BIOLARGO, INC. - Quarter Report: 2021 March (Form 10-Q)

 

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

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FORM 10-Q

 

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☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2021.

or

 

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from              to               

 

Commission File Number 000-19709

 

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BIOLARGO, INC.

(Exact name of registrant as specified in its charter)

 

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Delaware	65-0159115
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

 

14921 Chestnut St.

Westminster, CA 92683

(Address of principal executive offices)

 

(888) 400-2863

(Registrant’s telephone number, including area code)

 

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Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class	Trading symbol(s)	Name of each exchange on which registered
Common stock	BLGO	OTC Markets (OTCQB)

 

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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  ☒    No  ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes  ☒     No     ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ☐	Accelerated filer ☐
Non-accelerated filer   ☒	Smaller reporting company ☒
	Emerging growth company ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.         ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒

 

The number of shares of the Registrant’s Common Stock outstanding as of May 12, 2021 was 243,391,521 shares.  

 

 

BIOLARGO, INC.

FORM 10-Q

INDEX

 

PART I

 

Item 1	Financial Statements	3
Item 2	Management's Discussion and Analysis and Financial Condition and Results of Operations	24
Item 4	Controls and Procedures	34

 

PART II

 

Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	35
Item 5	Other Information	36
Item 6	Exhibits	37
	Exhibit Index	37
	Signatures	39

 

 

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

 

		March 31, 2021 (Unaudited)				December 31, 2020
Assets
Current assets:
Cash and cash equivalents		$	1,341			$	716
Accounts receivable, net of allowance			277				484
Inventories, net of allowance			242				277
Prepaid expenses and other current assets			62				28
Total current assets			1,922				1,505
Non-current assets
In-process research and development (Note 8)			2,150				2,150
Equipment, net of depreciation			63				60
Other non-current assets			35				35
Investment in South Korean joint venture			53				63
Right of use operating lease, net of amortization			326				341
Clyra Medical prepaid marketing (Note 9)			788				788
Total non-current assets			3,415				3,437
Total assets		$	5,337			$	4,942
Liabilities and stockholders’ equity (deficit)
Current liabilities:
Accounts payable and accrued expenses		$	414			$	513
Debt obligations, net of discount and amortization (Note 4)			448				1,102
Deferred revenue			45				48
Customer deposits			80				—
Lease liability			114				114
Clyra Medical accounts payable and accrued expenses (See Note 9)			665				536
Clyra Medical debt obligations (See Note 9)			1,207				1,231
Total current liabilities			2,973				3,544
Long-term liabilities:
Debt obligations, net of discount and amortization (Note 4)			481				507
Lease liability			211				226
Common stock held for redemption (Note 9)			900				900
Total long-term liabilities			1,592				1,633
Total liabilities			4,565				5,177
COMMITMENTS AND CONTINGENCIES (Note 12)
STOCKHOLDERS’ EQUITY (DEFICIT):
Preferred Series A, $0.00067 Par Value, 50,000,000 Shares Authorized, -0- Shares Issued and Outstanding, at March 31, 2021 and December 31, 2020			—				—
Common stock, $0.00067 Par Value, 400,000,000 Shares Authorized, 239,963,788 and 225,885,682 Shares Issued, at March 31, 2021 and December 31, 2020			161				151
Additional paid-in capital			138,363				135,849
Accumulated other comprehensive loss			(103	)			(101	)
Accumulated deficit			(133,672	)			(132,041	)
Total BioLargo Inc. and subsidiaries stockholders’ equity (deficit)			4,749				3,858
Non-controlling interest (Notes 9 and 10)			(3,977	)			(4,093	)
Total stockholders’ equity (deficit)			772				(235	)
Total liabilities and stockholders’ equity (deficit)		$	5,337			$	4,942

 

		MARCH 31, 2021				MARCH 31, 2020
Revenue
Product revenue		$	444			$	283
Service revenue			127				156
Total revenue			571				439
Cost of revenue
Cost of goods sold			(237	)			(128	)
Cost of service			(102	)			(132	)
Total cost of revenue			(339	)			(260	)
Gross profit			232				179
Operating expenses:
Selling, general and administrative expenses			1,763				1,546
Research and development			327				335
Total operating expenses			2,090				1,881
Operating loss			(1,858	)			(1,702	)
Other income (expense):
Grant income			30				57
PPP loan forgiveness			43				—
Interest expense			(93	)			(757	)
Loss on extinguishment of debt			—				(214	)
Total other income (expense)			(20	)			(914	)
Net loss			(1,878	)			(2,616	)
Net loss attributable to noncontrolling interest			(247	)			(342	)
Net loss attributable to common shareholders		$	(1,631	)		$	(2,274	)
Net loss per share attributable to common stockholders:
Loss per share attributable to shareholders – basic and diluted		$	(0.01	)		$	(0.01	)
Weighted average number of common shares outstanding:			233,733,015				168,873,233
Comprehensive loss attributable to common shareholders
Net loss		$	(1,878	)		$	(2,616	)
Foreign translation adjustment			(2	)			—
Comprehensive loss			(1,880	)			(2,616	)
Comprehensive loss attributable to noncontrolling interest			(247	)			(342	)
Comprehensive loss attributable to shareholders		$	(1,633	)		$	(2,274	)

 

		Common stock								Additional paid-in				Accumulated				Accumulated other comprehensive				Non- controlling				Total stockholders’
		Shares				Amount				capital				deficit				Loss				interest				equity (deficit)
Balance, December 31, 2020			225,885,682			$	151			$	135,849			$	(132,041	)		$	(101	)		$	(4,093	)		$	(235	)
Sale of common stock for cash			13,330,619				9				2,097				—				—				—				2,106
Issuance of common stock for service			747,487				1				110				—				—				—				111
Stock option compensation expense			—				—				424				—				—				—				424
Warrants and conversion feature issued as discount on convertible note payable			—				—				35				—				—				—				35
Clyra Medical stock option expense			—				—				161				—				—				—				161
Noncontrolling interest allocation			—				—				(313	)			—				—				313				—
Clyra Medical securities offering			—				—				—				—				—				50				50
Net loss			—				—				—				(1,631	)			—				(247	)			(1,878	)
Foreign currency translation			—				—				—				—				(2	)			—				(2	)
Balance, March 31, 2021			239,963,788			$	161			$	138,363			$	(133,672	)		$	(103	)		$	(3,977	)		$	772

		Common stock								Additional paid-in				Accumulated				Accumulated other comprehensive				Non- controlling				Total stockholders’
		Shares				Amount				capital				deficit				Loss				interest				equity (deficit)
Balance, December 31, 2019			166,256,024			$	111			$	121,327			$	(123,492	)		$	(99	)		$	(27	)		$	(2,180	)
Conversion of notes			3,387,649				2				432				—				—				—				434
Issuance of common stock for service			1,039,490				1				177				—				—				—				178
Issuance of common stock for interest			19,278				—				4				—				—				—				4
Sale of common stock for cash			4,848,305				3				898				—				—				—				901
Common stock issued as a financing fee; deferred offering costs			2,928,571				2				(124	)			—				—				—				(122	)
Stock option compensation expense			—				—				320				—				—				—				320
Deemed dividend for the change in accounting for derivative liability			—				—				100				(100	)			—				—				—
Clyra Medical securities offering			—				—				15				—				—				10				25
Clyra Medical stock option expense			—				—				420				—				—				—				420
Allocation of noncontrolling interest from Clyra Stock option issuance			—				—				(448	)			—				—				448				—
Net loss			—				—				—				(2,274	)			—				(342	)			(2,616	)
Balance, March 31, 2020			178,479,317			$	119			$	123,121			$	(125,866	)		$	(99	)		$	89			$	(2,636	)

 

		MARCH 31, 2021				MARCH 31, 2020
Cash flows from operating activities
Net loss		$	(1,878	)		$	(2,616	)
Adjustments to reconcile net loss to net cash used in operating activities:
Stock option compensation expense			585				526
Common stock issued in lieu of salary to officers and fees for services from vendors			111				178
Common stock issued for interest			—				4
Interest expense related to amortization of the discount on convertible notes payable and line of credit			46				668
PPP loan forgiveness			(43	)			—
Loss on extinguishment of debt			—				214
Loss on investment in South Korean joint venture			10				—
Bad debt expense			1				—
Depreciation expense			7				16
Changes in assets and liabilities:
Accounts receivable			206				96
Inventories			36				(17	)
Deferred revenue			(4	)			(26	)
Accounts payable and accrued expenses			(98	)			158
Clyra Medical accounts payable and accrued expenses			130				52
Prepaid expenses and other current assets			(34	)			(5	)
Customer deposits			80				(1	)
Net cash used in operating activities			(845	)			(753	)
Cash flows from investing activities
Investment in South Korean joint venture			—				(100	)
Purchase and sale of equipment			(10	)			16
Net cash used in investing activities			(10	)			(84	)
Cash flows from financing activities
Proceeds from sales of common stock			2,106				901
Proceeds from the sale of stock in Clyra Medical			50				25
Payment of debt obligations			(650	)			—
Payment of Clyra Medical debt obligations			(24	)			—
Net cash provided by financing activities			1,482				926
Net effect of foreign currency translation			(2	)			—
Net change in cash			625				89
Cash at beginning of year			716				655
Cash at end of period		$	1,341			$	744
Supplemental disclosures of cash flow information
Cash paid for:
Interest		$	26			$	25
Income taxes		$	—			$	2
Non-cash investing and financing activities
Common stock issued for convertible debt		$	—			$	434
Fair value of warrants issued with convertible notes		$	35			$	—
Lincoln Park deferred offering costs, recorded as additional paid-in capital		$	—			$	(122	)
Conversion of notes payable to common stock		$	—			$	434
Deemed dividend		$	—			$	100
Allocation of noncontrolling interest		$	313			$	448

 

Note 1. Business and Organization

 

Description of Business

 

BioLargo, Inc. is an innovative technology developer and environmental engineering company driven by a mission to “make life better” by delivering robust, sustainable solutions for a broad range of industries and applications, with a focus on clean water, clean air and a cleaner earth. The company also owns a minority interest in a medical products subsidiary that has licensed BioLargo’s technologies.  Our business strategy is straightforward: we invent or acquire technologies that we believe have the potential to be disruptive in large commercial markets; we develop and validate these technologies to advance and promote their commercial success as we leverage our considerable scientific, engineering, and entrepreneurial talent; we then monetize these technical assets through a variety of business structures that may include licensure, joint venture, sale, spin off, or by deploying direct to market strategies.

 

Liquidity / Going concern

 

The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of our business. For the three months ended March 31, 2021, we had a net loss of $1,878,000, used $845,000 cash in operations, and at March 31, 2021, we had a working capital deficit of $1,051,000, and current assets of $1,922,000. We do not believe gross profits in 2021 will be sufficient to fund our current level of operations or pay our debts as they become due during the next 12 months, and therefore we will have to obtain further investment capital to continue to fund operations and seek to refinance our existing debt, such as through our purchase agreement with Lincoln Park Capital. (See Note 3.) We have been, and anticipate that we will continue to be, limited in terms of our capital resources.

 

During the three months ended March 31, 2021, we generated revenues of $571,000 through our operational subsidiaries. (See Note 11.) Our subsidiaries did not individually or in the aggregate generate profits sufficient to fund their operations, or for our corporate operations or other business segments. Thus, we continued to sell securities to raise cash (see Note 3), and received additional grant aid through our Canadian subsidiary.

 

As of March 31, 2021, our cash and cash equivalents totaled $1,341,000, and our total liabilities included $406,000 in current debt that is convertible at the option of the debtholders , $100,000 of debt that we converted to equity at the April 2021 maturity date (see Note 13), $50,000 of debt that is due March 2023, $200,000 due on a line of credit by our partially owned subsidiary Clyra Medical Technologies, Inc. (“Clyra”) due in June 2021, and $1,007,000 owed by Clyra related to a 2018 acquisition with a maturity date that automatically extends each June (see Note 9, “Note Payable (Scion)”). We have $314,000 of loans issued as part of the Small Business Administration’s (“SBA”) Paycheck Protection Program. We have applied for forgiveness of the entire balance owed on these loans and are awaiting decisions. We have a $150,000 loan accruing interest at 3.75% annually from the SBA’s Economic Injury Disaster Loan program that is payable over 30 years beginning August 2021.

 

During the three months ended March 31, 2021, we received $2,001,000 in proceeds from stock sales to Lincoln Park and $105,000 from stock sales from our 2020 Unit Offering (see Note 3), and made cash payments to retire debt obligations totaling $674,000 (see Note 4 and Note 9 (“Line of Credit”)). We have two promissory notes due in August, 2021, (see Note 4, “Notes payable, mature August 12 and 16, 2021”), each of which may be converted by the holder into equity at a fixed price of $0.14 per share. If the holders do not voluntarily convert the notes to equity, we intend to pay the notes with cash, although there is no guarantee that we will be able to do so. The cash we receive from stock sales to Lincoln Park is a function of stock price and volume – a lower stock price and less trading volume results in less money we can receive from Lincoln Park. Our agreement with Lincoln Park precludes us from selling shares to Lincoln Park on a daily basis if our stock price falls below $0.10 per share. If we are unable to make daily sales, it is not likely we will be able to sell enough shares to Lincoln Park to pay the debt due in August, 2021. In such event, we intend to negotiate for a delay in repayment with the holders of the notes.

 

If we are unable to rely on our current arrangement with Lincoln Park to fund our working capital requirements, we would have to rely on other forms of financing, and there is no assurance that we will be able to do so, or if we do so, it will be on favorable terms.

 

To reduce our operational cash burdens, we regularly issue officers and vendors stock or options in lieu of cash compensation, and we anticipate that we will continue to be able to do so in the future. In the three months ended March 31, 2021, our CEO and CSO accepted stock in lieu of $31,000 in unpaid salary. Our CFO has also agreed to receive warrants in lieu of cash, (see note xx) as compensation for his services. Each has indicated a willingness to do so in the future.

 

 

BIOLARGO, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

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 technologies. The consolidated financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern.

 

Organization

 

We are a Delaware corporation formed in 1991. We have four wholly-owned subsidiaries: BioLargo Life Technologies, Inc., organized under the laws of the State of California in 2006; ONM Environmental, Inc., organized under the laws of the State of California in 2009; BioLargo Water Investment Group Inc., organized under the laws of the State of California in 2019, which wholly owns BioLargo Water, Inc., organized under the laws of Canada in 2014; and BioLargo Development Corp., organized under the laws of the State of California in 2016. Additionally, we own 94% of BioLargo Engineering Science and Technologies, LLC (“BLEST”), organized under the laws of the State of Tennessee in 2017 (see Note 10). We also own 45% of Clyra Medical Technologies, Inc. (“Clyra” or “Clyra Medical”), organized under the laws of the State of California in 2012, and consolidate their financial statements (see Note 2, subheading “Principles of Consolidation,” and Note 9).

 

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. For some of our activities, we are still operating in the early stages of the sales and distribution process, and therefore our operating results for the three months ended March 31, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021, or for any other period. These unaudited consolidated financial statements and notes should be read in conjunction with the Company’s audited consolidated financial statements and accompanying notes included in the Annual Report on Form 10-K for the year ended December 31, 2021, filed with the Securities and Exchange Commission (the “SEC”) on March 30, 2021.

 

Note 2. Summary of Significant Accounting Policies

 

In the opinion of management, the accompanying balance sheet and related statements of operations, cash flows, and stockholders’ deficit 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.

 

Principles of Consolidation

 

The consolidated financial statements include the accounts of the Company, its wholly owned subsidiaries, BLEST, and Clyra Medical. Management believes Clyra Medical’s financial statements are appropriately consolidated with that of the Company after reviewing the guidance of ASC Topic 810, “Consolidation”, and concluding that BioLargo controls Clyra Medical. While BioLargo does not have voting interest control through a majority stock ownership of Clyra Medical (it owns 45% of the outstanding voting stock), it does exercise control under the “Variable Interest Model.” There is substantial board overlap, BioLargo is the primary beneficiary since it has the power to direct Clyra Medical’s activities that most significantly impact Clyra Medical’s performance, and it has the obligation to absorb losses or receive benefits (through royalties and licensing) that could be potentially significant to Clyra Medical. BioLargo has consolidated Clyra Medical’s operations for all periods presented. (See Note 9.) 

 

All intercompany accounts and transactions have been eliminated in the financial statement presentation.

 

Foreign Currency

 

The Company has designated the functional currency of BioLargo Water, Inc., our Canadian subsidiary, to be the Canadian dollar. Therefore, translation gains and losses resulting from differences in exchange rates are recorded in accumulated other comprehensive income.

 

 

BIOLARGO, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Cash and Cash Equivalents

 

The Company considers all highly liquid investments with maturities of three months or less when acquired to be cash equivalents. Substantially all cash equivalents are held in short-term money market accounts at one of the largest financial institutions in the United States. From time to time, our cash account balances are greater than the Federal Deposit Insurance Corporation insurance limit of $250,000 per owner per bank, and during such times, we are exposed to credit loss for amounts in excess of insured limits in the event of non-performance by the financial institution. We do not anticipate non-performance by our financial institution.

 

As of March 31, 2021 and December 31, 2020, our cash balances were made up of the following (in thousands):

 

 

 

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 as of March 31, 2021 and December 31, 2020, was $13,000.

 

Credit Concentration

 

We have a limited number of customers that account for significant portions of our revenue. During the three months ended March 31, 2021 and 2020, we had the following customers that accounted for more than 10% of consolidated revenues, as follows:

 

 

 

We had three customers that each accounted for more than 10% of consolidated accounts receivable at March 31, 2021, and two customers at December 31, 2020, as follows:

 

 

 

Inventory

 

Inventories are stated at the lower of cost or net realizable value using the average cost method. The allowance for obsolete inventory as of March 31, 2021, and December 31, 2020, was $3,000. Inventories consisted of (in thousands):

 

 

 

BIOLARGO, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Other Assets

 

Other Assets consisted of security deposits of $35,000 related to our business offices.

 

Equity Method of Accounting

 

On March 20, 2020, we invested $100,000 into a South Korean entity (Odin Co. Ltd., “Odin”) pursuant to a Joint Venture agreement we had entered into with BKT Co. Ltd. and its U.S. subsidiary, Tomorrow Water. We received a 40% non-dilutive equity interest, and BKT and Tomorrow Water each received 30% equity interests for an aggregate $150,000 investment.

 

We account for our investment in the joint venture under the equity method of accounting. We have determined that while we have significant influence over the joint venture through our technology license and our position on the Board of Directors, we do not control the joint venture or are otherwise involved in managing the entity and we own less than a majority of the equity. Therefore, we record the asset on our consolidated balance sheet and record an increase or decrease the recorded balance by our percentage ownership of the profits or losses in the joint venture. During the three months ended March 31, 2021, the joint venture incurred a loss and our 40% ownership share reduced our investment interest by $10,000.

 

Impairment

 

Long-lived and definite lived intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If the sum of the expected future undiscounted cash flows from the use of the asset and its eventual disposition is less than the carrying amount of the asset, then an impairment loss is recognized. The impairment loss is measured based on the fair value of the asset. Any resulting impairment is recorded as a reduction in the carrying value of the related asset in excess of fair value and a charge to operating results. For the three months ended March 31, 2021 and 2020, management determined that there was no impairment of its long-lived assets, including its In-process Research and Development (see Note 8).

 

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 three months ended March 31, 2021 and 2020, 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.

 

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, debt transactions, derivative liabilities, allowance for bad debt, asset depreciation and amortization, among others.

 

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.

 

Share-Based Compensation Expense

 

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. Fair value is determined on the grant date. Share-based compensation expense is based on the grant date fair value estimated using the Black-Scholes Option Pricing Model.

 

 

BIOLARGO, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

For stock and stock options issued to consultants and other non-employees for services, the Company measures and records an expense as of the earlier of the date at which either: a commitment for performance by the non-employee has been reached or the non-employee’s performance is complete. The equity instruments are measured at the current fair value, and for stock options, the instruments are measured at fair value using the Black Scholes option model.

 

The following methodology and assumptions were used to calculate share-based compensation for the three months ended March 31, 2021 and 2020:

 

 

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.

 

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.

 

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.

 

Warrants

 

Warrants issued with our convertible promissory notes, note payables, line of credit are accounted for under the fair value and relative fair value method.

 

The warrant is first analyzed per its terms as to whether it has derivative features or not. If the warrant is determined to be a derivative and not qualify for equity treatment, then it is measured at fair value using the Black Scholes option model, and recorded as a liability on the balance sheet. The warrant is re-measured at its then current fair value at each subsequent reporting date (it is “marked-to-market”).

 

If the warrant is determined to not have derivative features, it is recorded into equity at its fair value using the Black Scholes option model, however, limited to a relative fair value based upon the percentage of its fair value to the total fair value including the fair value of the convertible note.

 

Convertible debt instruments are recorded at fair value, limited to a relative fair value based upon the percentage of its fair value to the total fair value including the fair value of the warrant. Further, the convertible debt instrument is examined for any intrinsic beneficial conversion feature (“BCF”) of which the conversion price is less than the closing common stock price on date of issuance. If the relative fair value method is used to value the convertible debt instrument and there is an intrinsic BCF, a further analysis is undertaken of the BCF using an effective conversion price which assumes the conversion price is the relative fair value divided by the number of shares the convertible debt is converted into by its terms. The BCF value is accounted for as equity.

 

The warrant and BCF relative fair values are also recorded as a discount to the convertible promissory notes. At present, these equity features of the convertible promissory notes have recorded a discount to the convertible notes that is substantially equal to the proceeds received.

 

 

BIOLARGO, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

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.

 

Revenue Recognition

 

We account for revenue in accordance with ASC 606, “revenue from Contacts with Customers”. The guidance focuses on the core principle for revenue recognition, which is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, the guidance provides that an entity should apply the following steps:

 

Step 1: Identify the contract(s) with a customer.

Step 2: Identify the performance obligations in the contract.

Step 3: Determine the transaction price.

Step 4: Allocate the transaction price to the performance obligations in the contract.

Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation.

 

We have revenue from four subsidiaries, ONM, BLEST, BioLargo Water, and Clyra. ONM, BioLargo Water, and Clyra identify its contract with the customer through a written purchase order, in which the details of the contract are defined including the transaction price and method of shipment. The only performance obligation is to create and ship the product and each product has separate pricing. Revenue is recognized at a point in time when the order for its goods are shipped if its agreement with the customer is FOB manufacturer, and when goods are delivered to its customer if its agreement with the customer is FOB destination. Revenue is recognized with a reduction for sales discounts, as appropriate and negotiated in the customer’s purchase order. ONM also installs misting systems for which it bills on a time and materials basis. It identifies its contract with the customer through a written purchase order in which the details of the time to be billed and materials purchased and an estimated completion date. The performance obligation is the completion of the installation, and at that time revenue is recognized.

 

BLEST identifies services to be performed in a written contract, which specifies the performance obligations and the rate at which the services will be billed. Each service is separately negotiated and priced. Revenue is recognized as services are performed and completed. BLEST’s contracts typically call for invoicing for time and materials incurred for that contract. A few contracts have called for milestone or fixed cost payments, where BLEST invoices an agreed-to amount per month for the life of the contract. In these instances, completed work, billed hourly, is recognized as revenue. If the billing amount is greater or lesser than the completed work, a receivable or payable is created. These accounts are adjusted upon additional billings as the work is completed. To date, there have been no discounts or other financing terms for the contracts.

 

In the event that we generate revenues from royalties or license fees from our intellectual property, we anticipate a licensee would 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. Upon entering into a licensing agreement, we will determine the appropriate method of recognizing the royalty and license fees.

 

Clyra also has certain distribution agreements that call for consigned inventory. Although the product is shipped to a third party, it is not revenue until that consigned inventory is sold to end user customer.

 

Government Grants

 

We have been awarded multiple research grants from the Canadian National Research Institute – Industrial Research Assistance Program (NRC-IRAP) and the National Science and Engineering Research Council of Canada (NSERC). The grants received are considered other income and are included in our consolidated statements of operations. We received our first grant in 2015 and have been awarded over 80 grants totaling over $3.7 million. Some of the funds from these grants are given directly to third parties (such as the University of Alberta or a third-party research scientist) to support research on our technology. The grants have terms generally ranging between six and eighteen months and support a majority, but not all, of the related research budget costs. This cooperative research allows us to utilize (i) a depth of resources and talent to accomplish highly skilled work, (ii) financial aid to support research and development costs, (iii) independent and credible validation of our technical claims.

 

 

BIOLARGO, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

The grants typically provide for (i) recurring monthly amounts, (ii) reimbursement of costs for research talent for which we invoice to request payment, and (iii) ancillary cost reimbursement for research talent travel related costs. All awarded grants have specific requirements on how the money is spent, typically to employ researchers. None of the funds may be used for general administrative expenses or overhead in the United States. These grants have substantially increased our level of research and development activities in Canada. We continue to apply for Canadian government and agency grants to fund research and development activities. Not all of our grant applications have been awarded, and no assurance can be made that any pending grant application, or any future grant applications, will be awarded.

 

Income Taxes

 

The asset and liability approach is used to recognize deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of asset and liabilities. Deferred tax assets and liabilities are determined based on the differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The effect on deferred tax asset and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

 

We account for uncertainties in income tax law under a comprehensive model for the financial statement recognition, measurement, presentation and disclosure of uncertain tax positions taken or expected to be taken in income tax returns as prescribed by generally accepted accounting principles (“GAAP”).  Under GAAP, the tax effects of a position are recognized only if it is “more-likely-than-not” to be sustained by the taxing authority as of the reporting date.  If the tax position is not considered “more-likely-than-not” to be sustained, then no benefits of the position are recognized.  Management believes there are no unrecognized tax benefits or uncertain tax positions as of March 31, 2021, and December 31, 2020.

 

The Company assessed its earnings history, trends and estimates of future earnings and determined that the deferred tax asset could not be realized as of March 31, 2021. Accordingly, a valuation allowance was recorded against the net deferred tax asset.

 

The Company recognizes interest and penalties on income taxes as a component of income tax expense, should such an expense be realized.

 

Fair Value of Financial Instruments

 

Management believes the carrying amounts of the Company’s financial instruments (excluding debt and equity instruments) as of March 31, 2021 and December 31, 2020, approximate their respective fair values because of the short-term nature of these instruments. Such instruments consist of cash, accounts receivable, prepaid assets, accounts payable, lines of credit, and other assets and liabilities.

 

Tax Credits

 

Our research and development activities in Canada may entitle our Canadian subsidiary to claim benefits under the “Scientific Research and Experimental Development Program”, a Canadian federal tax incentive program designed to encourage Canadian businesses of all sizes and in all sectors to conduct research and development in Canada. Benefits under the program include credits to taxable income. If our Canadian subsidiary does not have taxable income in a reporting period, we instead receive a tax refund from the Canadian Revenue Authority. Those refunds are classified in Other Income on our Consolidated Statement of Operations and Comprehensive Loss.

 

Leases

 

We adopted ASU 2016-12 using the effective date option. Upon the transition to the ASC 842, the Company elected to use hindsight as a practical expedient with respect to determining the lease terms (as we considered our updated expectations of acceptance of the Westminster California facility lease renewal) and in assessing any impairment of right-of-use assets for existing leases. No impairment is expected at this time.  As of March 31, 2021, the right of use assets on our balance sheet related to our operating leases totals $326,000.

 

 

BIOLARGO, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Recent Accounting Pronouncements

 

In August 2020, the FASB issued Accounting Standards Update No. 2020-06, “Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging— Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity”. For convertible instruments, the FASB decided to reduce the number of accounting models for convertible debt instruments and convertible preferred stock. Limiting the accounting models results in fewer embedded conversion features being separately recognized from the host contract as compared with current GAAP. Convertible instruments that continue to be subject to separation models are (1) those with embedded conversion features that are not clearly and closely related to the host contract, that meet the definition of a derivative, and that do not qualify for a scope exception from derivative accounting and (2) convertible debt instruments issued with substantial premiums for which the premiums are recorded as paid-in capital. The FASB decided to amend the guidance for the derivatives scope exception for contracts in an entity’s own equity to reduce form-over-substance-based accounting conclusions. The FASB observed that the application of the derivatives scope exception guidance results in accounting for some contracts as derivatives while accounting for economically similar contracts as equity. The FASB also decided to improve and amend the related EPS guidance. The amendments in this Update are effective for public business entities that meet the definition of a Securities and Exchange Commission (SEC) filer, excluding entities eligible to be smaller reporting companies as defined by the SEC, for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Management is currently evaluating the effect on the Company’s financials if and when future convertible securities are issued. This Update does not affect the Company’s current financial statements.

 

In January 2020, the FASB issued Accounting Standards Update No 2020-01, “Investments—Equity Securities (Topic 321), Investments—Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815): Clarifying the Interactions between Topic 321, Topic 323, and Topic 815”. This Update relates to the Company’s equity method of accounting and the potential interactions between the measurement alternative in Topic 321 and the equity method of accounting in Topic 323 and that diverse views have emerged about the application of the measurement alternative and the equity method of accounting since the adoption of Update 2016-01.  The measurement alternative is the ability to measure certain equity securities without a readily determinable fair value at cost, minus impairment, if any. Paragraph 321-10-35-2, as amended, states that if an entity identifies observable price changes in orderly transactions for the identical or a similar investment of the same issuer, it should measure the equity security at fair value as of the date that the observable transaction occurred (hereinafter referred to as the measurement alternative). The amendments clarify that an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting for the purposes of applying the measurement alternative in accordance with Topic 321 immediately before applying or upon discontinuing the equity method. Management adopted the updates, and after evaluation, did not make any modifications to the financial statements.

 

Note 3. Sale of Stock for Cash

 

Lincoln Park Financing

 

On March 30, 2020, we entered into a stock purchase agreement (the “Purchase Agreement”) with Lincoln Park Capital Fund, LLC (“Lincoln Park”), pursuant to which Lincoln Park agreed to purchase from us at our request up to an aggregate of $10,250,000 of our common stock (subject to certain limitations) from time to time over a period of three years. The agreement allows us, at our sole discretion, to direct Lincoln Park to purchase shares of our common stock, subject to limitations in both volume and dollar amount. The purchase price of the shares that may be sold to Lincoln Park under the agreement is the lower of (i) the lowest sale price on the date of purchase, or (ii) the average of the three lowest closing prices in the prior 12 business days. There are no restrictions on future financings, rights of first refusal, participation rights, penalties or liquidated damages other than a prohibition on entering into a “Variable Rate Transaction,” as defined in the agreement. This agreement replaced the August 2017 agreement with Lincoln Park. Concurrently with the Purchase Agreement, we entered into a Registration Rights Agreement, pursuant to which we filed a registration statement on Form S-1 with the SEC on April 10, 2020. This registration statement was declared effective on April 21, 2020, and as of April 29, 2020, we commenced regular purchases under the agreement. The Purchase Agreement replaced a similar agreement with Lincoln Park dated August 2017.

 

During the three months ended March 31, 2021 and 2020, we sold 12,455,619 and 3,198,358 shares to Lincoln Park, and received $2,001,000 and $545,000 in gross and net proceeds. Subsequent to March 31, 2021, we continue to draw on the Purchase Agreement for working capital from time to time (see Note 13).

 

 

BIOLARGO, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

2020 Unit Offering

 

During the three months ended March 31, 2021, pursuant to an offering commenced in May 2020, we sold 875,000 shares of our common stock and received $105,000 in gross and net proceeds from three accredited investors. In addition to the shares, we issued each investor a six-month and a five-year warrant to purchase additional shares (see Note 6, “Warrants Issued in 2020 Unit Offering”).

 

Note 4. Debt Obligations

 

The following table summarizes our debt obligations outstanding as of March 31, 2021, and December 31, 2020 (in thousands). The table does not include debt obligations of our partially owned subsidiary Clyra Medical (see Note 9, “Debt Obligations of Clyra Medical”).

 

 

⁽¹⁾ This note was converted at maturity (see Note 13).

 

For the three months ended March 31, 2021 and 2020, we recorded $93,000 and $757,000, respectively, of interest expense related to the amortization of discounts on convertible notes payable, coupon interest from our convertible notes and line of credit.

 

The following discussion includes debt instruments to which amendments were made or included other activity that management deemed appropriate to disclose. Each of the debt instruments contained in the above table are disclosed more fully in the financial statements contained in the Company’s Form 10-K filed March 30, 2021.

 

Cash payment of debt obligations

 

On March 1, 2021, we paid in cash the outstanding principal of $600,000, and $7,000 in accrued interest, on the promissory note issued August 9, 2019, and scheduled to mature on August 9, 2021.

 

On March 1, 2021, we paid in cash the outstanding principal of $50,000, and $1,000 in accrued interest, on the remaining amount due on a line of credit in which was due on demand at any time after September 1, 2019. There is no remaining balance on this line of credit, and we no longer have the ability to draw on the line of credit.

 

Amendment to Note payable matures on 60 days’ notice (or March 8, 2023)

 

On March 1, 2021, we and the holder of a $50,000 note payable modified the note to set a specific maturity date of March 1, 2023, and allow the investor to convert the note to our common stock at a price of $0.16 per share. In lieu of interest during the extended period of the note, we issued the investor a warrant to purchase 225,000 shares of our common stock at $0.16 per share for a period of five years. (See Note 6).

 

 

BIOLARGO, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Note 5. Share-Based Compensation

 

Issuance of Common Stock in exchange for payment of payables

 

Payment of Officer Salaries

 

On March 31, 2021, we issued 137,364 shares of our common stock at $0.23 per share in lieu of $31,000 of accrued and unpaid salary to our officers.

 

On March 31, 2020, we issued 648,755 shares of our common stock at $0.17 per share in lieu of $110,000 of accrued and unpaid salary to our officers.

 

Payment of Consultant Fees

 

On March 31, 2021, we issued 610,123 shares of our common stock at $0.23 per share in lieu of $81,000 of accrued and unpaid obligations to consultants.

 

On March 31, 2020, we issued 390,735 shares of our common stock at a range of $0.17 per share in lieu of $67,000 of accrued and unpaid obligations to consultants.

 

Payment of Accrued Interest

 

On March 31, 2020, we issued 19,278 shares of our common stock at $0.17 per share in lieu of $4,000 of accrued interest.

 

Stock Option Expense

 

During the three months ended March 31, 2021 and 2020, we recorded an aggregate $424,000 and $320,000, in selling general and administrative expense related to the issuance of stock options. We issued options through our 2018 Equity Incentive Plan, our now expired 2007 Equity Incentive Plan, and outside of these plans. See Note 9 for information on stock option expense for options issued by subsidiary Clyra Medical.

 

2018 Equity Incentive Plan

 

On June 22, 2018, our stockholders adopted the BioLargo 2018 Equity Incentive Plan (“2018 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 for a period of 10 years. Our Board of Director’s Compensation Committee administers this plan. As plan administrator, the Compensation Committee has sole discretion to set the price of the options. The plan authorizes the following types of awards: (i) incentive and non-qualified stock options, (ii) restricted stock awards, (iii) stock bonus awards, (iv) stock appreciation rights, (v) restricted stock units, and (vi) performance awards. The total number of shares reserved and available for awards pursuant to this Plan as of the date of adoption of this 2018 Plan by the Board is 40 million shares. The number of shares available to be issued under the 2018 Plan increases automatically each January 1^st by the lesser of (a) 2 million shares, or (b) such number of shares determined by our Board.

 

Activity for our stock options under the 2018 Plan for the three months ended March 31, 2021 and March 31, 2020, is as follows:

 

 

(1) Aggregate intrinsic value based on closing common stock price of $0.23 at March 31, 2021.

 

 

 

BIOLARGO, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

The options granted to purchase 1,217,670 shares during the three months ended March 31, 2021 were issued to an officer, board of directors, employees and consultants: (i) we issued options to purchase 300,000 shares of our common stock at an exercise price on the respective grant date of $0.17 per share to our CFO as described below; (ii) we issued options to purchase 296,704 shares of our common stock at an exercise price on the respective grant date of $0.23 per share to members of our board of directors for services performed, in lieu of cash; the fair value of these options totaled $65,000 and is recorded as selling, general and administrative expenses; (iii) we issued options to purchase 407,713 shares of our common stock to employees as part of an employee retention plan at an exercise price on the respective date of $0.23 per share; the fair value of employee retention plan options totaled $89,000 and will vest quarterly over four years as long as they are retained as employees; and (iv) we issued options to purchase 213,253 shares of our common stock to consultants and employees in lieu of cash for unpaid obligations totaling $37,000. All stock option expense is recorded on our consolidated statement of operations as selling, general and administrative expense.

 

Chief Financial Officer Contract Extension

 

On March 17, 2021, we and our Chief Financial Officer Charles K. Dargan, II, formally agreed to extend the engagement agreement dated February 1, 2008 (the “Engagement Agreement”, which had been previously extended multiple times), pursuant to which Mr. Dargan has been and continues to serve as the Company’s Chief Financial Officer. The Engagement Extension Agreement dated as of February 25, 2020 (the “Engagement Extension Agreement”) provides for an additional term to begin retroactively on October 1, 2019, and to expire January 31, 2021 (the “Extended Term”).

 

As compensation for the Extended Term, Mr. Dargan was issued an option (“Option”) to purchase 300,000 shares of our common stock. The Option vests over the period of the Extended Term, with 50,000 shares having vested as of March 31, 2021, and the remaining 250,000 shares to vest monthly through January 31, 2022, so long as the agreement is in full force and effect. The Option is exercisable at $0.23 per share, the closing price of our common stock on March 17, 2021, expires ten years from the grant date, and was issued pursuant to the 2018 Equity Incentive Plan. The fair value of these options totaled $49,000, which expense is recorded ratably over the twelve-month agreement term.

 

The Option is Mr. Dargan’s sole compensation for the Extended Term. As was the case in all prior terms of his engagement, there is no cash component of his compensation for the Extended Term. Mr. Dargan is eligible to be reimbursed for business expenses he incurs in connection with the performance of his services as the Company’s Chief Financial Officer (although he has made no such requests for reimbursement in the past). All other provisions of the Engagement Agreement not expressly amended pursuant to the Engagement Extension Agreement remain the same, including provisions regarding indemnification and arbitration of disputes.

 

2007 Equity Incentive Plan

 

On September 7, 2007, and as amended April 29, 2011, the BioLargo, Inc. 2007 Equity Incentive Plan (“2007 Plan”) was adopted 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 for a period of 10 years, which expired on September 7, 2017. The Board’s Compensation Committee administers this plan. As plan administrator, the Compensation Committee has sole discretion to set the price of the options. As of September 2017, the Plan was closed to further stock option grants.

 

 

BIOLARGO, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Activity for our stock options under the 2007 Plan for the three months ended March 31, 2021 and 2020 is as follows:

 

 

(1) – Aggregate intrinsic value based on closing common stock price of $0.23 at March 31, 2021.

 

Non-Plan Options issued

 

During the three months ended March 31, 2021, we issued an option to purchase 43,956 shares of our common stock at $0.23 per share to a vendor for services. The fair value of these options total $10,000 and is recorded in our selling, general and administrative expense.

 

During the three months ended March 31, 2020, we issued options to purchase 292,437 shares of our common stock at exercise prices ranging between $0.17 – $0.21 per share to vendors for fees for service. The fair value of the options issued totaled $50,000, is recorded in our selling, general and administrative expense.

 

Activity of our non-plan stock options issued for the three months ended March 31, 2021 and 2020 is as follows:

 

 

(1) – Aggregate intrinsic value based on closing common stock price of $0.23 at March 31, 2021.

 

 

BIOLARGO, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Note 6. Warrants

 

We issued warrants to purchase our common stock, at various prices for the three months ended March 31, 2021 and 2020, is as follows:

 

 

(1)

– Aggregate intrinsic value based on closing common stock price of $0.23 at March 31, 2021.

 

Warrants issued in 2020 Unit Offering

 

During the three months ended March 31, 2021, pursuant to our 2020 Unit Offering (see Note 3), we issued six-month stock purchase warrants to purchase an aggregate 875,000 shares of our common stock at $0.14 per share, and five-year stock purchase warrants to purchase an aggregate 875,000 shares of our common stock at $0.18 per share.

 

Amendment to Note payable matures on 60 days’ notice (or March 8, 2023)

 

On March 1, 2021, we and the holder of a $50,000 note payable modified the note to set a specific maturity date of March 1, 2023, and allow the investor to convert the note to our common stock at a price of $0.16 per share. In lieu of interest during the extended period of the note, we issued the investor a warrant to purchase 225,000 shares of our common stock at $0.16 per share for a period of five years.  The fair value of these warrants totaled $35,000 and is recorded as a debt discount on our consolidated balance sheets, of which amount will be amortized to interest expense over the two-year term of the debt.

 

Fair Value – Interest Expense

 

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 relative fair values are amortized over the life of the warrant. For the determination of expense of warrants issued for services, extinguishment of debt and settlement, management also uses the option-pricing model. The principal assumptions we used in applying this model were as follows:

 

 

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 life in years is based on the contract term of the warrant.

 

Note 7. Accounts Payable and Accrued Expenses

 

Accounts payable and accrued expenses included the following (in thousands):

 

 

 

BIOLARGO, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Accounts payable and accrued expenses includes ordinary business payables incurred by the Company and its operational subsidiaries. See Note 9, “Accounts Payable and Accrued Expenses”, for the accounts payable and accrued expenses of Clyra Medical.

 

Note 8. In-process Research and Development

 

On September 26, 2018, BioLargo and Clyra Medical entered into a transaction (the “Scion Transaction”) whereby BioLargo would acquire, and then license back to Clyra, the intangible assets of Scion Solutions, LLC (“Scion”), and in particular its in-process research and development of the “SkinDisc,” a method for treating advanced hard-to-treat wounds including diabetic ulcers. In addition to a pending patent application, the assets included the technical know-how and data developed by the Scion team.

 

Note 9. Noncontrolling Interest – Clyra Medical

 

As discussed in Note 2, we consolidate the operations of our partially owned subsidiary Clyra Medical, of which we owned 45% of its outstanding shares as of March 31, 2021.

 

Acquisition of In-process Research and Development

 

On September 26, 2018, Clyra Medical entered into a transaction with Scion Solutions, LLC, for the purchase of its intellectual property, including its SkinDisc. The consideration provided to Scion is subject to an escrow agreement (“Escrow Agreement”) and earn out provisions and includes: (i) 21,000 shares of the Clyra Medical common stock; (ii) 10,000 shares of Clyra Medical common stock redeemable for 7,142,858 BioLargo common shares (detailed below); and (iii) a promissory note in the principal amount of $1,250,000 to be paid through new capital investments and revenue, as detailed below. This consideration was initially held in escrow pending Clyra Medical raising $1 million “base capital” to fund its business operations.

 

On December 17, 2018, the parties entered into a closing agreement (“Closing Agreement”) reflecting the satisfaction of the obligation to raise $1 million “base capital” at that time, one-half of the shares of Clyra Medical common stock exchanged for the Scion assets were released to Scion. The remaining Clyra Medical common shares (a total of 15,500 shares) remain subject to the Escrow Agreement’s performance metrics, each vesting one-fifth of the remaining shares of common stock: (a) notification of FDA premarket clearance of certain orthopedics products, or recognition by Clyra Medical of $100,000 gross revenue; (b) the recognition by Clyra Medical of $100,000 in aggregate gross revenue; (c) the granting of all or any part of the patent application for the SkinDisc product, or recognition by Clyra Medical of $500,000 in gross revenue; (d) recognition by Clyra Medical of $1 million in aggregate gross revenue; and (e) recognition by Clyra Medical of $2 million in gross revenue.

 

Debt Obligations of Clyra Medical

 

Note Payable (Scion)

 

In conjunction with the transaction in which certain intellectual property was purchased from Scion, Clyra issued a promissory note to Scion in the principal amount of $1,250,000 on September 26, 2018 (“Clyra-Scion Note”), accruing interest at an annual rate of 5%. Clyra is obligated to make principal and interest payments periodically, based on a percent (25%) of investment proceeds, and 5% of revenues. Payments are due annually each June 26th until paid. At March 31, 2021 and December 31, 2020, the balance due on the Clyra Medical Note Payable totaled $1,007,000.

 

Inventory Line of Credit

 

On June 30, 2020, Clyra entered into a one-year Revolving Line of Credit Agreement whereby Vernal Bay Capital Group, LLC committed to provide a $1,000,000 inventory line of credit to Clyra.  Clyra has received $260,000 in draws since the inception of the line of credit.

 

Clyra is required to use funds from the line of credit to produce inventory. Additional draws are conditional upon Clyra presenting invoices or purchase orders to the lender equal to the greater of one-half of principal outstanding on the line of credit, and $200,000.  The line of credit note earns interest at 15%, matures in one year, and requires Clyra pay interest and principal from gross product sales. For the first 180 days, on a monthly basis, Clyra is required to pay 30% of gross product sales to reduce amounts owed, and thereafter 60% of gross sales. Clyra issued Vernal Bay 323 shares of its common stock as a commitment fee for the line of credit, valued at $70,000. A security agreement of the same date grants Vernal Bay a security interest in Clyra’s inventory, as that term is defined in the Uniform Commercial Code. Clyra may prepay the note at any time.

 

 

BIOLARGO, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

During the three months ended March 31, 2021, we made payments on the line of credit totaling $24,000. As of March 31, 2021, the balance outstanding on this line of credit totals $200,000. (See Note 13.)

 

Clyra Medical Equity transactions

 

As of March 31, 2021, Clyra Medical had the following common and preferred shares outstanding:

 

Notes:

 

(1)

Does not include an additional 9,300 shares held in escrow subject to performance metrics that have not been met.

 

Sales of Common Shares

 

During the three months ended March 31, 2021, Clyra raised $50,000 at $310 per Clyra share.

 

Stock Options

 

Clyra issues options to its employees and consultants in lieu of compensation owed on a regular basis. As of December 31, 2020, the Company had issued options to purchase 11,411 shares of Clyra stock. During the three months ended March 31, 2021 and 2020, Clyra issued options to purchase 777 and 1,945 shares of its common stock. Each option issued has an exercise price of $1.00 per share, are vested upon issuance and an expiration date 10 years from the date of grant. The fair value of the options issued in in the three months ended March 31, 2021 and 2020 totaled $161,000 and $420,000. We used the Black-Scholes model to calculate the initial fair value, assuming a stock price on date of grant of $310 per share. Because Clyra is a private company with no secondary market for its common stock, the resulting fair value was discounted by 30%.

 

Clyra Accounts Payable and Accrued Expenses

 

Clyra had the following accounts payable and accrued expenses as follows: 

 

 

 

 

Note 10. BioLargo Engineering, Science and Technologies, LLC

 

In September 2017, we commenced a full-service environmental engineering firm and formed a Tennessee entity named BioLargo Engineering, Science & Technologies, LLC (“BLEST”). In conjunction with the start of this subsidiary, we entered into a three-year office lease in the Knoxville, Tennessee area, and entered into employment agreements with six scientists and engineers. (See Note 11, “Business Segment Information”.) The company was capitalized with two classes of membership units: Class A, 100% owned by BioLargo, and Class B, held by management of BLEST, and which initially have no “profit interest,” as that term is defined in Tennessee law. However, over the succeeding five years, the Class B members can earn up to a 30% profit interest. They also have been granted options to purchase up to an aggregate 1,750,000 shares of BioLargo, Inc. common stock. The profit interest and option shares are subject to a five year vesting schedule tied to the performance of the subsidiary, including gross revenue targets that increase over time, obtaining positive cash flow by March 31, 2018 (which was not met), collecting 90% of its account receivables, obtaining a profit of 10% in its first year (and increasing in subsequent years), making progress in the scale-up and commercialization of our AOS system, and using BioLargo research scientists (such as our Canadian team) for billable work on client projects. These criteria are to be evaluated annually by BLEST’s compensation committee (which includes BioLargo’s president, CFO, and BLEST’s president), beginning September 2018. Given the significant performance criteria, the Class B units and the stock options will only be recognized in compensation expense if or when the criteria are satisfied.

 

 

BIOLARGO, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Note 11. Business Segment Information

 

BioLargo currently has four operating business segments, plus its corporate entity, which is responsible for general corporate operations, including administrative functions, finance, human resources, marketing, legal, etc. The four operational business segments are:

 

1.

ONM Environmental, Inc. (“ONM”) -- which sells odor and volatile organic control products and services(located in Westminster, California);

2.

Clyra Medical Technologies (“Clyra”) -- which develops and sells medical products based on our technologies;

3.

BLEST -- which provides professional engineering services on a time and materials basis for outside clients and supports our internal operations as needed (located in Oak Ridge, Tennessee); and

4.

BioLargo Water (“Water”) -- which historically focused entirely on R&D, and has now shifted its focus to commercializing the AOS technology (located in Edmonton, Alberta Canada).

 

Historically, none of our operating business units have operated at a profit and therefore each required additional cash to meet its monthly expenses. The additional sources of the cash to fund the shortfall from operations of ONM, BLEST and BioLargo Water have been provided by BioLargo’s sales of debt or equity, research grants, and tax credits. Clyra Medical has been funded by third party investors who invest directly in Clyra Medical in exchange for equity ownership in that entity.

 

The segment information for the three months ended March 31, 2021 and 2020, is as follows (in thousands):

 

 

 

 

BIOLARGO, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

 

 

 

Note 12. Commitments and Contingencies

 

Office Leases

 

We have long-term operating leases for office, industrial and laboratory space in Westminster, California, Oak Ridge, Tennessee, and Alberta, Canada. Payments made under operating leases are charged to the Consolidated Statement of Operations and Comprehensive Loss on a straight-line basis over the term of the operating lease agreement. For the three months ended March 31, 2021 and 2020, rental expense was $56,000 and $55,000, respectively.  As of March 31, 2021, our weighted average remaining lease term is three years and the total remaining operating lease payments is $479,000.

 

On January 1, 2019, we adopted ASC 842 which resulted in a right-of-use asset and lease liability. Short-term leases are not included in our analysis. The adoption resulted in an immaterial cumulative effect of an accounting change that was not recorded.  The lease of our Westminster facility qualifies for the new treatment; it originated in August 2016, was originally scheduled to expire August 2020, contains a yearly escalation of 3%, and includes a four-year renewal option whereby the base rent is adjusted to then market value. During 2020, we exercised our option to extend the lease for four years. It is too early for management to determine if it will extend another four years, therefore the additional four-year extension is not included in the analysis. The lease of our Oak Ridge, Tennessee facility also qualifies, and it had one three-year extension to September 2022, and has one renewal option for another five years where the rental rate would adjust to greater of the current price and fair market value. No determination has been made whether to exercise the five-year renewal option for the Oak Ridge facility. The lease of our Canadian facility is less than one year. None of our leases have additional terms related to the payments or mechanics of the lease. The leases have no additional payment terms such as common area maintenance payments, tax sharing payments or other allocable expenses. Likewise, the leases do not contain other terms and conditions of use, such as variable lease payments, residual value guaranties or other restrictive financial terms. Since there is no explicit interest rate in our leases, management used its incremental borrowing rate, which is estimated to be 18% to determine lease liability.  

 

Note 13. Subsequent Events.

 

Management has evaluated subsequent events through the date of the filing of this Annual Report and management noted the following for disclosure.

 

Unit Offering Investment

 

From April 1, 2021, through May 12, 2021, we received one investment in our 2020 Unit Offering (see Note 3) of $50,000 and issued 285,714 shares of common stock, a six-month warrant to purchase 285,714 shares of common stock, and a five-year warrant to purchase 285,714 shares of common stock.

 

Sales to Lincoln Park

 

From April 1, 2021, through May 12, 2021, we sold 2,658,955 shares of our common stock to Lincoln Park and received $454,000 in gross proceeds. (See Note 3.)

 

Conversion of Debt due April 2021

 

On its maturity date of April 20, 2021, we converted to equity a promissory note in the principal balance of $100,000, plus $9,995 of accrued interest, into 448,706 shares of our common stock.

 

Extension of Clyra Line of Credit

 

Subsequent to March 31, 2021, Clyra and the holder of its inventory line of credit (See Note 9) extended the maturity date to June 30, 2022.