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BIOLARGO, INC. - Quarter Report: 2010 September (Form 10-Q)

biolargo_10q-093010.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 

FORM 10-Q

 
x
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2010.
 
or
 
o
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
 
Commission File Number 000-19709
 

BIOLARGO, INC.
(Exact name of registrant as specified in its charter)

 
     
Delaware
 
65-0159115
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
16333 Phoebe Avenue
La Mirada, California 90638
(Address, including zip code, of principal executive offices)
 
(949) 643-9540
(Registrant’s telephone number, including area code)
 
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act: Common Stock, $0.0067 par
value.

 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer     ¨                                 Accelerated filer                   ¨                                  Non-accelerated filer       ¨                  Smaller reporting company     x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
 
The number of shares of the Registrant’s Common Stock outstanding as of November 12, 2010 was 48,855,043 shares.
 
 
 

 
 
Table of Contents
BIOLARGO, INC.
FORM 10-Q
INDEX
 
 
 
PART I
     
Item 1
Financial Statements
1
     
Item 2
Management's Discussion and Analysis
19
     
Item 4
Controls and Procedures
24
PART II
     
Item 2
Unregistered Sales of Equity Securities and Use of Proceeds
25
     
     
Item 6
Exhibits
25
     
 
Signatures  
    26
Exhibit Index
   
Exhibit 31.1
   
Exhibit 31.2
   
Exhibit 32
   

 
i

 
 
PART I – FINANCIAL INFORMATION
 
Item 1. Financial Statements
 
BIOLARGO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2009 AND SEPTEMBER 30, 2010
                 
   
December 31,
   
September 30, 2010
 
   
2009
   
(unaudited)
 
ASSETS
               
CURRENT ASSETS
               
Cash and cash equivalents
 
$
135,350
   
$
246,998
 
Accounts receivable
   
14,607
     
16,150
 
Inventory
   
9,678
     
15,184
 
Prepaid expenses
   
4,586
     
3,815
 
             
                 
Total current assets
   
164,221
     
282,147
 
             
                 
FIXED ASSETS
               
Equipment, net
   
16,390
     
9,217
 
             
                 
Total fixed assets
   
16,390
     
9,217
 
                 
TOTAL ASSETS
 
$
180,611
   
$
291,364
 
             
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
CURRENT LIABILITIES
               
Accounts payable and accrued expenses
 
$
1,273,028
   
$
789,472
 
Accrued option compensation expense
   
679,210
     
563,000
 
Convertible notes payable, current portion
   
1,913,625
     
945,625
 
Discount on convertible notes, current portion net of amortization
   
(470,822
)
   
(203,205
)
Note payable
   
70,000
     
150,000
 
Discount on note payable
   
     
(6,667
)
Deferred revenue
   
     
118,000
 
             
                 
Total Current Liabilities
   
3,465,041
     
2,356,225
 
             
                 
LONG-TERM LIABILITIES
               
Convertible notes payable, net of current portion
   
1,372,410
     
1,811,265
 
Discount on convertible notes, net of current portion and amortization
   
(793,523
)
   
(722,638
)
             
                 
Total Long-term Liabilities
   
578,887
     
1,088,627
 
                 
TOTAL LIABILITIES
   
4,043,928
     
3,444,852
 
             
                 
COMMITMENTS, CONTINGENCIES AND SUBSEQUENT EVENTS
               
STOCKHOLDERS’ EQUITY
               
Convertible Preferred Series A, $.00067 Par Value, 50,000,000 and 25,000,000 Shares Authorized,
     -0- Shares Issued and Outstanding, at September 30, 2010 and December 31, 2009.
   
 
     
 
 
Common Stock, $.00067 Par Value, 200,000,000 Shares Authorized, 48,730,771 and 43,196,355
     Shares Issued, at September 30, 2010 and December 31, 2009, respectively
   
 
28,969
     
 
32,715
 
Additional Paid-In Capital
   
53,876,278
     
59,058,769
 
Accumulated Deficit
   
(57,768,564
)
   
(62,244,972
)
             
                 
Total Stockholders’ Deficit
   
(3,863,317
)
   
(3,153,488
             
                 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
 
$
180,611
   
$
291,364
 

See accompanying notes to unaudited consolidated financial statements
 
 
1

 

BIOLARGO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2009 AND 2010
(unaudited)
 
   
For the three-month periods
ended September 30,
   
For the nine-month periods
ended September 30,
 
   
2009
   
2010
   
2009
   
2010
 
   
(unaudited)
   
(unaudited)
   
(unaudited)
   
(unaudited)
 
Revenue
  $ 115,741     $ 42,835     $ 115,741     $ 134,360  
                                 
Total revenue
    115,741       42,835       115,741       134,360  
                                 
Cost of goods sold
    72,175       40,899       72,175       104,689  
                                 
Total cost of goods sold
    72,175       40,899       72,175       104,689  
Gross Profit
    43,566       1,936       43,566       29,671  
                                 
Costs and expenses
                               
Selling, general and administrative
    919,103       812,291       3,056,771       3,203,826  
Research and development
    39,319       17,401       132,637       88,893  
Amortization and depreciation
    279,192       2,391       837,576       7,173  
                                 
Total costs and expenses
    1,237,614       832,082       4,026,984       3,300,663  
                                 
Loss from operations
    (1,194,048 )     (830,146 )     (3,983,418 )     (3,270,992 )
                                 
Other income and (expense)
                               
Interest expense
    (454,429 )     (465,646 )     (1,329,235 )     (1,329,054 )
Other income
    7,774       123,638       9,338       123,638  
                                 
Net other expense
    (446,655 )     (342,008 )     (1,319,897 )     (1,205,416 )
                                 
Net loss
  $ (1,640,703 )   $ (1,172,154 )   $ (5,303,315 )   $ (4,476,408 )
Loss per common share – basic and diluted
                               
Loss per share
  $ (0.04 )   $ (0.03 )   $ (0.12 )   $ (0.10 )
                                 
Weighted average common share equivalents outstanding
    42,920,614       46,416,678       42,535,996       44,487,528  
 
See accompanying notes to unaudited consolidated financial statements
 
 
2

 
 
BIOLARGO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (DEFICIT)
FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2010 (UNAUDITED)
 
    Common Stock                    
    Number
of
Shares
    Par
Value
$.00067
   
Additional
Paid-In
Capital
   
Retained
Earnings
(Deficit)
   
Total
 
                               
BALANCE DECEMBER 31, 2009     43,196,355     $ 28,969     $ 53,876,278     $ (57,768,564 )   $ (3,863,317 )
Vested portion of stock options
                997,134             997,134  
Issuance of warrants as part of convertible note offering and note payable
                450,327             450,327  
Fair value of the six-month extension of the 2009 Warrant
                277,992             277,992  
Issuance of stock options and a warrant to consultants
                319,881             319,881  
Issuance of stock options to officers and Board of Directors
                641,826             641,826  
Issuance of stock for the exercise of a warrant
    320,000       215       39,785             40,000  
Issuance of stock for cash received from the Summer 2010 PPM
    1,016,672       686       304,314               305,000  
Issuance of stock for services to consultants
    421,990       325       194,583             194,908  
Issuance of stock for services to officers and board of directors
    1,155,306       776       422,760             423,536  
Issuance of stock for an accrued and unpaid obligation to a related party, New Millenium
    454,546       305       149,695             150,000  
Conversion of the accrued interest obligations related to the 2009 Spring Notes
    109,851       34       42,200             42,234  
Conversion of the accrued interest obligations related to the 2008 Spring Notes
    268,019       196       91,585             91,781  
Conversion of 2007 Offering of convertible notes and related accrued interest obligations
    1,788,032       1,209       1,250,409             1,251,618  
Net loss for the nine-month period ended September 30, 2010
                      (4,476,408 )     (4,476,408 )
                                         
BALANCE SEPTEMBER 30, 2010
    48,730,771     $ 32,715     $ 59,058,769     $ (62,244,972 )   $ (3,153,488 )

See accompanying notes to unaudited consolidated financial statements
 
 
3

 
 
BIOLARGO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2009 AND 2010
(unaudited)

   
For the nine-month
periods ended September 30 ,
 
   
2009
   
2010
 
CASH FLOWS FROM OPERATING ACTIVITIES
               
Net Loss
 
$
(5,303,315
)
 
$
(4,476,408
)
Adjustments to Reconcile Net Loss to Net Cash Used in Operating Activities:
               
Non-cash accrued option compensation expense
   
933,996
     
880,924
 
Non-cash expense related to options issued to officers and board of directors
   
52,493
     
408,040
 
Non-cash interest expense related to the amortization of the fair value of warrants issued in conjunction with our convertible notes
   
1,101,365
     
1,060,154
 
Non-cash expense related to warrants and options issued to consultants
   
498,000
     
269,052
 
Non-cash expense related to stock issued for settlement of obligations to consultants
   
309,414
     
194,908
 
Non-cash expense related to stock issued to our officers and board of directors to settle obligations
   
     
135,457
 
Amortization and depreciation expense
   
831,771
     
7,173
 
Increase in accounts payable and accrued expenses
   
695,435
     
696,771
 
Increase in deferred revenue
   
     
118,000
 
Increase in accounts receivable
   
(11,223
   
(1,543
)
(Increase) Decrease in inventory
   
(4,843
   
(5,506
)
Decrease in prepaid expenses
   
     
771
 
             
Net Cash Used In Operating Activities
   
(891,102
)
   
(712,207
)
             
CASH FLOWS FROM FINANCING ACTIVITIES
               
Payment of note payable
   
     
(20,000
)
Proceeds from convertible notes
   
869,410
     
438,855
 
Proceeds from the sale of stock
   
     
305,000
 
Proceeds from a note payable
   
70,000
     
100,000
 
             
Net Cash Provided By Financing Activities
   
939,410
     
823,855
 
             
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
   
48,308
     
111,648
 
CASH AND CASH EQUIVALENTS — BEGINNING
   
90,384
     
135,350
 
             
CASH AND CASH EQUIVALENTS — ENDING
 
$
138,692
   
$
246,998
 
             
SUPPLEMENTAL DISCLOSURES OF CASHFLOW INFORMATION
               
Cash Paid During the Period for:
               
Interest
 
$
   
$
 
Taxes
 
$
1,600
   
$
3,000
 
             
Conversion of accrued expenses to shares of the Company’s common stock:
               
Board of Directors and officer obligations incurred in 2009
 
$
150,000
   
$
228,079
 
Board of Directors and officer obligations incurred in 2010
 
$
   
$
115,457
 
Consultant obligations incurred in 2009
 
$
75,678
   
$
25,212
 
Consultant obligations incurred in 2010
 
$
   
$
122,500
 
Conversion related party obligations – New Millennium and other.
 
$
242,358
   
$
150,000
 
                 
Conversion of accrued expenses to an option to purchase shares of the Company’s common stock:
               
Board of Directors and officer obligations incurred in 2009
 
$
   
$
133,786
 
Board of Directors and officer obligations incurred in 2010
 
$
   
$
15,454
 
Consultant obligations incurred in 2009
 
$
   
$
117,653
 
Consultant obligations incurred in 2010
 
$
   
$
96,873
 
                 
SUPPLEMENTAL DISCLOSURES OF NON-CASH FINANCING AND INVESTING ACTIVITIES:                
                 
Conversion of Noteholder’s to shares of the Company’s common stock:
               
Conversion of the 2007 Notes convertible note payable obligations
 
$
   
$
968,000
 
             
Convertible Noteholder’s related accrued interest incurred in 2009
 
$
91,363
   
$
279,074
 
Convertible note holders and related accrued interest incurred in 2010
 
$
   
$
138,140
 
             
Fair value of the issuance of warrants in conjunction with convertible note offerings
 
$
1,240,178
   
$
430,327
 
             
Issuance of a warrant in conjunction with a note payable   $
   
20,000
 
Issuance of a warrant to a consultant for services provided   $     $
 25,000
 
Repriced warrants in conjunction with convertible note offering
 
$
52,967
   
$
277,992
 
 
See accompanying notes to unaudited consolidated financial statements
 
 
4

 
BIOLARGO, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 
Note 1. Business and Organization
 
Outlook
 
The 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 $4,476,408 for the nine-month period ended September 30, 2010, and an accumulated stockholders’ deficit of $62,244,972 as of September 30, 2010. 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 financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern.
 
We have been, and anticipate that we will continue to be, limited in terms of our capital resources. Our total cash and cash equivalents was $246,998 at September 30, 2010. We generated revenues of $134,360 in the nine-month period ended September 30, 2010, which amount was not sufficient to fund our operations, and we incurred negative cash flow from operating activities of $712,207 for the nine-month period ended September 30, 2010. We had negative working capital of $2,074,078 for the nine-month period ended September 30, 2010. Our accounts payable and accrued expenses decreased by $483,556 during nine-month period ended September 30, 2010 and were $789,472 at September 30, 2010. We do not have enough cash or source of capital to pay our accounts payable and expenses as they arise, and have relied on the issuance of stock options and common stock, as well as extended payment terms with our vendors, to continue to operate. Additionally, our officers are continuing to finance operations by delaying the receipt of their salary and by incurring expenses which have not been reimbursed.
 
As of September 30, 2010 we had $2,906,890 aggregate principal amount, together with $163,396 accrued and unpaid interest, outstanding on various promissory notes. We may pay the majority of these amounts in cash or in stock, at our option, at maturity. In addition, as of September 30, 2010, we had $626,076 in accrued and unpaid payables. (See Note 11.)
 
On January 15, 2010 we commenced a private offering of our convertible promissory notes, which terminated in July, 2010. In this offering, we sold $438,855 principal amount of convertible notes and issued warrants to purchase up to an aggregate 763,235 shares of our common stock.  Additionally, in July 2010 we commenced a private offering of our common stock at a price of $0.30 per share, and raised $305,000 in this offering through September 30, 2010 and issued 1,016,672 shares of our common stock. (See Note 5.)
 
In the opinion of management, the accompanying balance sheets and related statements of operations, cash flows, and stockholders’ equity include all adjustments, consisting only of normal recurring items, necessary for their fair presentation in conformity with accounting principles generally accepted in the United States of America. Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. Actual results and outcomes may differ from management’s estimates and assumptions. Estimates are used when accounting for stock-based transactions, account payables and accrued expenses and taxes, among others.
 
The unaudited consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and pursuant to Rule 8-03 of Regulation S-X under the Securities Act of 1933, as amended.  Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for annual financial statements.  In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been included. We have less than two years of historical operating revenues, and therefore our operating results for the nine-month period ended September 30, 2010 are not necessarily indicative of the results that may be expected for the year ended December 31, 2010, or for any other period. These unaudited consolidated financial statements and notes should be read in conjunction with the Company’s audited financial statements and accompanying notes included in the Annual Report on Form 10-K for the year ended December 31, 2009 filed with the Securities and Exchange Commission (the “SEC”).
 
 
5

 
BIOLARGO, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 
Organization
 
We were initially organized under the laws of the State of Florida in 1989 as Repossession Auction, Inc. In 1991, we merged into a Delaware corporation bearing the same name. In 1994, we changed our name to Latin American Casinos, Inc. to reflect our new focus on the gaming and casino business in South and Central America, and in 2001 we changed our name to NuWay Energy, Inc. to reflect our new emphasis on the oil and gas development industry. During October 2002, we changed our name to NuWay Medical, Inc. coincident with the divestiture of our non-medical assets and the retention of new management. In March 2007, in connection with the approval by our stockholders of the acquisition of the BioLargo technology, we changed our name to BioLargo, Inc.
 
Business 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 performance with concerns about toxicity.
 
In addition to our BioLargo technology, in 2008 we acquired the rights to market an iodine based water disinfection system (the “Isan system”) from Ioteq IP Pty. Ltd., an Australian company, and its U.S. affiliate Ioteq Inc. (“Ioteq”). The Isan system is an automated water disinfection system that substantially reduces the incidence of fungal growth, spoilage, organisms and pathogens in water and on food. Capable of treating high volumes of water flow, the Isan system is a combination of electrodes for measuring iodine levels in the target water stream, a control unit which automatically controls the running of the system, iodine canisters to deliver the iodine, and resin canisters to collect by-products after disinfection has been completed. The Isan system is registered with the APVMA (Australian Pesticides and Veterinary Medicines Authority) and FSANZ (Food Standards Australia and New Zealand) in Australia and New Zealand, where it has approximately 150 customer installations currently operating.
 
 Both our BioLargo technology and the Isan system have potential commercial applications within global industries, including but not limited to agriculture, animal health, beach and soil environmental remediation, consumer products, food processing, medical, and water industries. While we believe the potential applications are many, we are currently focused in three primary areas – the development and commercial expansion of certain products designed for the animal health industry, advancing our proof of claims for contaminated water treatment applications, with an emphasis in the oil and gas related industry, and agriculture.
 
First, in 2009, we launched our first products incorporating our BioLargo technology under the brand name “Odor-No-More”, in the animal health industry. The primary benefits of the products are odor and moisture control, and customers using our animal bedding additive experience a net savings on total bedding costs. We have focused our efforts on building wholesale distribution within the equine market. In 2010, we have expanded our marketing and business development efforts into new industry, including the pet products and livestock markets, and continue to evaluate new product opportunities within the animal health industry. Recently, our animal bedding additive product was honored with the receipt of the Editor’s Choice Award as presented by the Horse Journal, the equine industry’s leading independent product, care and service guide for horse owners.
 
Second, we recently added oil and gas industry expert Dr. Vikram Rao to our management team as a senior advisor. Dr. Rao, former Chief Technology Officer and Senior Vice President of global leader Halliburton, and current Executive Director of the Research Triangle Energy Consortium, brings considerable industry expertise and contacts to our company. We are pursuing opportunities with companies to introduce our technology to this industry.
 
Third, we are actively seeking to secure strategic partners to either license or partner with to exploit commercial opportunities in the agricultural industry. In March 2010, we entered into a series of transactions whereby we licensed the Isan system technology from Ioteq, and then sublicensed the technology to a third party for commercialization in the United States in certain fields of use. We are still actively marketing the Isan system for opportunities outside the United States pursuant to our marketing agreement with Ioteq, and in the United States through an agency agreement with Isan USA.
 
 
6

 
BIOLARGO, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 
We continue research and product development for our CupriDyne™ technology, and continue to work with a number of global companies who are engaged in technology evaluation and testing processes. Simultaneously, we are also actively seeking to identify and negotiate regional or global partnerships to exploit commercial opportunities for both CupriDyne™ and the Isan technologies. No such regional or global partnerships have been formed at this time, and we can make no representation about our ability to successfully conclude such arrangements.
 
 Although we are focused primarily on the aforementioned industries, we also intend to continue to advance our intellectual property, product designs and licensing opportunities for our technology for use in other industries, as capital resources are available to support these efforts. We continue to market both our BioLargo technology and the Isan system to various companies for licensure in numerous industry segments.
 
Note 2. Summary of Significant Accounting Policies
 
Principles of Consolidation
 
As of September 30, 2010, we had two subsidiaries, BioLargo Life Technologies, Inc. (“BLTI”) and Odor-No-More, Inc. (“ONM”). The consolidated balance sheets include the accounts of BioLargo, Inc. and BLTI and ONM. All significant inter-company balances have been eliminated in consolidation.
 
Cash and Cash Equivalents
 
We consider all highly liquid investments with original maturities of three months or less or money market funds from substantial financial institutions to be cash equivalents. We place substantially all of our cash and cash equivalents with one financial institution.
 
Accounts Receivable
 
Trade accounts receivable are recorded net of allowances for doubtful accounts.  Estimates for allowances for doubtful accounts are determined based on payment history and individual customer circumstances.  The allowance for doubtful accounts was zero at September 30, 2010.
 
Inventory
 
Inventories are stated at the lower of cost or net realizable value using the average cost method.  Inventories consisted of:
 
   
December 31,
2009
   
September 30,
2010
 
Raw Materials   $ 4,241     $ 5,184  
Finished Goods     5,437       10,000  
Total
  $ 9,678     $ 15,184  
 
Equipment
 
Equipment is carried at cost and depreciated using the straight-line method over the estimated useful lives of the assets, which is three years. Equipment is stated on the balance sheet net of accumulated depreciation of $19,472 as of September 30, 2010. Depreciation expense totaled $7,173 for the nine-month periods ended September 30, 2009 and 2010.
 
Earnings (Loss) Per Share
 
We report basic and diluted earnings (loss) per share (“EPS”) for common and common share equivalents. Basic EPS is computed by dividing reported earnings by the weighted average shares outstanding. Diluted EPS is computed by adding to the weighted average shares the dilutive effect if stock options and warrants were exercised into common stock. For the nine-month periods ended September 30, 2009 and 2010, the denominator in the diluted EPS computation is the same as the denominator for basic EPS due to the anti-dilutive effect of the warrants and stock options on the Company’s net loss.
 
 
7

 
BIOLARGO, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 
Use of Estimates
 
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and revenues and expenses during the period reported. Actual results could differ from those estimates. Estimates are used when accounting for stock-based transactions, uncollectible accounts receivable, asset depreciation and amortization, and taxes, among others.
 
Stock Options and Warrants issued for Services
 
All share-based payments to employees, including grants of employee stock options, are recognized in the financial statements based on their fair values.
 
For stock issued to consultants and other non-employees for services, we record the expense based on the fair market value of the securities as of the date of the stock issuance. The issuance of stock warrants or options to non-employees are valued at the time of issuance utilizing the Black Scholes calculation and the amount is charged to expense.
 
Non-Cash Transactions
 
We have established a policy relative to the methodology to determine the value assigned to each intangible we acquire, and/or services or products received for non-cash consideration of our common stock. The value is based on the market price of our common stock issued as consideration, at the date of the agreement of each transaction or when the service is rendered or product is received.
 
The methods, estimates and judgments we use in applying these most critical accounting policies have a significant impact on the results of our financial statements.
 
Revenue Recognition
 
We recognize revenues based upon contract terms and completion of the sales process in accordance the SEC codification of revenue recognition.
 
We also 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.
 
Recently issued Accounting Guidance
 
In January 2010, the FASB issued guidance related to accounting for distributions with components of both stock and cash. This amended guidance clarifies that the stock portion of a distribution to shareholders that allows them to elect to receive cash or stock with a potential limit on the total amount of cash that all shareholders can elect to receive in the aggregate is considered a share issuance that is reflected in EPS prospectively. This guidance is effective for fiscal years beginning after December 15, 2009. The adoption of this standard effective January 1, 2010 did not have a material impact on the Company’s financial position, results of operations, or cash flows. Other recent accounting updates 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.
 
 
8

 
BIOLARGO, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 
Note 3. Intangible Assets/Long-lived Assets and Impairment
 
 Amortization expense for the intangible assets for the nine-month periods ended September 30, 2009 and 2010 was $830,403 and $0.
 
Management performed its assessment of the fair value of the intangible assets for the year ended December 31, 2009. In our undertaking we analyzed the projected cash flow from the assets discounted at appropriate rates, the length of time to full development of the cash flow potential and the current recessionary state of the world-wide economy. We determined after this analysis that it was appropriate for us to record an impairment charge of $8,781,133 consisting of $8,610,940, which was the remaining net book value of our licensing rights acquired from IOWC Technologies, Inc., in March 2007, and $170,193, which was the remaining net book value of certain agreements assigned to us as part of the technology we acquired from IOWC Technologies, Inc., in March 2007. The impairment charge reduced the net book value of all our intangible assets to zero.
 
Note 4. Deferred Revenue
 
Sublicense to Isan USA
 
On March 29, 2010, we entered into a sublicense agreement (the “Isan USA Sublicense”)  with Isan USA, Inc. (“Isan USA”) which grants Isan USA the exclusive rights to use, exploit, develop and commercialize the Isan System Technology in the United States, in particular fields of use.  Pursuant to the Isan USA Sublicense, Isan USA paid to BioLargo a $100,000 initial license fee, of which $5,000 is recorded as revenue as of September 30, 2010.
 
During the three-month period ended September 30, 2010, we received $23,000 from Isan USA, an amount which was less than what is called for in the Isan USA Sublicense, and which is recorded as deferred revenue. The total deferred revenue balance of $118,000 as of September 30, 2010 relates to the Isan USA transaction.
 
Note 5. Private Security Offerings
 
The following tabular summary describes some key terms of our private securities offerings in which we sold convertible promissory notes, and should be read in conjunction with the detailed descriptions in this footnote.
 
Convertible Offerings
Name
Maturity
Date
 
Interest
 
Conversion
Price
 
Principal
Outstanding
Spring 2010 Offering
4/15/13
    10 %   $ 0.575     $ 438,855  
Spring 2009 Offering
6/1/12
    10 %   $ 0.55       681,410  
Fall 2008 Offering
10/15/11
    10 %   $ 1.00       723,000  
Spring 2008 Offering
3/31/11
    10 %   $ 1.35       913,625  
                      $ 2,756,890  
 
Summer 2010 Offering
 
Pursuant to a private offering of our common stock at a price of $0.30 per share, that commenced July 2010 (the “Summer 2010 Offering”), through September 30, 2010, we sold 1,016,672 shares of our common stock and received $305,000 gross proceeds from the sales. Unlike our prior securities offerings, this offering did not involve the sale of convertible debt or warrants.
 
Spring 2010 Offering
 
Pursuant to a private offering that commenced January 2010 (the “Spring 2010 Offering”) and terminated July 2010, we sold $438,855 of our 10% convertible notes (the “Spring 2010 Notes”), which are due and payable on April 15, 2013, to 18 investors, the principal amount of which was converted into an aggregate 763,235 shares of our common stock. The Spring 2010 Notes are convertible into shares of our common stock at an initial conversion price of $0.575 per share. The Spring 2010 Notes can be converted voluntarily by the noteholders at any time prior to the maturity date. We can unilaterally convert the Spring 2010 Notes (i) on or after July 31, 2010, if we have received one or more written firm commitments, or have closed on one or more transactions, or a combination of the foregoing, of at least $3 million gross proceeds of equity or debt; or (ii) on the maturity date. Accordingly, the Spring 2010 Notes may be repaid in cash or may be converted, at our sole option, into shares of our common stock, on or before the April 15, 2013 maturity date.
 
 
9

 
BIOLARGO, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 
Each purchaser of the Spring 2010 Notes received, for no additional consideration, two stock purchase warrants, each of which entitle the holder to purchase the number of shares of our common stock into which the holder’s Spring 2010 Note is initially convertible. The first warrant (the “Spring 2010 Eighteen Month Warrant”) is exercisable at a price of $0.75 per share and expires on July 15, 2011. The second warrant (the “Spring 2010 Thirty-Six Month Warrant”) is exercisable at a price of $1.00 per share and expires on January 15, 2013. (See Note 8.)
 
Spring 2009 Offering
 
Pursuant to a private offering that commenced April 2009 (the “Spring 2009 Offering”) and terminated November 2009, we sold $681,410 of our 10% convertible notes (the “Spring 2009 Notes”), which are due and payable on June 1, 2012, to 23 investors, convertible into an aggregate 1,238,935 shares of our common stock. The Spring 2009 Notes are convertible into shares of our common stock at an initial conversion price of $0.55 per share. The Spring 2009 Notes can be converted voluntarily by the noteholders at any time prior to the maturity date. We can unilaterally convert the Spring 2009 Notes (i) on or after December 15, 2009, if we have received one or more written firm commitments, or have closed on one or more transactions, or a combination of the foregoing, of at least $3 million gross proceeds of equity or debt; or (ii) on the maturity date. Accordingly, the Spring 2009 Notes may be repaid in cash or may be converted, at our sole option, into shares of our common stock, on or before the June 1, 2012 maturity date.
 
Each purchaser of the Spring 2009 Notes received, for no additional consideration, two stock purchase warrants, each of which entitle the holder to purchase the number of shares of our common stock into which the holder’s Spring 2009 Note is initially convertible. The first warrant (the “Spring 2009 One-Year Warrant”) is exercisable at a price of $0.75 per share and initially was scheduled to expire on June 1, 2010. We extended this expiration date to December 1, 2010. The second warrant (the “Spring 2009 Three-Year Warrant”) is exercisable at a price of $1.00 per share and expires on June 1, 2012. (See Note 8.)
 
Fall 2008 Offering
 
Pursuant to a private offering that commenced October 2008 (the “Fall 2008 Offering”) and terminated March 2009, we sold $723,000 of our 10% convertible notes (the “Fall 2008 Notes”), which are due and payable October 15, 2011, to 18 investors, convertible into an aggregate 1,446,000 shares of our common stock. As originally offered, the Fall 2008 Notes were convertible into shares of our common stock at an initial conversion price of $1.00 per share. The Fall 2008 Notes can be converted voluntarily by the noteholders at any time prior to the maturity date. We can unilaterally convert the Fall 2008 Notes (i) on or after April 30, 2009, if we have received one or more written firm commitments, or have closed on one or more transactions, or a combination of the foregoing, of at least $3 million gross proceeds of equity or debt; or (ii) on the maturity date. Accordingly, the Fall 2008 Notes may be repaid in cash or may be converted, at the noteholders’ option or our option, into shares of our common stock, on or before the October 15, 2011 maturity date.
 
Each purchaser of the Fall 2008 Notes received, for no additional consideration, two stock purchase warrants (a one-year warrant and a three-year warrant), each of which entitled the holder to purchase the number of shares of our common stock into which the holder’s Fall 2008 Note is initially convertible. As originally offered, the first warrant (the “Fall 2008 One-Year Warrant”) was exercisable at $1.00 per share and was due to expire on October 15, 2009. The second warrant (the “Fall 2008 Three-Year Warrant” and together with the One-Year Warrant, the “Fall 2008 Warrants”) was exercisable at $2.00 per share and is scheduled to expire on October 15, 2011. (See Note 8.)
 
On January 16, 2009, our Board of Directors amended the terms of the Offering as follows: (i) the initial conversion price of the Fall 2008 Notes was reduced from $1.00 per share to $0.50 per share; (ii) the exercise price of the Fall 2008 One-Year Warrant was reduced from $1.00 per share to $0.75 per share; (iii) the exercise price of the Fall 2008 Three-Year Warrant was reduced from $2.00 per share to $1.00 per share; and the number of shares of our common stock for which the Fall 2008 One-Year Warrants and the Fall 2008 Three-Year Warrants may be exercised is being increased from one share per dollar invested to two shares for each dollar invested. The Fall 2008 One-Year Warrants expired unexercised on October 15, 2009.
 
 
10

 
BIOLARGO, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 
Spring 2008 Offering
 
Pursuant to a private offering that commenced March 2008 (the “Spring 2008 Offering”) and terminated August 2008, we sold $913,625 of our 10% convertible notes (the “Spring 2008 Notes”), which were due and payable on March 31, 2010, to 30 investors, convertible into an aggregate 676,775 shares of our common stock. The Spring 2008 Notes are convertible into shares of our common stock at an initial conversion price of $1.35 per share. The Spring 2008 Notes can be converted voluntarily by the noteholders at any time prior to the maturity date. We can unilaterally convert the Spring 2008 Notes (i) on or after September 30, 2008, if we have received one or more written firm commitments, or have closed on one or more transactions, or a combination of the foregoing, of at least $3 million gross proceeds of equity or debt; or (ii) on the maturity date. Accordingly, the Spring 2008 Notes may be repaid in cash or may be converted, at our sole option, into shares of our common stock, on or before the maturity date.
 
Each purchaser of the Spring 2008 Notes received, for no additional consideration, two stock purchase warrants (a one-year warrant and a three-year warrant), each of which entitled the holder to purchase the number of shares of our common stock into which the holder’s Spring 2008 Note is initially convertible. The “Spring 2008 One-Year Warrants” expire on March 31, 2009 and were exercisable at $0.50 (originally $1.50) per share. The “Spring 2008 Three-Year Warrants” are exercisable at an initial exercise price of $2.00 per share and expire on March 31, 2011. On September 19, 2008, our Board of Directors reduced the exercise price of the Spring 2008 One-Year Warrants from $1.50 per share (the original exercise price pursuant to the terms of the Spring 2008 Offering) to $1.00 per share. On January 16, 2009, our Board of Directors reduced the exercise price of the Spring 2008 One-Year Warrants from $1.00 per share to $0.50 per share.  The Spring 2008 One-Year Warrants expired unexercised on March 31, 2009.
 
On March 30, 2010, our board accepted proposals from the holders of the Spring 2008 Notes to extend the maturity date of the notes by one year, such that the Spring 2008 Notes mature on March 31, 2011.
 
Note 6. Conversion of 2007 Note
 
Pursuant to a private offering that commenced May 2007 (the “2007 Offering”) and terminated December 2007, we sold $1,000,000 of our convertible notes (the “2007 Notes”), which were initially due and payable on June 30, 2009 (extended by one year to June 30, 2010, see Note 6) to 21 investors, the principal of which is convertible into an aggregate 1,428,582 shares of our common stock. The 2007 Notes interest rate was 10%, compounding annually.   On November 23, 2009, a holder of a 2007 Note in the principal amount of $32,000 elected to convert the note, and accrued and unpaid interest in the amount of $8,364, into 57,663 shares of our common stock, at a conversion rate of $0.70 per share in accordance with the terms of the note.
 
On June 30, 2010, per the terms of the 2007 Notes, we elected to convert the remaining aggregate principal amount of $968,000, which amount represented the entire then outstanding principal amount of the 2007 Notes, and $283,618 of accrued but unpaid interest, into an aggregate 1,787,999 shares of our common stock, at a conversion rate of $0.70 per share.
 
All of these offerings and sales were made in reliance on the exemption from registration contained in Section 4(2) of the Securities Exchange Act and/or Regulation D promulgated thereunder as not involving a public offering of securities.
 
Note 7. Issuance of Securities in exchange for payment of payables
 
Payment of Officer Salaries and Board of Director Fees
 
On January 4, 2010, we issued an aggregate 114,287 shares of our common stock, at a conversion price of $0.70, which was the closing price of our common stock on the day of issuance, to two members of our board of directors in lieu of $80,000 in accrued and unpaid payables for their services as a director.  Of this amount $60,000 related to payables accrued and unpaid as of December 31, 2009.
 
 
11

 
BIOLARGO, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 
On August 4, 2010, in an effort to preserve our cash and reduce outstanding payables, the Board offered to third parties, officers and board members the opportunity to convert outstanding payable amounts into common stock (“Stock”) or an option (“Option”) to purchase common stock in lieu of cash payment. The Stock would be converted at $0.30 per share, and Options may be exercised at $0.30 cents a share, would be issued pursuant to our 2007 Equity Incentive Plan, and would expire five years from the date of issuance. Our common stock closed trading at $0.23 a share on August 4, 2010.
 
On August 4, 2010, we issued an aggregate 1,041,019 shares of our common stock, at a conversion price of $0.33, which was at a 10% premium to our officers, in lieu of $343,536 of accrued and unpaid salary obligations.  Of this amount $228,079 related to services performed in 2009 and the remaining $115,457 related to services performed through June 30, 2010.
 
Payment of Consultant Fees
 
On February 1, 2010, we issued an aggregate 200,000 shares of our common stock, at a conversion price of $0.50, which was the closing price of our common stock on the day of issuance, to a consultant for services provided. We recorded $100,351 in consulting expense in 2010 related to that issuance.
 
On June 1, 2010, we issued an aggregate 56,525 shares of our common stock, at a conversion price of $0.53, which was the trailing 20 day average of our common stock, to a consultant for services provided in lieu of $30,000 in accrued and unpaid payables.
 
On August 4, 2010, in an effort to preserve our cash and reduce outstanding payables, the Board offered to third parties, officers and board members the opportunity to convert outstanding payable amounts into common stock (“Stock”) or an option (“Option”) to purchase common stock in lieu of cash payment. The Stock would be converted at $0.30 per share, and Options may be exercised at $0.30 cents a share, would be issued pursuant to our 2007 Equity Incentive Plan, and would expire five years from the date of issuance. Our common stock closed trading at $0.23 a share on August 4, 2010.
 
On August 4, 2010, we issued an aggregate 59,039 shares of our common stock, at a conversion price of $0.30, in lieu of $17,712 of accrued and unpaid obligations.  All of this amount related to services performed in 2009.
 
All of these offerings and sales were made in reliance on the exemption from registration contained in Section 4(2) of the Securities Exchange Act and/or Regulation D promulgated thereunder as not involving a public offering of securities.
 
Note 8. Warrants
 
We have certain warrants outstanding to purchase our common stock, at various prices, as described in the following table:
 
   
Number of
       
   
Shares
   
Price Range
 
Outstanding as of December 31, 2009
   
9,766,456
   
$
0.125 – 2.00
 
Issued
   
1,626,472
   
$
0.50 – 1.00
 
Exercised
   
   
$
 
Expired
   
1,446,000
   
$
 
Outstanding as of September 30, 2010
   
9,946,928
   
$
0.125 – 2.00
 

To determine interest expense related to our outstanding warrants issued in conjunction with debt offerings, the fair value of each award grant is estimated on the date of grant using the Black-Scholes option-pricing model and the calculated value is amortized over the life of the warrant. The determination of expense of warrants issued for services or settlement also uses the option-pricing model. The principal assumptions we used in applying this model were as follows:
 
 
12

 
BIOLARGO, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 
   
2009
   
2010
 
Risk free interest rate
   
0.52 – 2.42
%
   
0.37 – 0.80
%
Expected volatility
   
253 – 480
%
   
195 – 468
%
Expected dividend yield
   
     
 
Forfeiture rate
   
     
 
Expected life in years
   
0.50 – 3.00
     
1.00 – 3.00
 

The risk-free interest rate is based on U.S Treasury yields in effect at the time of grant. Expected volatilities are based on historical volatility of our common stock. The expected term is presumed to be the mid-point between the vesting date and the end of the contractual term.
 
Warrants issued as part of our Convertible Notes
 
The aggregate fair value of the warrants issued and outstanding as of September 30, 2010 totaled $2,843,322 was issued in conjunction with our convertible notes and is recorded on our balance sheet as discount on convertible notes net of amortization of $1,917,479. We recorded $1,101,365 and $1,060,154 of interest expense related to the amortization of the discount on convertible notes for the nine-month periods ended September 30, 2009 and 2010, respectively.
 
Spring 2010 Warrants
 
From the inception of our Spring 2010 Offering on January 15, 2010, through its termination in July 2010, we issued warrants to purchase up to an aggregate 1,526,470 shares of our common stock to purchasers of our Spring 2010 Notes, consisting of Spring 2010 Eighteen Month Warrants to purchase up to an aggregate 763,235 shares which expire July 15, 2011, at an exercise price of $0.75 per share, and Spring 2010 Thirty-Six Month Warrants to purchase up to an aggregate 763,235 shares which expire January 15, 2013, at an exercise price of $1.00 per share.
 
Spring 2009 Warrants
 
From April 2009 through November 2009, we issued warrants to purchase up to an aggregate 2,477,870 shares of our common stock to purchasers of our Spring 2009 Notes, consisting of Spring 2009 One-Year Warrants to purchase up to an aggregate 1,238,935 shares which were originally scheduled to expire June 1, 2010, and were extended to December 1, 2010, at an exercise price of $0.75 per share, and Spring 2009 Three-Year Warrants to purchase up to an aggregate 1,238,935 shares which expire June 1, 2012, at an exercise price of $1.00 per share.
 
On June 1, 2010, the expiration of the Spring 2009 One-Year Warrants was extended from June 1, 2010 through December 1, 2010, resulting in additional fair value totaling $277,992, which $185,328 was recorded as interest expense through September 30, 2010.  The remaining fair value will be amortized as interest expense over the term of the warrant.
 
Fall 2008 Warrants
 
 From January 2009 through June 2009, we issued warrants to purchase up to an aggregate 2,652,000 shares of our common stock to purchasers of our Fall 2008 Notes, consisting of Fall 2008 One-Year Warrants to purchase an aggregate 1,326,000 shares which expire October 15, 2009, at an exercise price of $0.75 per share (initially issued at $1.00 per share), and Fall 2008 Three-Year Warrants to purchase up to an aggregate 1,326,000 shares which expire October 15, 2011, at an exercise price of $1.00 per share (initially issued at $2.00 per share).
 
On January 16, 2009, the exercise price of the Fall 2008 One-Year Warrants was reduced from $1.00 to $0.75, and the exercise price of the Fall 2008 Three-Year Warrants was reduced from $2.00 to $1.00, resulting in additional fair value totaling $52,967, which was recorded as interest expense.
 
From October 2008 through December 2008, we issued warrants to purchase up to an aggregate 240,000 shares of our common stock to purchasers of our Fall 2008 Notes, consisting of Fall 2008 One-Year Warrants to purchase an aggregate 120,000 shares which expire October 15, 2009, at an exercise price of $0.75 per share (initially issued at $1.00 per share), and Fall 2008 Three-Year Warrants to purchase up to an aggregate 120,000 shares which expire October 15, 2011, at an exercise price of $1.00 per share (initially issued at $2.00 per share).
 
 
13

 
BIOLARGO, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 
Other Warrants
 
On February 5, 2010 we issued a warrant to a consultant for services provided to purchase up to an aggregate 50,000 shares of our common stock at an exercise price of $0.50 per share, resulting in a fair value of $25,000, which was recorded as selling, general and administrative expense.   The warrant expires February 5, 2013.
 
On June 8, 2010 we issued a warrant to the holder of a note payable to purchase up to an aggregate 50,000 shares of our common stock at an exercise price of $0.50 per share, resulting in a fair value of $20,000, of which $13,333 was recorded as interest expense through September 30, 2010. The remaining fair value will be amortized as interest expense over the term of the warrant.  The warrant expires June 8, 2013.
 
Note 9. Stockholders’ Equity
 
Preferred Stock
 
Our certificate of incorporation authorizes our Board of Directors to issue preferred stock, from time to time, on such terms and conditions as they shall determine. As of December 31, 2009 and September 30, 2010 there were no outstanding shares of our preferred stock.
 
Common Stock
 
As of December 31, 2009 and September 30, 2010 there were 43,196,355 and 48,730,771 shares of common stock outstanding, respectively. The increase in shares during the nine-month period ended September 30, 2010 is comprised of the following stock issuances: (i) 320,000 shares issued upon the exercise of an outstanding warrant, (ii) 1,016,672 shares issued to purchasers of our Summer 2010 PPM, (iii) 421,990 shares of our common stock as payment to consultants for services provided,  (iv) 1,155,306 shares of our common stock as payment to two officers and our board of directors in exchange for accrued and unpaid obligation for their services, , (v) 454,546 shares of our common stock as payment for an accrued and unpaid obligation to a related party, New Millennium. (vi) 109,851 shares of our common stock as payment for accrued interest related to our 2009 Spring Notes, (iv) 268,019 shares of our common stock as payment for accrued interest related to our 2008 Spring Notes, and (v) 1,788,032 shares as payment of our 2007 Notes and related accrued interest.
 
Note 10. Stock-Based Compensation and Other Employee Benefit Plans
 
2007 Equity Incentive Plan
 
On August 7, 2007, our Board of Directors adopted the BioLargo, Inc. 2007 Equity Incentive Plan (“2007 Plan”) as a means of providing our directors, key employees and consultants additional incentive to provide services. Both stock options and stock grants may be made under this plan. The Compensation Committee administers this plan. The plan allows grants of common shares or options to purchase common shares. As plan administrator, the Compensation Committee has sole discretion to set the price of the options. The Compensation Committee may at any time amend or terminate the plan.   See our 10K as filed for further details of the 2007 Plan.
 
During the nine-month period ended September 30, 2010, we granted options to purchase an aggregate 90,000 shares of our common stock to our Chief Financial Officer, pursuant to the terms of our engagement agreement with him. These options are exercisable at various exercise prices ranging between $0.24 and $0.50 depending upon their respective dates of grant, and resulted in an aggregate fair value of $32,200  and was recorded as selling, general and administrative expense as of September 30, 2010. Each option is fully vested upon grant and is exercisable for ten years from its respective date of grant.
 
On February 1, 2010, the Company’s Compensation Committee issued options pursuant to the Company’s 2007 Equity Incentive Plan to certain employees, outside consultants and professionals who have and continue to provide services to the Company, consistent with management’s recommendations to the committee.
 
 
14

 
BIOLARGO, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 
In total, options to purchase an aggregate 1,060,000 shares of the Company’s common stock were issued, at an exercise price of $0.575 per share, which price was $0.075 more than the $0.50 closing price of the Company’s common stock on the date of grant.  Of the options issued, 400,000 were issued to third party consultants for their respective roles within the Company and the remaining 660,000 options were issued to the Company’s principal executive officer, principal financial officer, and named executive officers, as set forth in the following table:
 
 
Name
 
Position
 
Number of Shares
Underlying Options
 
           
Dennis P. Calvert
 
President and
Chief Executive Officer
    200,000  
Charles K. Dargan II
 
Chief Financial Officer
    60,000  
Kenneth R. Code
 
Chief Technology Officer
    200,000  
Joseph L. Provenzano
 
Secretary, VP of Operations
    200,000  
   
Total
    660,000  
 
With one exception, the options issued expire ten years from the date of grant (the option issued to Mr. Code expires five years from the date of grant).
 
On August 4, 2010, in an effort to preserve our cash and reduce outstanding payables, the Board offered to third parties, officers and board members the opportunity to convert outstanding payable amounts into common stock (“Stock”) or an option (“Option”) to purchase common stock in lieu of cash payment. The Stock would be converted at $0.30 per share, and Options may be exercised at $0.30 cents a share, and are issued pursuant to our 2007 Equity Incentive Plan, and expire five years from the date of issuance.
 
We issued Options to purchase an aggregate 1,818,831 shares of our common stock in exchange for the settlement of accrued and unpaid obligations totaling $363,766.  Of this amount we issued an option to an officer to purchase 496,203 shares of our common stock at $0.30 per share in lieu of $99,240 in unpaid salary obligations that were incurred in fiscal year 2009, an option to our board of directors to purchase 250,000 shares of our common stock at $0.33 per share in lieu of $50,000 in unpaid salary obligations that were incurred in fiscal year 2010, and an option to purchase an aggregate 1,072,628 shares of our common stock at $0.30 per share to some of our third party consultants in lieu of $214,526 of accrued and unpaid obligations.
 
All of these offerings and sales were made in reliance on the exemption from registration contained in Section 4(2) of the Securities Exchange Act and/or Regulation D promulgated thereunder as not involving a public offering of securities.
 
During the nine-month periods ended September 30, 2009 and 2010 we recorded an aggregate $478,288 and $524,765 in option compensation expense related to options issued pursuant to the 2007 Plan.
 
Activity for our stock options under the 2007 Plan for the nine-month period ended September 30, 2010 is as follows:
 
                           
Weighted
 
                    Price    
Average
 
   
Options
   
Shares
    per    
Price per
 
   
Outstanding
   
Available
   
share
   
share
 
Balances, December 31, 2009
   
1,667,135
     
4,332,865
   
$
0.28 – $1.89
   
$
0.75
 
Granted
   
2,836,331
     
(2,836,331
)
 
$
0.23  –   0.50
   
$
0.39
 
Exercised
   
     
     
     
 
Canceled
   
     
     
     
 
Balances, September 30, 2010
   
4,503,466
     
1,496,534
   
$
  0.23  –  $1.89
   
$
0.52
 
 
 
15

 
BIOLARGO, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 
The following table summarizes the stock options issued under the 2007 Equity Plan outstanding at September 30, 2010.
 
           
Weighted
         
Currently Exercisable
 
           
Average
   
Weighted
   
Number of
       
Options
         
Remaining
   
Average
   
Shares at
   
Weighted
 
Outstanding at
         
Contractual
   
Exercise
   
September 30,
   
Average
 
September 30, 2010
   
Exercise Price
   
Life
   
Price
   
2010
   
Exercise Price
 
20,000     $ 0.40       8     $ 0.40       20,000     $ 0.40  
605,000     $ 0.94 – 1.03       8     $ 0.97       105,000     $ 0.94  
50,000     $ 1.89       8     $ 1.89       50,000     $ 1.89  
110,000     $ 0.35 – 1.65       3     $ 1.04       110,000     $ 1.04  
120,000     $ 0.28 - 0.50       8     $ 0.40       120,000     $ 0.40  
20,000     $ 0.33       8     $ 0.33       20,000     $ 0.33  
557,035     $ 0.50       3     $ 0.50       557,035     $ 0.50  
155,100     $ 0.55       3     $ 0.55       155,100     $ 0.55  
30,000     $ 0.57       4     $ 0.57       30,000     $ 0.57  
20,000     $ 0.33       9     $ 0.33       20,000     $ 0.33  
30,000     $ 0.45 – 0.50       9     $ 0.48       30,000     $ 0.48  
200,000     $ 0.50       5     $ 0.50       200,000     $ 0.50  
600,000     $ 0.50       10     $ 0.50       600,000     $ 0.50  
50,000     $ 0.25 – 0.40       10     $ 0.35       50,000     $ 0.35  
1,866,331     $ 0.30       5     $ 0.30       1,866,331     $ 0.30  
30,000     $ 0.27       5     $ 0.27       30,000     $ 0.27  
 
Stock Options Issued Outside the 2007 Equity Incentive Plan
 
We recognize compensation expense for stock option awards on a straight-line basis over the applicable service period of the award, which is the vesting period. Share-based compensation expense is based on the grant date fair value estimated using the Black-Scholes Option Pricing Model. The following methodology and assumptions were used to calculate share based compensation for the nine-month period ended September 30, 2010:
 
   
Non plan
       
   
Option
   
2007 Plan
 
Risk free interest rate
   
%
   
1.55 – 2.75
%
Expected volatility
   
%
   
 724
%
Expected dividend yield
   
     
 
Forfeiture rate
   
     
 
Expected life in years
   
     
5
 

Expected price volatility is the measure by which our stock price is expected to fluctuate during the expected term of an option. Expected volatility is derived from the historical daily change in the market price of our common stock, as we believe that historical volatility is the best indicator of future volatility.
 
Following the SEC guidance, we use the “shortcut” method to determine the expected term of plain vanilla options issued to employees and Directors. The expected term is presumed to be the mid-point between the vesting date and the end of the contractual term.
 
 
16

 
BIOLARGO, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 
The risk-free interest rate used in the Black-Scholes calculation is based on the prevailing U.S Treasury yield as determined by the U.S. Federal Reserve. We have never paid any cash dividends on our common stock and do not anticipate paying cash dividends on our common stock in the foreseeable future.
 
We recognize compensation expense for stock option awards on a straight-line basis over the applicable service period of the award, which is the vesting period. Share-based compensation expense is based on the grant date fair value estimated using the Black-Scholes Option Pricing Model.  Historically, we have not had significant forfeitures of unvested stock options granted to employees and Directors. A significant number of our stock option grants are fully vested at issuance or have short vesting provisions. Therefore, we have estimated the forfeiture rate of our outstanding stock options as zero.
 
Note 11. Accounts Payable and Accrued Expenses
 
Accounts payable and accrued expenses included the following:
 
   
December 31,
   
September 30,
 
   
2009
   
2010
 
Accounts payable and accrued expenses
 
$
479,034
   
$
620,823
 
Accrued interest
   
462,129
     
163,396
 
Officer and board of director payable
   
331,865
     
5,253
 
Total Accounts Payable and Accrued Expenses
 
$
1,273,028
   
$
789,472
 
 
During the nine-month periods ended September 30, 2009 and 2010, we recorded $227,870 and $268,900, respectively, of interest expense related to our outstanding promissory notes.
 
Note 12.  Note Payable
 
On June 8, 2010, we received $100,000 and issued a promissory note with a maturity date of December 1, 2010, which accrued interest at a rate of 10%. The noteholder, for no additional consideration, received a stock purchase warrant entitling the holder to purchase 50,000 shares of our common stock, exercisable at $0.50 per share and expire on June 3, 2013.  (See Note 8.)
 
On August 3, 2009, we received $70,000 and issued a promissory note with a maturity date of October 31, 2009 which accrued interest at a rate of 10%. On October 31, 2009 the maturity date of this promissory note was extended to February 1, 2010.  The maturity date was further extended to December 1, 2010, and in March 2010 a $20,000 payment on the note was made.
 
For the nine-month period ended September 30, 2010 and 2009 we recorded $6,412 and $0 of interest expense related to these note payables. 
 
Note 13. Related Party Transactions
 
New Millennium
 
On April 13, 2007, New Millennium Capital Partners LLC (“New Millennium”), a limited liability company controlled and owned in part by the Company’s CEO and president, Dennis P. Calvert, converted a promissory note (the “Note”) in principal amount of $900,000 into 1,636,364 shares of our common stock, at a price of $0.55 per share, which was the last bid price on the date of conversion. Accrued but unpaid interest in the amount of $380,658 as of the conversion date of April 13, 2007 remained outstanding on the Note, which amount was due to be paid on January 15, 2008. We did not make such payment on such date. On November 12, 2008, we and New Millennium agreed to extend the date on which interest would be paid to April 30, 2009. On April 27, 2009, New Millennium agreed to accept as payment of $230,658 of the outstanding $380,658 in accrued but unpaid interest an option to purchase 691,974 shares of our common stock, exercisable at $0.55 cents per share. This option will expire April 24, 2012. New Millennium further agreed to extend the due date for the remaining $150,000 unpaid interest, which, as discussed immediately below, has been paid.
 
 
17

 
BIOLARGO, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 
On August 4, 2010, we issued to New Millennium 454,546 shares of our common stock, at a conversion price of $0.33, as payment of the $150,000 accrued and unpaid interest.
 
The balance to the related party is $0 as of September 30, 2010.
 
Note 14. Commitments and Contingencies
 
Litigation
 
We are not currently a party to any litigation.
 
Engagement of Charles K. Dargan, II as Chief Financial Officer
 
On February 1, 2010, we extended the engagement agreement dated February 1, 2008 (the “Engagement Agreement”, which had been previously extended by one year by agreement dated February 23, 2009), pursuant to which Mr. Dargan served as the Company’s Chief Financial Officer for a period of two years, and which expired January 31, 2010. The extension agreement dated as of February 1, 2010 (the “Engagement Extension Agreement”) provides for an additional one-year term January 31, 2011 (the “Extended Term”). During the Extended Term, Mr. Dargan will continue to receive a fee of $4,000 per month, which amount will be increased to $8,000 or more in months during which the Company files its periodic reports with the Securities and Exchange Commission.
 
In addition to the cash compensation specified above, Mr. Dargan will be issued stock options over the Extended Term.  Each option will allow Mr. Dargan to purchase 10,000 shares of the Company’s common stock, and will be granted on the last business day of each month commencing February 2010 and ending January 2011, provided that the Engagement Extension Agreement with Mr. Dargan has not been terminated prior to each such grant date, at an exercise price equal to the closing price of a share of the Company’s common stock on each grant date, each such option to be fully vested upon grant.
 
Note 15. Subsequent Events
 
Summer 2010 Offering
 
Subsequent to September 30, 2010 and pursuant to a private offering at $0.30 per share that commenced July 2010 (the “Summer 2010 Offering”) and continued through the date of this report, we received $160,000 from five investors and issued 533,334 shares of our common stock at a conversion price of $0.30 per share.
 
All of these offerings and sales were made in reliance on the exemption from registration contained in Section 4(2) of the Securities Exchange Act and/or Regulation D promulgated thereunder as not involving a public offering of securities.
 
 
18

 
 
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:
 
  
 
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 liquidity and sufficiency of existing cash; and
 
 
the success of our financing plans.
 
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, 2009. Unless otherwise expressly stated herein, all statements, including forward-looking statements, set forth in this Form 10-Q are as of September 30, 2010, 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.
 
The following discussion and analysis should be read in conjunction with our unaudited 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 performance with concerns about toxicity.
 
In addition to our BioLargo technology, in 2008 we acquired the rights to market an iodine based water disinfection system (the “Isan system”) from Ioteq IP Pty. Ltd., an Australian company, and its U.S. affiliate Ioteq Inc. (“Ioteq”). The Isan system is an automated water disinfection system that substantially reduces the incidence of fungal growth, spoilage, organisms and pathogens in water and on food. Capable of treating high volumes of water flow, the Isan system is a combination of electrodes for measuring iodine levels in the target water stream, a control unit which automatically controls the running of the system, iodine canisters to deliver the iodine, and resin canisters to collect by-products after disinfection has been completed. The Isan system is registered with the APVMA (Australian Pesticides and Veterinary Medicines Authority) and FSANZ (Food Standards Australia and New Zealand) in Australia and New Zealand, where it has approximately 150 customer installations currently operating.
 
 Both our BioLargo technology and the Isan system have potential commercial applications within global industries, including but not limited to agriculture, animal health, beach and soil environmental remediation, consumer products, food processing, medical, and water industries. While we believe the potential applications are many, we are currently focused in three primary areas – the development and commercial expansion of certain products designed for the animal health industry, advancing our proof of claims for contaminated water treatment applications, with an emphasis in the oil and gas related industry, and agriculture.
 
 
19

 
 
First, in 2009, we launched our first products incorporating our BioLargo technology under the brand name “Odor-No-More”, in the animal health industry. The primary benefits of the products are odor and moisture control, and customers using our animal bedding additive experience a net savings on total bedding costs. We have focused our efforts on building wholesale distribution within the equine market. In 2010, we have expanded our marketing and business development efforts into new industry, including the pet products and livestock markets, and continue to evaluate new product opportunities within the animal health industry. Recently, our animal bedding additive product was honored with the receipt of the Editor’s Choice Award as presented by the Horse Journal, the equine industry’s leading independent product, care and service guide for horse owners.
 
Second, we recently added oil and gas industry expert Dr. Vikram Rao to our management team as a senior advisor. Dr. Rao, former Chief Technology Officer and Senior Vice President of global leader Halliburton, and current Executive Director of the Research Triangle Energy Consortium, brings considerable industry expertise and contacts to our company. We are pursuing opportunities with companies to introduce our technology to this industry.
 
Third, we are actively seeking to secure strategic partners to either license or partner with to exploit commercial opportunities in the agricultural industry. In March 2010, we entered into a series of transactions whereby we licensed the Isan system technology from Ioteq, and then sublicensed the technology to a third party for commercialization in the United States in certain fields of use. We are still actively marketing the Isan system for opportunities outside the United States pursuant to our marketing agreement with Ioteq, and in the United States through an agency agreement with Isan USA.
 
We continue research and product development for our CupriDyne™ technology, and continue to work with a number of global companies who are engaged in technology evaluation and testing processes. Simultaneously, we are also actively seeking to identify and negotiate regional or global partnerships to exploit commercial opportunities for both CupriDyne™ and the Isan technologies. No such regional or global partnerships have been formed at this time, and we can make no representation about our ability to successfully conclude such arrangements.
 
Although we are focused primarily on the aforementioned industries, we also intend to continue to advance our intellectual property, product designs and licensing opportunities for our technology for use in other industries, as capital resources are available to support these efforts. We continue to market both our BioLargo technology and the Isan system to various companies for licensure in numerous industry segments.
 
Results of Operations—Comparison of the three and nine-month periods ended September 30, 2010 and 2009
 
We generated revenues of $134,360 during the nine-month period ended September 30, 2010, as compared with $115,741 of revenues during the nine-month period ended September 30, 2009. During the nine-month period ended September 30, 2010, we incurred a net loss of $4,476,408, we used cash in operations of $712,207, incurred  $2,948,535 of non-cash expenses related to the issuances of stock options, warrants and stock for services, and the remainder is related to accrued and unpaid expenses related to our operations.
 
Revenue
 
We generated $42,835 and $134,360 in revenues from operations during the three and nine-month periods ended September 30, 2010, and $115,741 in revenues during the three and nine-month periods ended September 30, 2009. The revenues primarily consist of sales of our Odor-No-More branded products to the animal health industry. Although we had a slight increase in sales in the nine month period ended September 30, 2010 versus 2009, the products are still in the early stages of the sales and distribution process and therefore it is not a meaningful variance.
 
 
20

 
 
Selling, General and Administrative Expense
 
Selling, General and Administrative expenses were $812,291 and $3,203,826 for the three and nine-month periods ended September 30, 2010, compared to $919,103 and $3,056,771 for the three and nine-month periods ended September 30, 2009, a decrease of $106,812 and an increase of $147,055, respectively. The largest components of these expenses were:
 
a. Salaries and Payroll-related Expenses: These expenses were $172,309 and $1,343,520 for the three and nine-month periods ended September 30, 2010, compared to $458,250 and $1,392,843 for the three and nine-month periods ended September 30, 2009, a decrease of $285,941 and $49,323, respectively. The decrease in the three months is related to the end of the amortization of accrued option compensation expense for an option issued to our Chief Executive Officer in 2007.  The decrease in the nine-month period is related to the non-cash stock option compensation expense issued to our officers and directors in February 2010 off set by the end of the amortization of accrued option compensation expense for an option issued to our Chief Executive Officer in 2007.
 
b. Consulting Expenses: These expenses were $328,729 and $1,043,022 for the three and nine-month periods ended September 30, 2010, compared to $260,444 and $808,991 for the three and nine-month periods ended September 30, 2009, an increase of $67,835 and $234,031, respectively. The increase in the three months is related to an increase in our use of consultants during the period.  The increase in the nine-month period ended September 30, 2010 is primarily attributable to non-cash stock option compensation expense and stock issued for services to consultants.
 
c. Professional Fees: These expenses were $104,374 and $254,372 for the three and nine-month periods ended September 30, 2010, compared to $76,602 and $230,526 for the three and nine-month periods ended September 30, 2009, an increase of $27,772 and $23,846, respectively. These increases are associated with increased accounting, auditing and legal costs associated with our increased operations.
 
d. Other Expense: These expenses were $35,875 and $151,200 for the three and nine-month periods ended September 30, 2010, compared to $60,000 and $170,000 for the three and nine-month periods ended September 30, 2009, a decrease of $24,125 and $18,800, respectively. The expenses incurred in 2009 and 2010 were the result of the obligations pursuant to an agreement with Ioteq.
 
Interest expense
 
Interest expense totaled $465,646 and $1,329,054 for the three and nine-month periods ended September 30, 2010, compared to $471,280 and $1,329,235 for the three and nine-month periods ended September 30, 2009, a decrease of $5,634 and $181, respectively.
 
Amortization and depreciation expense
 
Amortization and depreciation expense totaled $2,391 and $7,173 for the three and nine-month periods ended September 30, 2010, compared to $279,192 and $837,576 for the three and nine-month periods ended September 30, 2009, a decrease of $276,801 and $830,403, respectively. The decrease is attributable to the impairment expense recorded December 31, 2009, in which we reduced the value of the intangible assets acquired from IOWC Technologies, Inc. in April 2007 to zero Management performed its assessment of the fair value of the intangible assets for the year ended December 31, 2009. In our undertaking we analyzed the projected cash flow from the assets discounted at appropriate rates, the length of time to full development of the cash flow potential and the current recessionary state of the world-wide economy. We determined that after this detailed analysis that it was appropriate for us to record an impairment charge.
 
Research and Development
 
Research and development expenses were $17,401 and $88,893 for the three and nine-month periods ended September 30, 2010, compared to $56,389 and $132,639 for the three and nine-month periods ended September 30, 2009, a decrease of $38,988 and $43,744 related to a reduction of university studies and patent application and prosecutions as compared to 2009, as well our limited financial resources during 2010.
 
 
21

 
 
Net Loss
 
Net loss for the three and nine-month periods ended September 30, 2010 was $1,172,154 and $4,476,408, a loss of $0.03 and $0.10 per share, compared to a net loss for the three and nine-month periods ended September 30, 2009 of $1,640,703 and $5,303,315, a loss of $0.04 and $0.12 per share. The decrease in net loss for the three and nine-month periods ended September 30, 2009 is primarily attributable to the non-cash amortization expense related to our intangible assets which were fully impaired as of December 31, 2009.  This is offset somewhat from the non-cash option expense related to the issuance of options to the management team and common stock to consultants for services provided, recorded in 2010.
 
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 $246,998 at September 30, 2010. We had negative working capital of $2,074,078 for the nine-month period ended September 30, 2010, compared with negative working capital of $3,020,231 for the nine-month period ended September 30, 2009. We had negative cash flow from operating activities of $712,207 for the nine-month period ended September 30, 2010, compared to a negative cash flow from operating activities of $891,102 for the nine-month period ended September 30, 2009. We used cash from financing activities to fund operations. Although we have reduced our negative cash flows from operations and we have reduced our negative working capital position in the nine months ended September 30, 2010, 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 financial statements accompanying this report 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 $4,476,408 for the nine-month period ended September 30, 2010, and an accumulated stockholders’ deficit of $62,244,972 as of September 30, 2010. 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 its 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 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, 2010 we had $2,906,890 aggregate principal amount, together with $163,396 accrued and unpaid interest, outstanding on various promissory notes. We may pay all of these amounts in cash or in stock, at our option, at maturity. In addition, as of September 30, 2010, we had $626,076 in accrued and unpaid payables.
 
We continue to be limited in terms of our capital resources. During the nine-month period ended September 30, 2010, we received gross and net proceeds of $843,855 pursuant to a private offering of our securities and a note payable. 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.
 
 
22

 
 
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.
 
Obligation to New Millennium Capital Partners, LLC
 
On April 13, 2007, New Millennium Capital Partners LLC (“New Millennium”), a limited liability company controlled and owned in part by the Company’s CEO and president, Dennis P. Calvert, converted a promissory note (the “Note”) in principal amount of $900,000 into 1,636,364 shares of our common stock, at a price of $0.55 per share, which was the last bid price on the date of conversion. Accrued but unpaid interest in the amount of $380,658 as of the conversion date of April 13, 2007 remained outstanding on the Note, which amount was due to be paid on January 15, 2008. We did not make such payment on such date. On November 12, 2008, we and New Millennium agreed to extend the date on which interest would be paid to April 30, 2009. On April 27, 2009, New Millennium agreed to accept as payment of $230,658 of the outstanding $380,658 in accrued but unpaid interest an option to purchase 691,974 shares of our common stock, exercisable at $0.55 cents per share. This option will expire April 24, 2012.
 
On August 4, 2010, New Millennium and the Company agreed to convert the remaining payable into 454,546 shares of our common stock at a conversion rate of $0.33 per share.
 
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.
 
 
23

 
 
Recently issued Accounting Guidance
 
In January 2010, the FASB issued guidance related to accounting for distributions with components of both stock and cash. This amended guidance clarifies that the stock portion of a distribution to shareholders that allows them to elect to receive cash or stock with a potential limit on the total amount of cash that all shareholders can elect to receive in the aggregate is considered a share issuance that is reflected in EPS prospectively. This guidance is effective for fiscal years beginning after December 15, 2009. The adoption of this standard effective January 1, 2010 did not have a material impact on the Company’s financial position, results of operations, or cash flows.
 
Item 4.  Controls and Procedures
 
(a)  Evaluation of disclosure controls and procedures.
 
We conducted an evaluation, under the supervision and with the participation of management, including our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this Report.
 
Our procedures have been designed to ensure that the information relating to our company, including our consolidated subsidiaries, required to be disclosed in our SEC reports is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow for timely decisions regarding required disclosure. Based on this evaluation, our chief executive officer and chief financial officer concluded that as of the evaluation date our disclosure controls and procedures are effective.
 
It should be noted that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.
 
(b) Changes in internal control over financial reporting. There was no change in our internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
 
 
24

 
 
PART II

OTHER INFORMATION
 
 
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds
 
Spring 2010 Offering
 
Pursuant to a private offering that commenced January 2010 (the “Spring 2010 Offering”) and terminated July 2010, we sold $438,855 of our 10% convertible notes (the “Spring 2010 Notes”), which are due and payable on April 15, 2013, to 16 investors, convertible into an aggregate 763,235 shares of our common stock. The Spring 2010 Notes are convertible into shares of our common stock at an initial conversion price of $0.575 per share. The Spring 2010 Notes can be converted voluntarily by the noteholders at any time prior to the maturity date. We can unilaterally convert the Spring 2010 Notes (i) on or after July 31, 2010, if we have received one or more written firm commitments, or have closed on one or more transactions, or a combination of the foregoing, of at least $3 million gross proceeds of equity or debt; or (ii) on the maturity date. Accordingly, the Spring 2010 Notes may be repaid in cash or may be converted, at our sole option, into shares of our common stock, on or before the April 15, 2013maturity date.
 
Each purchaser of the Spring 2010 Notes received, for no additional consideration, two stock purchase warrants, each of which entitle the holder to purchase the number of shares of our common stock into which the holder’s Spring 2010 Note is initially convertible. The first warrant (the “Spring 2010 Eighteen Month Warrant”) is exercisable at a price of $0.75 per share and expires on July 15, 2011. The second warrant (the “Spring 2010 Thirty-Six Month Warrant”) is exercisable at a price of $1.00 per share and expires on January 15, 2013. (See Note 8.)
 
Summer 2010 Offering
 
Pursuant to a private offering at $0.30 per share that commenced July 2010 (the “Summer 2010 Offering”), through September 2010 we sold 1,016,672 shares of our common stock at $0.30 per share, and received $305,000 gross proceeds from the sales. Unlike our prior securities offerings, this offering did not involve the sale of convertible debt or warrants.
 
All of these offerings and sales were made in reliance on the exemption from registration contained in Section 4(2) of the Securities Exchange Act and/or Regulation D promulgated thereunder as not involving a public offering of securities.
 
Item 6.  Exhibits
 
The exhibits listed below are attached hereto and filed herewith:
 
Exhibit No.
  
Description
31.1
  
Certification of Chief Executive Officer of Quarterly Report Pursuant to Rule 13(a)-15(e) or Rule 15(d)-15(e).
   
31.2
  
Certification of Chief Financial Officer of Quarterly Report Pursuant to  Rule 13(a)-15(e) or Rule 15(d)-15(e).
   
32    
  
Certification of Chief Executive Officer and Chief Financial Officer of Quarterly Report pursuant to 18 U.S.C. Section 1350 and Rules 13a-14 and 15d-14.
 
 
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SIGNATURES
 
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant has caused this report to be signed on its behalf by the undersigned, hereunto duly authorized.
 
 
BIOLARGO, INC.
 
       
Date: November 15, 2010
By:
/s/ DENNIS P. CALVERT  
   
Dennis P. Calvert
Chief Executive Officer
 
 
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EXHIBIT INDEX
 
 
Exhibit No.
  
Description
31.1
  
Certification of Chief Executive Officer of Quarterly Report Pursuant to Rule 13(a)-15(e) or Rule 15(d)-15(e).
   
31.2
  
Certification of Chief Financial Officer of Quarterly Report Pursuant to  Rule 13(a)-15(e) or Rule 15(d)-15(e).
   
32    
  
Certification of Chief Executive Officer and Chief Financial Officer of Quarterly Report pursuant to 18 U.S.C. Section 1350 and Rules 13a-14 and 15d-14.