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BLGO > SEC Filings for BLGO > Form 10-K on 1-Apr-2014All Recent SEC Filings

Show all filings for BIOLARGO, INC.

Form 10-K for BIOLARGO, INC.


1-Apr-2014

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

This discussion contains forward-looking statements that involve risks and uncertainties. Such statements, which include statements concerning future revenue sources and concentration, 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 above in Part I, Item 1 and elsewhere in this Annual Report, particularly in "Risk Factors," that could cause actual results to differ materially from those projected. The forward-looking statements set forth in this Annual Report are as of December 31, 2013 unless expressly stated otherwise, and we undertake no duty to update this information.

Results of Operations-Comparison of the years ended December 31, 2013 and 2012

Revenue

We generated revenue totaling $167,946 during the year ended December 31, 2013, compared with $65,542 during the year ended December 31, 2012. Included in the 2013 revenue is $100,000 in license revenue from the deposit related to the Central Garden transaction. See Note 3 of our financial statements for additional information. In 2013 we generated product revenue totaling $67,946, which consisted primarily of sales of our Odor-No-More branded products, and Deodorall branded products. In 2012 we generated product revenue totaling $65,542, which consisted primarily of sales of our Odor-No-More branded products.

Cost of Goods Sold

Our cost of goods sold during 2013 was $29,656, or 44% of product revenues, as compared with $39,781 in 2012, or 61% of 2012 revenues. Our cost of goods sold includes costs of raw materials, contract manufacturing, and portions of salaries related to the product development and manufacturing. 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 higher fluctuations. The difference in the percentage of product revenues in 2013 versus 2012 is due to such fluctuations.

Selling, General and Administrative Expense

Selling, General and Administrative expenses were $2,004,777 for the year ended December 31, 2013, compared to $4,354,414 for the year ended December 31, 2012, a decrease of $2,349,637. The decrease is primarily related to non-cash cash transactions which occurred in 2012 and did not occur in 2013. The largest components of the decrease in selling, general and administrative expenses were:

a. Salaries and Payroll-related Expenses: These expenses were $551,753 for the year ended December 31, 2013, compared to $1,278,765 for the year ended December 31, 2012, a decrease of $727,012. The decrease is primarily attributable to fair value of the common stock issuance and the amortization of the fair value of the options issued to senior executives in 2012 compared to no option issuances in 2013.

b. Consulting Expenses: These expenses were $377,569 for the year ended December 31, 2013, compared to $1,714,493 for the year ended December 31, 2012, a decrease of $1,336,924. The decrease is primarily attributable to the amortization of the fair value of an option issued to a consultant, and the fair value of an extension of an option issued to two consultants, resulting in a non-cash stock option compensation expense in 2012, but no such expense for that option in 2013.

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c. Professional Fees: These expenses were $433,322 for the year ended December 31, 2013, compared to $454,487 for the year ended December 31, 2012, a decrease of $21,165. The use of and payment to professionals were consistent between 2013 and 2012.

Research and Development

Research and development expenses were $742,247 for the year ended December 31, 2013, compared to $383,549 for the year ended December 31, 2012, an increase of $358,698. The increase is due to additional product development activities associated with the development of our advanced wound care products, water treatment and oil and gas products.

Interest expense

Interest expense totaled $281,591 for the year ended December 31, 2013, compared to $616,354 for the year ended December 31, 2012, a decrease of $334,763. The decrease is primarily due to a reduction of interest expense related to our Spring 2009 and Spring 2010 offerings which were converted into shares of our common stock in 2012. This was offset by the fair value of the warrants issued in connection with extending the expiration date of our Winter 2012 Warrants.

Net Loss

Net loss for the year ended December 31, 2013 was $2,901,245, a loss of $0.04 per share, compared to a net loss for the year ended December 31, 2012 of $5,333,986, a loss of $0.08 per share. The decrease in net loss for the year ended December 31, 2013 is primarily attributable to the decrease in Selling, General and Administrative expenses, and the reduction of interest expense, partially offset by the increase in research and development 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 $92,437 at December 31, 2013. We had negative working capital of $605,961 as of December 31, 2013, compared with negative working capital of $341,589 as of December 31, 2012. We had negative cash flow from operating activities of $1,212,252 for the year ended December 31, 2013, compared to a negative cash flow from operating activities of $2,032,804 for the year ended December 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. See Note 1 for a discussion of the presentation and preparation of the financial statements on a going concern basis.

Since we continue to be limited in terms of our capital resources, we are continuing to raise investment funds through private securities offerings. During the year ended December 31, 2013, we received gross proceeds of $1,153,500 from our financing activities. (See Note 5 and Note 11). We will be required to raise substantial additional capital to continue our current operations, as well as to meet our liabilities as they become due, if our efforts to commercialize our technology do not generate cash flow in the near future. There can be no assurance that we will be able to do so. If we are unable to do so, and our operations do not generate sufficient cash, we will be compelled to reduce or curtail certain activities to preserve cash, 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. If we were forced to significantly curtail aspects of our operations, there would be a material adverse impact on our future outlook, as well as our current financial condition and results of operations.

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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.

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.

Revenue Recognition

Revenues are recognized as risk and title to products transfers to the customer (which generally occurs at the time shipment is made), the sales price is fixed or determinable, and collectability is reasonably assured. We also may generate revenues from royalties and license fees from our intellectual property. 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.

Valuation of Intangibles and Investments Acquired in a Non-Monetary Transaction

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.

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Share-based Payments

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

No recent accounting pronouncements or other authoritative guidance have been issued that management considers likely to have a material impact on our consolidated financial statements.

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