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BLGO > SEC Filings for BLGO > Form 10-Q on 15-May-2013All Recent SEC Filings

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Form 10-Q for BIOLARGO, INC.


15-May-2013

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:

ˇ our business plan;

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

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

ˇ expenses we will incur in operating our business;

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

ˇ 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;

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

ˇ 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;

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

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

ˇ the sufficiency of our liquidity and working capital;

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

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

ˇ 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, 2012. Unless otherwise expressly stated herein, all statements, including forward-looking statements, set forth in this Form 10-Q are as of March 31, 2013, 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, and Odor-No-More, Inc., a California corporation, and its partially owned subsidiary Clyra Medical Technologies, Inc.

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 core of this innovative technology is the accurate and safe delivery of iodine in a wide range of forms, moieties and conditions. Iodine is an essential nutrient and all natural broad-spectrum disinfectant with no known microbial resistance. When used effectively, it can keep people and the world safer from disease and infection, and can be engaged as a powerful oxidant and catalyst to keep our water, earth, and air clean, safe, and healthy. Our goal is to target our capabilities to create and utilize iodine to improve the quality of life for people worldwide, to protect the environment, all while producing positive economic results for our customers, partners, and shareholders.

Our products offer a solution to an array of pervasive problems, including odor, moisture control, disinfection, wound healing and contaminated water. The iodine most of us are familiar with, sold in pharmacies and used by hospitals, has severe limitations - it is considered toxic, causes staining, and contains a limited dose of the active oxidizing ingredient. Our technology, on the other hand, directly addresses many of these shortcomings - we can deliver iodine's oxidizing ingredient ("free iodine") with precision, ranging from very small doses up to very large doses with more than 20 times the power of traditional iodine. We can deliver iodine so that it is both non-toxic and non-staining, thus extending its usefulness well beyond historical product applications. Consequently, we feel our best advantage is to leverage iodine's breadth to develop uses and products that offer a competitive edge against other technologies. These uses can secure BioLargo its highest value proposition, resulting in sales and licensing opportunities.

The centerpieces of our technology are embodied by our patented and proprietary CupriDyneŽ and its methods of delivery, the Isan system, and our new "Advanced Oxidation System." These technologies offer a nearly seamless range of capabilities for the generation, delivery and control of iodine and implementation of iodine in most of its moieties.

Although our technology has potential commercial applications within many industries, we are focusing our efforts in three areas:

1. The companion animal industry, as a segment of the commercial, household and personal products ("CHAPP");

2. Advanced wound care; and

3. Water treatment.

Within these broad categories, we also narrow our product focus to exploit opportunities that we believe are of high-value to potential customers and that present commercially significant opportunities.


Commercial, Household and Personal Care Products

CHAPP includes broad product categories and many opportunities for the application of our technology. It is defined by the ability to utilize similar, if not identical, consumption products in multiple market segments. Detergents, single use absorbents, wipes, products that provide odor or disinfection control, and stain removal all fall within this category. Packaging ranges from consumer sizes of a few ounces to bulk packaging for commercial or industrial use.

We are currently marketing products in this category under three brands - Odor-No-More, Nature's Best Solution, and Deodorall. A third party distributor markets "Deodorall Sport", primarily to the ice hockey industry. We have retained sales representative agencies who specialize in various aspects of the retail market, including pet and mass merchant, to have our products placed and national retailers. Those efforts are ongoing. As of yet, our sales in these brands are nominal.

Advanced Wound Care - Clyra Medical Technologies Subsidiary

In 2012 we formed a subsidiary Clyra Medical Technologies, Inc. ("Clyra") to commercialize our technology in the medical products industry, with an initial focus on advanced wound care. Our formulated advanced wound care products combine broad-spectrum antimicrobial capabilities with iodine's natural and well-understood metabolic pathway to promote healing. We believe these benefits, along with reduced product costs as compared with other antimicrobials, give our products a competitive advantage in the marketplace.

In late 2012, Clyra organized a strategic supply agreement with Formulated Solutions, a state-of-the-art FDA registered drug and device manufacturing company in Florida, to make final preparations and apply for a FDA 510(k) approval for its first two products to be sold into the advanced wound care industry. While no assurances can be made about the ultimate success of such applications, given the forward looking nature of such events, the company has retained and engaged a team of experts in the area to guide the company through the process and is not aware of any inherent technical or practical reason that its products would not receive the approvals sought. Given the timing of the FDA process, and the requirement for approval before product can be sold, we do not anticipate product sales until the first half 2014. In the interim, we will continue to seek licensing partners, and refine our product roll out, marketing, and distribution plans.

Results of Operations-Comparison of the three-month periods ended March 31, 2013 and 2012

Revenue

We generated $14,363 in revenues during the three-month period ended March 31, 2013, and $30,816 in revenues during the three-month period ended March 31, 2012. Our revenue in the three-month period ended March 31, 2013, consisted primarily of sales of our Deodorall branded sports equipment spray, and Odor-No-More branded Animal Bedding Additive. The revenue for the in the three-month period ended March 31, 2012, consisted primarily of sales of our Odor-No-More branded products (our Animal Bedding Additive, Cat Litter Additive, and Facilities and Equipment Wash).

Cost of Goods Sold

Our cost of goods sold was $6,198 or 43% of revenues for the three-month period ended March 31, 2013, as compared with $17,772, or 58% of revenues for the three-month period ended March 31, 2012. Our cost of goods sold includes costs of raw materials, contract manufacturing, and proportions of salaries and expenses related to the sales and marketing efforts of our Odor-No-More branded products. Because we have not achieved a meaningful revenue base, and our number of products is increasing, 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 $596,839 for the three-month period ended March 31, 2013, compared to $700,438 for the three-month period ended March 31, 2012, a decrease of $103,599. The largest components of these expenses were:

a. Salaries and Payroll-related Expenses: These expenses were $183,390 for the three-month period ended March 31, 2013, compared to $194,472 for the three-month period ended March 31, 2012, a decrease of $11,082. There were no cash bonuses, issuances of stock or options to our executives during the three-month period ended March, 31, 2013 as compared to 2012 where we issued stock bonuses to our Chief Executive Officer, Chief Technology Officer and Secretary and the expense related to the fair value of the stock issuance to our Chief Executive Officer and Chief Technology Officer.

b. Consulting Expenses: These expenses were $191,131 for the three-month period ended March 31, 2013, compared to $242,357 for the three-month period ended March 31, 2012, a decrease of $51,226. The decrease is primarily attributable to a reduced amount of non-cash stock option compensation expense and stock issued for services to consultants in the three months ended March 31, 2013 versus 2012.

c. Professional Fees: These expenses were $75,325 for the three-month period ended March 31, 2013, compared to $93,358 for the three-month period ended March 31, 2012, a decrease of $18,033. This decrease is consistent with our usage of professionals for accounting and legal costs associated with our operations.

Research and Development

Research and development expenses were $51,393 for the three-month period ended March 31, 2013, compared to $16,311 for the three-month period ended March 31, 2012, an increase of $35,082. The increase is related to product research and product development and testing related to our Odor-No-More and Clyra products.

Interest expense

Interest expense totaled $2,500 for the three-month period ended March 31, 2013, compared to $215,931 for the three-month period ended March 31, 2012, a decrease of $213,431. The decrease is primarily due to the reduction of interest expense related to the conversion of all of our outstanding convertible notes with warrants in the fourth quarter of 2012.

Net Loss

Net loss for the three-month period ended March 31, 2013 was $645,297, a loss of $0.01 per share, compared to a net loss for the three-month period ended March 31, 2012 of $920,971, a loss of $0.02 per share. The decrease in net loss for the three-month period ended March 31, 2012 is primarily a reduction of interest expense related to the conversion of all of our outstanding convertible notes and a reduction in compensation expense to consultants from the reduced issuance of stock options.


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 $90,959 at March 31, 2013. We had negative working capital of $530,226 as of March 31, 2013, compared with negative working capital of $1,425,507 as of March 31, 2012. We had negative cash flow from operating activities of $465,230 for the three-month period ended March 31, 2013, compared to a negative cash flow from operating activities of $379,000 for the three-month period ended March 31, 2012. We used cash from financing activities to fund operations. 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 $645,297 for the three-month period ended March 31, 2013, and an accumulated stockholders' deficit of $73,444,577 as of March 31, 2013. 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 March 31, 2013, we had $100,000 principal amount outstanding on a note payable (see Note 11), and $472,915 of outstanding accounts payable. (See Note 10.)

During the three-month period ended March 31, 2013, we received an aggregate $405,000 net proceeds pursuant to our private securities offerings, consisting of $369,000 from our Winter 2013offering, and $36,000 from the Clyra private securities offering. (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.

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. We seek to mitigate the adverse effects of inflation primarily through improved productivity and strategic buying initiatives. Additionally, 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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