables us to deliver precise dosing of iodine in a variety of physical forms and delivery systems, which often include the combination of chemical reagents with other materials. We primarily focus on developing uses and/or applications for our technology for its use in products, in order for us to secure a licensing and/or supplier agreement with other companies, that will in turn, sell services or products to their customers within a specific industry segment. We believe that we should continually work to advance proofs of claims and commercial validations wherever possible to support our fundamental licensing strategy and improve the perceived value of our technology to potential licensees.

Armed with a solution to specific industry problems, our BioLargo technology has potential commercial applications within global industries, including animal health, oil and gas extraction, agriculture and livestock, beach and soil environmental remediation, consumer products, food processing, medical, and water industries. While we believe the potential applications are many, we have thus far commercially launched products in only one area -- the animal health industry, under the brand name "Odor-No-More". In March 2011, we entered into an exclusive license and supply agreement with Central Garden & Pet Company ("Central"), the industry leading producer of premium pet products in the United States. Many of Central's product brands are the industry leader and household names with more than 20 years of history, including Kaytee, Nylabone, Four Paws, and others. In September 2012, Central introduced our Odor-No-More cat litter additive to pet store retailers at SuperZoo 2012. Since that time, we have retained professionals to advise us in our marketing efforts and we are actively developing a comprehensive marketing plan and refined product messaging that focuses on developing consumer awareness to encourage increased acceptance across various media outlets and that can support numerous selling channels.

While we continue to advance our efforts to market and sell our Odor-No-More products, with the addition of key industry experts to our team, we are also actively seeking opportunities for product sales or licensing in the oil and gas industry, the food processing industry, and the medical products industry. We are in discussions with leading researchers that serve the food and agriculture industry to conduct a series of trials for both the Isan Sytem and Cupridyne based systems to help meet specific targeted needs within those industries. We hope to begin this work as soon as possible.

In December 2011 we announced that we had been selected as a founding member of a Canadian Natural Sciences and Engineering Research Council ("NSERC") "research chair", joined by globally leading oil companies, the regional water district in Alberta Canada and the University of Alberta. The Chair was formed to solve the contaminated water and tailings ponds problems associated with the oil sands industry and commenced in December of last year. The Canadian Oil Sands are the second largest deposit of oil in the world. Extracting oil from the Oil Sands creates high volumes of contaminated water (between 2 and 4.5 barrels of water to produce one barrel of synthetic crude oil), currently discharged in "tailings" ponds, sometimes for years, to separate the solids from the liquids for eventual recycling or safe discharge into the environment. With Canadian oil production estimated to increase from 1.9 million to over 6 million barrels of oil a day over the next 20 years, the released water from oil sands operations is estimated to reach one billion cubic meters in the Athabasca oils sands region by 2025. An innovative solution that can reduce the water treatment time, and thus the overall footprint and environmental impact of the tailings ponds, is required for Canada to meet its production goals. It is widely believed that the future of oil sands exploration, its social and economic contribution as the second largest oil reserve in the world, and its contribution to the public good of both Canada and the Unites States, hinges on industry's ability to manage the wastewater in tailings ponds. Our Chief Science Officer continues to support the efforts at the University of Alberta on a direct and active basis. We believe our work with the Chair is important for this industry, both the Canadian and Unites States national interests, and could impact the global industry as the Chair was organized to develop sustainable solutions for managing these natural resources and the associated water issues. We expect technical publications by the researchers in the near future.


In February 2011, we added to our team a recognized industry water treatment expert, Harry DeLonge. Having spent more than 40 years at Pepsi-Cola International, Mr. DeLonge is assisting us in our efforts to commercialize our BioLargo technology in the food and beverage industry. Within the food and beverage industry, we believe the BioLargo technologies are useful in a number of applications, including "clean-in-place" related uses, treating processed and wastewater, and for enhancing performance of certain filter and water treatment technologies. In addition, we believe that we have a cost effective solution for managing dangerous and/or odorless compounds common with this industry. Our efforts to develop new patents and other intellectual property, advancing proof of claim, pilot projects and seeking customers and/or licensing partners are continuing throughout 2012.

In August of 2011, we added a medical products expert to our management team to develop and exploit commercial opportunities within the medical industry. Since that time, in addition to organizing an internal team to champion products in this segment, we have developed prototype wound care and medical-use products incorporating our BioLargo technology for evaluation and proving basic product claims. We have engaged third party labs to validate basic product claims, and have successfully verified that our newly developed products meet required safety and efficacy benchmarks according to industry specific standards. This work is continuing as we refine and optimize our product designs. In May 2012, we formed a wholly owned subsidiary for the purpose of commercializing medical products, and have since retained the services of Tanya Rhodes, a former Vice President at Smith & Nephew, to assist in the efforts. We are actively engaged in discussions with potential strategic partners about forming a business relationship to initiate the required regulatory applications and ultimately introduce new products to market, but have also determined, based on the substantial work that has been accomplished by our team, to now take the necessary steps to fully develop market-ready wound care products, including obtaining required regulatory approvals as soon as we are able. As a result, we are currently negotiating with contract manufacturers to finalize specific product specifications and technical validations for the purposes of finalizing the claims and product designs in anticipation of making an FDA application for requisite approvals which are targeted for mid-2013.

Throughout 2012, we have continued our product development, formulation refinement and test marketing for a number of animal-health related products in the equine and pet industries. We believe the work in this area is complimented by our technical advances and proofs of claims for products associated with human wound care and that many of these animal health care products could be ready for market in early to mid-2013 depending on our human and financial resources and our capability.

Results of Operations-Comparison of the three and nine-month periods ended September 30, 2012 and 2011

Revenue

We generated $10,490 and $55,145 in revenues from product sales during the three and nine-month periods ended September 30, 2012 and revenues of $10,805 and $26,759 during the same periods for 2011. In addition, for the three and nine-month periods ended September 30, 2011, we recognized revenue of $109,720 and $115,500 related to the Isan USA license transaction (see Note 4). For 2012, all of our product revenues relate to our Odor-No-More products for which sales are primarily to retail establishments at wholesale prices.

Cost of Goods Sold

For the three and nine-month periods ended September 30, 2012, our cost of goods sold was $6,857, or 65% of revenues, and $32,706, or 59% or revenues versus $12,683 or 11% of revenues and $36,270 or 25% of revenues for the three and nine month periods ended September 30, 2011. In the 2011 periods, we recognized licensing revenue, which reduced our cost of goods sold as a percentage of revenue. As well, in the nine-month period ended September 30, 2011, we agreed to purchase back product shipped in 2010 to a customer, which resulted in an increased cost of goods sold related to our product sales as compared with 2012.


Our cost of goods sold includes costs of raw materials, contract manufacturing, and proportions of salaries and expenses related to the production of our Odor-No-More branded products. Because we have not achieved a large or consistent revenue base, the inclusion of the fixed costs related to the product development and manufacturing increases our cost of goods disproportionately, resulting in high percentage fluctuations.

Selling, General and Administrative Expense

Selling, General and Administrative expenses were $828,354 and $3,064,792 for the three and nine-month periods ended September 30, 2012, compared to $580,507 and $2,453,038 for the three and nine-month periods ended September 30, 2011, an increase of $247,847 and $611,754, respectively. The largest components of these expenses were:

a. Salaries and Payroll-related Expenses: These expenses were $219,291 and $1,047,400 for the three and nine-month periods ended September 30, 2012, compared to $206,484 and $875,670 for the three and nine-month periods ended September 30, 2011, increases of $12,807 and $171,730, respectively. The increase in the nine-month period is primarily related to the non-cash expense related to the fair value of stock options, the expiration dates for which were extended in April 2012 by five years. An additional portion of the increase is related to annual salary increases pursuant to contracts with our executive officers.

b. Consulting Expenses: These expenses were $319,607 and $892,110 for the three and nine-month periods ended September 30, 2012, compared to $179,494 and $657,301 for the three and nine-month periods ended September 30, 2011, an increase of $140,113 and $234,809, respectively. . The increases are primarily related to the non-cash expense incurred as a result of the five-year extension in April 2012 of the expiration dates for warrants and stock options issued to consultants.

c. Professional Fees: These expenses were $47,464 and $155,194 for the three and nine-month periods ended September 30, 2012, compared to $39,323 and $206,459 for the three and nine-month periods ended September 30, 2011, an increase of $8,141 and a decrease of $34,976, respectively. The increase is primarily related to the non-cash expense incurred as a result of the five-year extension in April 2012 of the expiration dates for warrants and stock options issued to professionals. The decrease for the nine-month period is primarily due to the fair value of warrants issued to professionals in 2011 that have not been incurred in 2012.

Research and Development

Research and development expenses were $54,497 and $114,609 for the three and nine-month periods ended September 30, 2012, compared to $9,034 and $48,325 for the three and nine-month periods ended September 30, 2011, an increase of $45,463 and $66,284. The increases are attributed to an increase in product development activities and patent application and prosecutions as compared to 2011.

Interest expense

Interest expense totaled $36,137 and $454,074 for the three and nine-month periods ended September 30, 2012, compared to $228,639 and $642,088 for the three and nine-month periods ended September 30, 2011, a decrease of $192,502 and $188,014. The decrease is primarily due to the repayment of $670,410 in convertible notes during 2012 (see Item 2, "Conversion of Spring 2009 Notes", below) and amortization of the discount based on the fair value of the warrants issued in connection with our convertible debt offset by the fair value of the extension of warrants.

Net Loss

Net loss for the three and nine-month periods ended September 30, 2012 was $915,668 and $3,612,994, a loss of $0.01 and $0.06 per share, compared to a net loss for the three and nine-month periods ended September 30, 2011 of $711,671 and $3,043,994, a loss of $0.01 and $0.06 per share. Although the dollar amount of the loss has declined, the per share loss hasn't declined as much due to the issuance of additional shares for new capital and for compensation and other related expenses.


Liquidity and Capital Resources

We have been, and anticipate that we will continue to be, limited in terms of our capital resources. Until we are successful in commercializing products or negotiating and securing payments for licensing rights from prospective licensing candidates, we expect to continue to have operating losses. Cash and cash equivalents totaled $427,842 at September 30, 2012. We had negative working capital of $1,106,544 as of September 30, 2012, compared with negative working capital of $2,027,351 as of September 30, 2011. We had negative cash flow from operating activities of $1,662,101 for the nine-month period ended September 30, 2012, compared to a negative cash flow from operating activities of $1,334,451 for the nine-month period ended September 30, 2011. We used cash from financing activities to fund operations. Although we have reduced our negative working capital position in the nine-month period ended September 30, 2012, our cash position is insufficient to meet our continuing anticipated expenses or fund anticipated operating expenses. Accordingly, we will be required to raise significant additional capital to sustain operations and further implement our business plan and we may be compelled to reduce or curtail certain activities to preserve cash.

The accompanying condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of our business. As reflected in the accompanying financial statements, we had a net loss of $3,612,994 for the nine-month period ended September 30, 2012, and an accumulated stockholders' deficit of $71,078,288 as of September 30, 2012. The foregoing factors raise substantial doubt about our ability to continue as a going concern. Ultimately, our ability to continue as a going concern is dependent upon our ability to attract significant new sources of capital, attain a reasonable threshold of operating efficiencies and achieve profitable operations by licensing or otherwise commercializing products incorporating our BioLargo technology. The accompanying condensed consolidated financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern.

As of September 30, 2012, we had $513,775 aggregate principal amount outstanding on various promissory notes. We may pay the principal and interest due on these notes in cash or in stock, at our option, at maturity. In addition, as of September 30, 2012, we had $971,266 of outstanding accounts payable and accrued expenses, of which $43,395 relates to interest due on outstanding promissory notes, and $927,871 relates to accrued and unpaid payables. (See Note 10.)

During the nine-month period ended September 30, 2012, we received $1,961,445 pursuant to our private securities offerings. (See Note 5.)

We will be required to raise substantial additional capital to expand our operations, including without limitation, hiring additional personnel, additional scientific and third-party testing, costs associated with obtaining regulatory approvals and filing additional patent applications to protect our intellectual property, and possible strategic acquisitions or alliances, as well as to meet our liabilities as they become due for the next 12 months. We may also be compelled to reduce or curtail certain activities to preserve cash.

In addition to the private securities offerings discussed above, we are continuing to explore numerous alternatives for our current and longer-term financial requirements, including additional raises of capital from investors in the form of convertible debt or equity. There can be no assurance that we will be able to raise any additional capital. No commitments are in place as of the date of the filing of this report for any such additional financings. Moreover, in light of the current unfavorable economic conditions, we do not believe that any such financing is likely to be in place in the immediate future.

It is also unlikely that we will be able to qualify for bank or other financial institutional debt financing until such time as our operations are considerably more advanced and we are able to demonstrate the financial strength to provide confidence for a lender, which we do not currently believe is likely to occur for at least the next 12 months or more.


If we are unable to raise sufficient capital, we may be required to curtail some of our operations, including efforts to develop, test, market, evaluate and license our BioLargo technology. If we were forced to curtail aspects of our operations, there could be a material adverse impact on our financial condition and results of operations.

Critical Accounting Policies

Our discussion and analysis of our results of operations and liquidity and capital resources are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates and judgments, including those related to revenue recognition, valuation of intangible assets and investments, and share-based payments. We base our estimates on anticipated results and trends and on various other assumptions that we believe are reasonable under the circumstances, including assumptions as to future events. These estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. By their nature, estimates are subject to an inherent degree of uncertainty. Actual results that differ from our estimates could have a significant adverse effect on our operating results and financial position. We believe that the following significant accounting policies and assumptions may involve a higher degree of judgment and complexity than others.

The methods, estimates and judgments the Company uses in applying these most critical accounting policies have a significant impact on the results of the Company reports in its financial statements.

We anticipate that revenue will come from two sources: sales of Odor-No-More products and from royalties and license fees from our intellectual property. Odor-No-More revenue is recognized upon shipment of the product and all other contingencies have been met. Licensees typically pay a license fee in one or more installments and ongoing royalties based on their sales of products incorporating or using our licensed intellectual property. License fees are recognized over the estimated period of future benefit to the average licensee.

The Company has established a policy relative to the methodology to determine the value assigned to each intangible acquired with or licensed by the Company and/or services or products received for non-cash consideration of the Company's common stock. The value is based on the market price of the Company's common stock issued as consideration, at the date of the agreement of each transaction or when the service is rendered or product is received, as adjusted for applicable discounts.

It the Company's policy to expense share based payments as of the date of grant in accordance with Auditing Standard Codification Topic 718 "Share-Based Payment." Application of this pronouncement requires significant judgment regarding the assumptions used in the selected option pricing model, including stock price volatility and employee exercise behavior. Most of these inputs are either highly dependent on the current economic environment at the date of grant or forward-looking expectations projected over the expected term of the award. As a result, the actual impact of adoption on future earnings could differ significantly from our current estimate.

Recent Accounting Pronouncements

Recent accounting pronouncements issued by FASB and the SEC did not or are not believed by management to have a material impact on the Company's present or future consolidated financial statements.

Inflation

Inflation affects the cost of raw materials, goods and services we use. In recent years, inflation overall has been modest, but we believe inflation may increase our costs in the near future. Some of our products incorporate oil based polymers, which are subject to price fluctuations based on the price of crude oil, as well as shortages.

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