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BLGO > SEC Filings for BLGO > Form 10-Q on 13-Nov-2013All Recent SEC Filings

Show all filings for BIOLARGO, INC.

Form 10-Q for BIOLARGO, INC.


13-Nov-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:

? 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, 2012. Unless otherwise expressly stated herein, all statements, including forward-looking statements, set forth in this Form 10-Q are as of September 30, 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, Odor-No-More, Inc., a California corporation, BioLargo Water, Inc., a California corporation, and its partially-owned subsidiary Clyra Medical Technologies, Inc., a California corporation.


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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 repor, and in consideration of our limited financial resources, which necessarily require us to make difficult strategic choices and delay progress on our commercial activities.

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 - direct to consumers, through retail stores, and most recently, to the US Government.

We engaged a leading third party testing company to compare our pet products' performance against leading brands and, much like we were able to prove in with our equine products, the testing verified that we outperform the leading brands in odor control in side-by-side consumer testing. Cat Fancy Magazine named our "Litter Deodorizing Concentrate" one of 18 "Best Products of the Year" for 2013, and it won an "Editor's Choice Award" from Pet Product News International.


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In April 2013, we added our pet line of products under our "Deodorall" brand, with the intent to distribute our pet products under the Deodorall brand through mass-merchant (non-pet) retailers. We have retained sales representative agencies that specialize in various aspects of the retail market, including pet and mass merchant, to have our products placed at national retailers. We have test marketed a series of label designs and package refinements, and are targeting national and regional retailers to carry our products and/or develop a private label product using our patented formulas.

Were any national or regional chain to carry our products, we anticipate a need for increased investment capital to conduct an appropriate marketing campaign, and to reinvest most of the margin available from early sales into marketing and merchandising, to support the sell through of the products. While we have had discussions with a number of capital sources and believe that we would be able to successfully secure the needed capital to support such a campaign, until such time as the specifics requirements are well defined and related negotiations are complete, we can make no assurances that we will be successful in such financing activities.

In October 2013, we introduced a new line of odor and moisture control products to the US Government in a pouch and canister design that can be used to solidify liquids or absorb blood and other bodily fluids. We initially plan to target government medical providers, and plan to expand into general industrial applications and first responders markets.

A third party distributor markets "Deodorall Sport" to the sporting goods apparel and equipment industry with an emphasis in the ice hockey industry. We are actively developing new complimentary products and refining our existing products to support this selling channel. Our products are being introduced and sold into retail stores in time for the fall and winter sports seasons.

As of yet, our sales in the CHAPP product category are nominal. Product development, sales, and marketing require significant financial resources that we currently do not have. As such, our progress in this area has been slower than we had hoped. As our financial resources permit, we will continue to evaluate and test new products, marketing programs and selling opportunities, as well as strategic alliances to expand and refine our messaging and generate sales.

Agreement with Central Garden & Pet

On March 24, 2011, we granted Central Garden & Pet the exclusive worldwide right and license to sell products that contain our technologies in the "pet supplies industry" pursuant to a written agreement. The rights granted to Central are exclusive so long as Central purchased a minimum amount of product from us by February 11, 2013. Central failed to do so, and had 60 days from our February 11, 2013 notice to them of such failure to purchase the minimum amount of product or provide us equivalent compensation in order to maintain exclusive rights to our technology in the "pet supplies industry". Central failed to do so, and thus no longer has exclusive rights to our technology in the "pet supplies industry". The $100,000 deposit paid to us by Central in 2011 is non-refundable and will not be returned to Central.

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 conclude development and testing, and apply for 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, Clyra has retained and engaged a team of experts in the area to guide it through the process and is not aware of any inherent technical or practical reason that its products would not receive the approvals sought. The product development process has been more time consuming than originally anticipated, and our limited financial resources have impacted our ability to complete the process. 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 second half 2014. In the interim, we will continue to seek licensing partners, and refine our product roll out, marketing, and distribution plans.

Water Treatment

We have developed a number of technologies for water treatment we call the Advanced Oxidation System ("AOS"). Our AOS systems directly allow for the removal and in-sitú destruction of many dangerous, yet common waterborne contaminants and we believe can solve some of the world's most important problems that threaten our water. Within the menu of systems offer what we call our "AOS Filter." We believe our AOS Filter, a product in development, is a significant breakthrough in water filtration technology in that it eliminates difficult and environmentally sensitive contaminants in minutes, compared with existing filter technologies that take hours or longer.


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In June 2013, we formed BioLargo Water Inc. (www.BioLargoWater.com) a wholly-owned subsidiary, to showcase our AOS systems and organize and refine our commercial strategy. While a number of our delivery systems may have a role to play in water treatment in general, we believe our AOS Filter will prove to be the showcase of our business over time and we believe it offers a host of advantages as compared to competing technologies like settling ponds, adsorption technologies, and other advanced oxidation systems such as UV and ozone.

We have developed a lab-scale prototype design of our AOS Filter, filed for patents, and gathered our initial proof of claims. We are further engineering and testing the filter against a number of contaminants, and are positioning it and actively seeking partners for commercial trials and pilot programs. We believe our AOS Filter can enhance any water treatment system already in use in almost any industry that values speed of processing and/or hard to deal with contaminants.

We are currently evaluating the most practical way and appropriate market to exploit our AOS Filter. As part of that process, we intend to find further industry resources to assist in the endeavor, and have begun discussions with potential strategic partners. Revenue opportunities present themselves in many forms: licensing, sale, manufacturing, servicing, joint venture, leasing, tolling, etc. However, we have not yet identified the specific industry segment or revenue opportunity for our first commercial trials.

Many industry segments, like energy and industrial process water systems, use extremely high volumes of water in their daily business activity. Often, tiny organic molecules, including soluble contaminants, are problematic for these types of water uses. Some contaminants are especially troublesome for existing technologies such that significant time must be expended to fully treat the contaminant. We also know that many industry segments require ultra-pure water. With our AOS Filter, we have been able to prove a level of performance in which our system dismantles organic contaminants to their basic molecular forms in minutes, rendering them safe. Other systems can take years, as in the case of settling ponds, or hours for other advanced oxidation technologies like UV and ozone. As such, we believe the speed in which our AOS Filter operates provides a significant advantage to a potential customer. We also believe our AOS Filter can facilitate continuous and scalable water treatment with maximum efficiency, is complimentary with many filter systems, and can extend the life of filtration systems, lower corrosion and conserve chemistry.

Our work as a founding member of the University of Alberta Research Chair to solve the contaminated water issues associated with the Canadian Oil Sands production is continuing. We believe our AOS Filter will likely play an important role in that area as the industry seeks to comply with regulated mandates to deal with the reclamation and ongoing water uses. Our work with the stakeholders involved in the research chair is focused on optimization and tailoring the system to deal with the unique requirements of this industry segment. As the work progresses and additional proof of claims are gathered, the next logical step would be to begin pilot testing for commercial scale uses of the system.

Intellectual Property

In supplement to the description of our patents in our Annual Report on Form 10-K, we are now able to disclose the following patent applications with the United States Patent and Trademark Office:

? US Patent Application 61/490,448 (filed May 26, 2011) relating to our "AOS Filter", titled "Activated Carbon associated with Alkaline or Alkali Iodide", in which a contaminated fluid stream is passed through an activated carbon filter.

? US Patent Application 13/308,105 (filed November 30, 2011) relating to our "AOS Filter", titled "Antimicrobial and Antiodor Solutions and Delivery Systems" relating to our liquid antimicrobial solutions, including our gels, sprays and liquids imbedded into wipes and other substrates.


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Applications for international protection pursuant to the Patent Cooperation Treaty (PCT) have been filed for both of these US applications. However, it is cost prohibitive to seek patent protection all countries that are party to the PCT, and thus we intend to choose a limited number of countries to seek patent protection, as funds are available to do so. See the Risk Factors set forth in our Annual Report, beginning on page 13.

Results of Operations-Comparison of the three- and nine-month periods ended September 30, 2013 and 2012.

Revenue

We generated $18,418 and $152,764 in revenues during the three and nine-month periods ended September 30, 2013, and $10,490 and $55,145 in revenues during the three and nine-month periods ended September 30, 2012. In the three-month period ended June 30, 2013 we recorded $100,000 in license revenue from the deposit related to the Central Garden transaction. (See Note 3.) Our product revenue in the three and nine-month periods ended September 30, 2013, consisted primarily of sales of our Deodorall branded sports equipment spray, and Odor-No-More branded products. The revenue for the three and nine-month periods ended September 30, 2012, consisted primarily of sales of our Odor-No-More branded products.

Cost of Goods Sold

Excluding the $100,000 of license revenue, our cost of goods sold was $8,381 or 46% and $23,563 or 45% of revenues for the three and nine-month periods ended September 30, 2013, as compared with $6,857 or 65% and $32,706, or 59% of revenues for the three and nine-month periods ended September 30, 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 $536,026 and $1,470,936 for the three and nine-month periods ended September 30, 2013, compared to $760,584 and $2,871,648 for the three and nine-month periods ended September 30, 2012, a decrease of $224,558 and $1,400,712. The decrease in 2013 is primarily attributable to the non-cash expense recorded in 2012 as a result of the fair value of the April 2012 extension of stock options originally issued as three-year options in April 2009. The largest components of our Selling, General and Administrative expenses were:

a. Salaries and Payroll-related Expenses: These expenses were $140,217 and $401,457 for the three and nine-month periods ended September 30, 2013, compared to $151,520 and $854,256 for the three and nine-month periods ended September 30, 2012, a decrease of $11,303and $452,799. The decrease in 2013 is related to the absence of the non-cash expense recorded in 2012 for the extension of certain stock options.

b. Consulting Expenses: These expenses were $72,167 and $255,383 for the three and nine-month periods ended September 30, 2013, compared to $319,607 and $892,110 for the three and nine-month periods ended September 30, 2012, a decrease of $247,440 and $636,727. As noted above, the decrease is primarily attributable to the non-cash expense associated with the 2012 extension of certain stock options.

c. Professional Fees: These expenses were $170,156 and $332,072 for the three and nine-month periods ended September 30, 2013, compared to $74,464 and $349,187 for the three and nine-month periods ended September 30, 2012, an increase of $95,962 and a decrease of $17,115. The increase in the three-month period is due to the additional fair value related to the options issued in lieu of accrued and unpaid obligations.


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Research and Development

Research and development expenses were $267,861 and $603,568 for the three and nine-month periods ended September 30, 2013, compared to $122,268 and $307,754 for the three and nine-month periods ended September 30, 2012, an increase of $145,593 and $295,815, respectively. The increase in R&D is largely due to the expansion of our technology into the wound care and water treatment industries.

Interest expense

Interest expense totaled $238,056 and $240,556 for the three and nine-month periods ended September 30, 2013, compared to $36,137 and $454,074 for the three- and nine-month periods ended September 30, 2012, an increase of $201,919 and a decrease of $213,518. The increase in the three-month period is the result of the fair value of the winter 2012 Warrant one-year extension of $233,000. The decrease in the nine month period is a result of the winter 2012 warrant extension, offset by a 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 and nine-month periods ended September 30, 2013 was $799,108 and $2,194,049, a loss of $0.01 and $0.03 per share, compared to a net loss for the three and nine-month periods ended September 30, 2012 of $915,668 and $3,612,994, a loss of $0.01 and $0.06 per share. The decrease in net loss for the three and nine-month period ended September 30, 2013 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 officers and 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 $53,482 at September 30, 2013. We had negative working capital of $407,058 as of September 30, 2013, compared with negative working capital of $341,589 as of December 31, 2012. We had negative cash flow from operating activities of $991,207 for the nine-month period ended September 30, 2013, compared to a negative cash flow from operating activities of $1,662,101 for the nine-month period ended September 30, 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 $2,194,049 for the nine-month period ended September 30, 2013, and an accumulated stockholders' deficit of $74,681,872 as of September 30, 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 September 30, 2013, we had $100,000 principal amount outstanding on a note payable (see Note 11), and $401,307 of outstanding accounts payable. (See Note 10.)

During the nine-month period ended September 30, 2013, we received an aggregate $893,500 net proceeds pursuant to our private securities offerings, consisting of $633,000 from our Winter 2013 private securities offering, $49,500 from our Summer 2013 private securities offering, and $211,000 from the private securities offering conducted by our subsidiary, Clyra Medical Technologies, Inc. (See Note 5.)


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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.

We have been, and may continue to be, required to financially support the operations of our subsidiaries, none of which are operating at a positive cash flow. For example, during the nine-month period ended September 30, 2013, while our subsidiary Clyra raised net proceeds of $215,000 in its private securities offering, it expended $311,457, resulting in a shortfall of approximately $100,000. Through intercompany loans, we funded the shortfall.

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 . . .

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