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BLGO > SEC Filings for BLGO > Form 10-Q on 15-Aug-2014All Recent SEC Filings

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Form 10-Q for BIOLARGO, INC.


15-Aug-2014

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, 2013. Unless otherwise expressly stated herein, all statements, including forward-looking statements, set forth in this Form 10-Q are as of June 30, 2014, 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, BioLargo Water, Inc. of California and its subsidiary BioLargo Water, Inc. of Canada, and its partially owned subsidiary Clyra Medical Technologies, Inc.


Table Of Contents

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.

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 CupriDyne® and its methods of delivery, the Isan™ System, and our BioLargo® AOS Filter ("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.

Water Treatment

We have developed and are further refining a technology for water treatment called the BioLargo AOS Filter, an advanced oxidation system, which we believe represents a technical breakthrough in water purification. While we expect our patent-protected technology will impact a number of major water industry segments, our initial focus is in processed water from oil operations, including the Canadian Athabasca Oil Sands.

The proof-of-claim work recently completed at the University of Alberta verifies that our AOS technology can be highly effective in addressing the issues of oil sands processed water. We have been able to show performance results (dismantling contaminants from a flow of water) at an efficiency level that has never before been seen commercially. In May 2014 we announced that the AOS filter has been proven successful at replicating earlier proof of claim results and confirmed the role of advanced oxidation within the AOS filter reactor. The pilot work included bench-scale testing of contaminated water taken from actual field operations and it has proven the AOS filter's effectiveness at dismantling and removing targeted naphthenic acids, which are considered high-value and hard to contain contaminants of keen interest to the oil sands industry for more than 15 years.

The Department of Agricultural, Food and Nutritional Science at the University of Alberta has agreed to expand the AOS Filter pilot testing into areas of interest in food processing and agricultural production, including livestock related areas. The initial targets include clean in place (CIP), carcass and food washing and animal drinking water applications.

As a result of the validation and support expressed for the project by the University of Alberta, researchers and funding agencies, a new $5+ million pilot study is scheduled to begin in 2014. The University is tasked to engineer the solution to work on the large scale required for these tailing ponds in preparation for commercialization. The lead researcher from the University, Mohamed Gamal El-Din, Ph.D., P.E., will lead the pilot study. We are working with the Dr. Gamal El-Din on funding from government and private sources. We expect to execute a formal research contract for the pilot project in the near future. Bench-scale pilot testing of the AOS Filter will continue while documents and funding are finalized. In the first quarter of 2014, we formed a Canadian entity as a subsidiary of our U.S. based BioLargo Water, Inc. subsidiary. Our Canadian subsidiary opened an office on the University of Alberta campus, and appointed Richard Smith, Ph.D., to serve as President. Dr. Smith received an MSc in Veterinary Microbiology and a PhD in Viral Immunopathology from the University of Saskatchewan and he completed a postdoctoral fellowship in the Department of Medical Microbiology and Immunology at the University of Alberta. Dr. Smith has over 10 years of experience in the industry working with several Biotech Companies in Alberta, including ChemBioMed and VirRexx. In 2003, Dr. Smith joined the University of Alberta as Coordinator, Research Development & Industry Relations for the Department of Agricultural, Food and Nutritional Science (AFNS) where he assisted academics with research development and program funding. Dr. Smith was actively involved with the many facets of major grants, including NSERC, CRC and CFI applications.


Table Of Contents

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 four brands - Odor-No-More, Nature's Best Solution, Deodorall, and NBS - direct to consumers, through retail stores, and most recently, to the U.S. Government.

In May 2014, our line of "Suction Canister Solidifiers" were issued U.S. Government "National Stocking Numbers", making them available for order by various government and military agencies, and the Army Medical Material Agency (USAMMA) will include the "Suction Canister Solidifiers" for use in triage and surgery in future U.S. Army troop deployments.

Our sales in the CHAPP product category to-date 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. We are actively marketing the technology for licensure to established companies in this industry segment, and are

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 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.

Clyra is currently in the product development and testing phase, and intends ultimately to 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. 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 2015. In the interim, we will continue to seek licensing partners, secure additional and dedicated capital resources for Clyra, and refine our product roll out, marketing, and distribution plans.

Intellectual Property

In the first six-months of the year ending December 31, 2014, we've been awarded the following four patents:

? U.S. Patent 8,642,057 issued on February 14, 2014, 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.

? U.S. States Patent 8,679,515 issued on March 25, 2014, titled "Activated Carbon Associated with Alkaline or Alkali Iodide", which provides protection for our BioLargo® AOS filter.

? U.S. Patent 8,734,559 issued on May 27, 2014, relating to the moderation of animal waste environments.

? U.S. Patent 8,757,253 issued on June 24, 2014, relating to the moderation of oil extraction waste environments.

The three most recent patents validate and further protect our advanced iodine technology, which utilizes iodine chemistry and polymer science for providing increased performance and functionality of flocculants to bind and extract contaminants and to enhance odor and microbial control. The patents focus on our applications within oil and gas waste streams and agriculture waste streams.

Results of Operations-Comparison of the three and six-month periods ended June 30, 2014 and 2013.

Revenue

We generated $21,086 and $30,373 in product revenues during the three and six-month periods ended June 30, 2014, and $19,983 and $34,346 in product revenues during the three and six-month periods ended June 30, 2013. In addition, in the three-month period ended June 30, 2013 we recorded $100,000 in license revenue from a customer deposit (related to a 2011 transaction with Central Garden & Pet). Our product revenue in the three and six-month periods ended June 30, 2013, consisted primarily of sales of our Deodorall branded sports equipment spray, and Odor-No-More branded products. Our product revenue for the three and six-month periods ended June 30, 2014, 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 $8,933 or 42% and $11,463 or 38% of revenues for the three and six-month periods ended June 30, 2014, as compared with $8,984 or 45% and $15,182 or 43% of revenues for the three and six-month periods ended June 30, 2013. 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.


Table Of Contents

Selling, General and Administrative Expense

Selling, General and Administrative expenses were $948,663 and $1,556,029 for the three and six-month periods ended June 30, 2014, compared to $475,273 and $934,910 for the three and six-month periods ended June 30, 2013, an increase of $473,390 and $621,119. The increase in 2014 is primarily attributable to the non-cash expense associated with the stock options and common stock issued during 2014. Our net cash used in operating activities increased $181,289 in the six-month period ended June 30, 2014 as compared with the same period in 2013. The largest components of our selling general and administrative expenses were:

a. Salaries and Payroll-related Expenses: These expenses were $191,959 and $336,283 for the three and six-month periods ended June 30, 2014, compared to $145,620 and $261,240 for the three and six-month periods ended June 30, 2013, an increase of $46,339 and $75,043. The increase is primarily related to additional non-cash expense related to the option issued to our Chief Financial Officer in 2014.

b. Consulting Expenses: These expenses were $169,349 and $309,760 for the three and six-month periods ended June 30, 2014, compared to $61,517 and $183,216 for the three and six-month periods ended June 30, 2013, an increase of $107,832 and $126,544. As noted above, the increase is primarily attributable to the non-cash expense associated with the stock options and common stock issued in 2014.

c. Professional Fees: These expenses were $103,900 and $180,932 for the three and six-month periods ended June 30, 2014, compared to $86,591 and $161,916 for the three and six-month periods ended June 30, 2013, an increase of $17,309 and $23,766.

d. Investor Relations. These expenses were $196,837 and $264,807 for the three and six-month periods ended June 30, 2014, compared to $705 and $8,733 for the three and six-month periods ended June 30, 2013, an increase of $196,132 and $256,074. The increase is due to the retention of an investor and public relations firm that began work in January 2014.

Research and Development

Research and development expenses were $129,376 and $292,981 for the three and six-month periods ended June 30, 2014, compared to $147,112 and $335,707 for the three and six-month periods ended June 30, 2013, a decrease of $17,736 and $42,726, respectively. The research and development levels are consistent with the expansion of our technology into the wound care and water treatment industries.

Interest expense

Interest expense totaled $3,336 and $309,452 for the three and six-month periods ended June 30, 2014, compared to $235,528 and $238,028 for the three and six-month periods ended June 30, 2013, a decrease of $232,202 and an increase of $71,424. The decrease for the three-month period is the result of the fair value of the winter 2012 Warrant one-year extension of $233,000 issued in 2013 and the increase for the six-month period is due to the interest expense related to the conversion of our note payables in the first quarter of 2014.

Net Loss

Net loss for the three and six-month periods ended June 30, 2014 was $1,071,942 and $2,145,012, a loss of $0.01 and $0.03 per share, compared to a net loss for the three and six-month periods ended June 30, 2013 of $749,644 and $1,394,941, a loss of $0.01 and $0.02 per share. The net loss per share is remaining consistent because the increase in expenses are offset by the increase in the weighted average number of shares issued and outstanding.

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 $318,318 at June 30, 2014. Of this amount, $77,592 is held in our subsidiary Clyra. Also at June 30, 2014, Clyra has an intercompany balance due to BioLargo of $114,179, resulting from previous expenses we paid on Clyra's behalf. As such, Clyra is continuing to seek capital to fund its on-going research and development efforts as well as to reimburse us for prior expenditures. (See Item II below.) We had negative working capital of $90,331 as of June 30, 2014, compared with negative working capital of $605,961 as of December 31, 2013. We had negative cash flow from operating activities of $1,008,763 for the six-month period ended June 30, 2014, compared to a negative cash flow from operating activities of $827,474 for the six-month period ended June 30, 2013. 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.


Table Of Contents

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 $2,145,012 for the six-month period ended June 30, 2014, and an accumulated stockholders' deficit of $77,448,410 as of June 30, 2014. 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 June 30, 2014, we had $50,000 principal amount outstanding on a note payable (see Note 11), and $331,281 of outstanding accounts payable. (See Note 9.)

During the six-month period ended June 30, 2014, we received an aggregate $1,244,644 gross and $1,234,644 net proceeds pursuant to our private securities offerings, consisting of $767,500 from our Summer 2013 offering, $187,144 from the exercise of our Winter 2012 Warrants, $60,000 from the exercise of our Summer 2013 Warrants, and $220,000 from the Clyra Spring 2014 private securities offering. (See Note 4.)

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 our subsidiaries, none of which are operating at a positive cash flow.

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.


Table Of Contents

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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