BIOLARGO, INC. - Quarter Report: 2022 March (Form 10-Q)

BIOLARGO, INC.

FORM 10-Q

INDEX

PART I

PART II

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

BIOLARGO, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

AS OF MARCH 31, 2022 AND DECEMBER 31, 2021

(in thousands, except for per share data)

The accompanying notes are an integral part of these unaudited consolidated financial statements.

BIOLARGO, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

FOR THE THREE MONTHS ENDED MARCH 31, 2022 AND 2021

(in thousands, except for share and per share data)

(unaudited)

The accompanying notes are an integral part of these unaudited consolidated financial statements.

BIOLARGO, NC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (DEFICIT)
FOR THE THREE MONTHS ENDED MARCH 31, 2022 AND 2021

(in thousands, except for share data)

(unaudited)

The accompanying notes are an integral part of these unaudited consolidated financial statements.

BIOLARGO, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2022 AND 2021

(in thousands, except for per share data)

(unaudited)

The accompanying notes are an integral part of these unaudited consolidated financial statements.

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 majority 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, 2022, we had a net loss of $1,544,000, used $1,140,000 cash in operations, and at March 31, 2022, we had working capital of $804,000, and current assets of $2,048,000. During the three months ended March 31, 2022, we generated revenues of $965,000. (See Note 9.)  Only one of our subsidiaries – ONM Environmental – generated positive operating income. None of our other operational subsidiaries did so.

We do not believe gross profits in the year ended December 31, 2022, will be sufficient to fund our current level of operations, and therefore believe we will have to obtain further investment capital to continue to fund operations, such as through our purchase agreement with Lincoln Park Capital, and private sales of our securities. (See Note 3.) We have been, and anticipate that we will continue to be, limited in terms of our capital resources.

If we are unable to rely on our current arrangement with Lincoln Park to continue to fund our working capital requirements, we will 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.

The foregoing factors raise substantial doubt about our ability to continue as a going concern, unless we are able to continue to raise funds through stock sales to Lincoln Park or other private financings, and in the long term, our ability to 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 89% of BioLargo Engineering Science and Technologies, LLC (“BLEST”), organized under the laws of the State of Tennessee in 2017. We also own 58% 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 8).

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, 2022, are not necessarily indicative of the results that may be expected for the year ending December 31, 2022, 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 31, 2022.

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, and partially-owned subsidiaries BLEST and Clyra Medical. All intercompany accounts and transactions have been eliminated.

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.

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, 2022 and December 31, 2021, 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, 2022 was $12,000 and December 31, 2021, 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, 2022 and 2020, the following customers accounted for more than 10% of consolidated revenues:

We had two customers that each accounted for more than 10% of consolidated accounts receivable at March 31, 2022, and two customers at December 31, 2021, 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, 2022, and December 31, 2021, was $3,000. Inventories consisted of (in thousands):

Other Assets

Other non-current assets consisted of (i) security deposits of $35,000 related to our business offices, and (ii) three patents for $34,000, and contract assets related to ongoing projects of our BLEST subsidiary totaling $29,000.

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, 2022 and March 31, 2021 the joint venture incurred a loss and our 40% ownership share reduced our investment interest by $8,000 and $10,000, respectively.

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, 2022 and 2021, management determined that there was no impairment of its long-lived assets, including its patents.

Nevertheless, for the year ended December 31, 2021, management determined that there was an impairment expense related to the sale back to Scion Solutions, LLC (“Scion’) of certain intellectual property, recorded on our balance sheet as “In-Process Research and Development” and an impairment of Clyra’s prepaid marketing.  Total impairment expense for 2021 was $342,000.

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, 2022 and 2021, 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.

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, 2022 and 2021:

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.

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. We recognized $118,000 in the three months ended March 31, 2022, from contracts, of which $89,000 had a deferred liability balance as of December 31, 2021. As of March 31, 2022, we have a contract receivable totaling $29,000, recorded in other assets on our balance sheet. 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.

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.

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, 2022, and December 31, 2021.

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, 2022. 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, 2022 and December 31, 2021, 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, 2022, the right of use assets on our balance sheet related to our operating leases totals $421,000.

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

During the three months ended March 31, 2022 and 2021, we sold 1,506,821 and 12,455,619 shares to Lincoln Park, and in exchange received $346,000 and $2,001,000 in gross and net proceeds, respectively.

2020 Unit Offering

During the three months ended March 31, 2022, pursuant to an offering commenced in May 2020, we sold 5,196,968 shares of our common stock and received $856,000 in gross and net proceeds from eleven 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”).

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. Inaddition 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, 2022, and December 31, 2021 (in thousands). The table does not include debt obligations of our partially owned subsidiary Clyra Medical (see Note 8, “Debt Obligations of Clyra Medical”).

For the three months ended March 31, 2022 and 2021, we recorded $4,000 and $93,000, 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, 2022.

SBA Program Loans

In  April 2020, our subsidiaries ONM Environmental, BLEST and Clyra Medical received $218,000, $96,000 and $43,000, respectively, in loans pursuant to the Small Business Association’s (“SBA”) Paycheck Protection Program (“PPP”). The loans mature two years from the inception date (although any payments due are deferred once a forgiveness application has been filed), and incur interest at 1%. Management believes that it has fully complied with the terms of forgiveness as set forth by the SBA, and each subsidiary has filed forgiveness applications.  On February 7, 2022, we received notice that the SBA had partially approved ONM Environmental's application for forgiveness of its PPP loan in the amount of $174,000; ONM has appealed and provided additional documentation to support forgiveness of the remaining $44,000. The forgiveness application of BLEST remains pending. On March 19, 2021, we received notice that the SBA had approved the application for forgiveness Clyra’s PPP loan.

Note 5. Share-Based Compensation

Issuance of Common Stock in exchange for payment of payables

Payment of Officer Salaries

No shares were issued as payment of officer salary in the three month period March 31, 2022.

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.

Payment of Consultant Fees

On March 31, 2022, we issued 86,752 shares of our common stock at $0.23 per share in lieu of $17,000 of accrued and unpaid obligations to consultants.

On March 31, 2021, we issued 610,123 shares of our common stock at $0.23 per share in lieu of $80,000 of accrued and unpaid obligations to consultants.

Stock Option Expense

During the three months ended March 31, 2022 and 2021, we recorded an aggregate $660,000 and $424,000, 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 8 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, 2022 and 2021, is as follows:

The options granted to purchase 2,621,229 shares during the three months ended March 31, 2022 were issued to officers, board of directors, employees and consultants: (i) we issued options to purchase 39,848 shares of our common stock at an exercise price on the respective grant date of $0.23 per share to our CFO and President to replace options that had expired; (ii) we issued options to purchase 444,092 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 $96,000; (iii) we issued options to purchase 1,690,257 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 $362,000 and will vest quarterly over four years as long as they are retained as employees; and (iv) we issued options to purchase 447,032 shares of our common stock to consultants in lieu of cash for expiring options and per agreement totaling $97,000. All stock option expense is recorded on our consolidated statement of operations as selling, general and administrative expense.

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; (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.

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.

Activity for our stock options under the 2007 Plan for the three months ended March 31, 2022 and 2021 is as follows:

(1) – Aggregate intrinsic value based on closing common stock price of $0.23 at March 31, 2022.

Non-Plan Options issued

During the three months ended March 31, 2022, we issued an option to purchase 32,609 shares of our common stock at $0.23 per share to a vendor for services. The fair value of these options total $7,000 and is recorded in our selling, general and administrative expense.

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.

Activity of our non-plan stock options issued for the three months ended March 31, 2022 and 2021 is as follows:

(1) – Aggregate intrinsic value based on closing common stock price of $0.23 at March 31, 2022.

Note 6. Warrants

We issued warrants to purchase our common stock, at various prices for the three months ended March 31, 2022 and 2021, is as follows:

Warrants issued in 2020 Unit Offering

During the three months ended March 31, 2022, pursuant to our 2020 Unit Offering (see Note 3), we issued six-month stock purchase warrants to purchase an aggregate 5,196,968 shares of our common stock at $0.21 per share, and five-year stock purchase warrants to purchase an aggregate 5,196,968 shares of our common stock at $0.25 per share.

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.

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):

Accounts payable and accrued expenses includes ordinary business payables incurred by the Company and its operational subsidiaries. See Note 8, “Accounts Payable and Accrued Expenses”, for the accounts payable and accrued expenses of Clyra Medical.

Note 8. Noncontrolling Interest – Clyra Medical

We consolidate the operations of our partially owned subsidiary Clyra Medical, of which we owned 58% of its outstanding shares as of March 31, 2022.

BioLargo and its partially owned subsidiary Clyra Medical entered into an agreement dated  March 3, 2022, whereby BioLargo agreed to convert $633,000 in working capital advances, made to or on behalf of Clyra Medical, into 2,042 shares of Clyra Medical common stock at a rate of $310 per share.

Debt Obligations of Clyra Medical

Inventory Line of Credit

On  June 30, 2020, Clyra Medical entered into a Revolving Line of Credit Agreement whereby Vernal Bay Capital Group, LLC committed to provide a $1,000,000 inventory line of credit. Clyra Medical received $260,000 in draws and made repayments totaling $83,000. As of  March 31, 2022, the balance outstanding on this line of credit totals $177,000. Funds from the line of credit must be used to produce inventory. Additional draws are conditional upon the presentation of 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 on June 30, 2022, and requires Clyra pay interest and principal from gross product sales. Clyra is required to pay 60% of gross product sales to reduce amounts owed on the line of credit. 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.

Clyra Medical other asset

On  December 30, 2015, Clyra entered into a consulting agreement with Beach House Consulting, LLC, through which Jack B. Strommen will be providing consulting services to Clyra related to its sales and marketing activities, and in exchange receive $23,000 per month for a period of four years. On  June 30, 2020, at Clyra’s request, Beach House Consulting agreed to accept 3,639 shares of Clyra common stock, in lieu of cash, as full prepayment of the consulting fee. The obligation to provide the consulting services is dependent on Clyra generating an average of $250,000 in monthly sales over three consecutive months, which has not been met. The value of the shares issued to Beach House were higher but the asset was impaired in 2021, the asset totals $591,000 and is recorded as a non-current asset on our balance sheet.

Clyra Medical Equity transactions

As of March 31, 2022, Clyra Medical had the following common shares outstanding:

Sales of Common Shares

There were no sales of Clyra shares during the three months ended March 31, 2022.

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, 2021, the Company had issued options to purchase 14,004 shares of Clyra stock. During the three months ended March 31, 2022 and 2021, Clyra issued options to purchase 648 and 777 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, 2022 and 2021 totaled $141,000 and $161,000. 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%. We also used a risk-free rate of 2.32%, a volatility of 40% and an expected life of 10 years.

Clyra Accounts Payable and Accrued Expenses

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

Note 9. 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:

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, 2022 and 2021, is as follows (in thousands):

Note 10. 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, 2022 and 2021, rental expense was $63,000 and $56,000, respectively.  As of March 31, 2022, our weighted average remaining lease term is four years and the total remaining operating lease payments is $670,000.

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. 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 expires August 2024. It is too early for management to determine if it will exercise its option to extend the lease four years, therefore the 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. Management determined that it will 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 11. Subsequent Events.

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

Unit Offering Investments

On April 19, 2022, we sold 3,723,077 shares of our common stock to four investors and received $726,000 in gross and net proceeds. Each investor received two stock purchase warrants: (i) a warrant expiring six months after the investment date allowing for the purchase of the number of shares the investor purchased, for $0.234 per share, and (ii) a warrant expiring five years after the investment date allowing for the purchase of the number of shares the investor purchased, for $0.2925 per share.

Item 2.                  Management’s Discussion and Analysis of Financial Condition and Results of Operations

This quarterly report on Form 10-Q contains forward-looking statements. These forward-looking statements involve risks and uncertainties, including statements regarding BioLargo’s capital needs, business plans and expectations. Such forward-looking statements involve risks and uncertainties regarding BioLargo’s ability to carry out its planned development and production of products. Forward-looking statements are made, without limitation, in relation to BioLargo’s operating plans, BioLargo’s liquidity and financial condition, availability of funds, operating and exploration costs and the market in which BioLargo competes. Any statements contained herein that are not statements of historical facts may be deemed to be forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “may”, “will”, “should”, “expect”, “plan”, “intend”, “anticipate”, “believe”, “estimate”, “predict”, “potential” or “continue”, the negative of such terms or other comparable terminology. Actual events or results may differ materially. In evaluating these statements, you should consider various factors, including the risks outlined in our Form most recent annual report on Form 10-K, and, from time to time, in other reports BioLargo files with the SEC. These factors may cause BioLargo’s actual results to differ materially from any forward-looking statement. BioLargo disclaims any obligation to publicly update these statements, or disclose any difference between its actual results and those reflected in these statements. The information constitutes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Given these uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.

Unless otherwise expressly stated herein, all statements, including forward-looking statements, set forth in this Form 10-Q are as of March 31, 2022, unless expressly stated otherwise, and we undertake no duty to update this information.

As used in this report, “we” and “Company” refers to (i) BioLargo, Inc., a Delaware corporation; (ii) its wholly-owned subsidiaries BioLargo Life Technologies, Inc., a California corporation, ONM Environmental, Inc., a California corporation, BioLargo Development Corp., a California corporation, and BioLargo Water Investment Group, Inc., a California corporation, and its wholly owned Canadian subsidiary BioLargo Water, Inc. (iii) its majority-owned subsidiary BioLargo Engineering, Science & Technologies, LLC, a Tennessee limited liability company; and (iv) Clyra Medical Technologies, Inc. (“Clyra”), a partially owned subsidiary.

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.

Our Business - Innovator and Solution Provider

BioLargo, Inc. invents, develops, and commercializes innovative platform technologies to solve challenging environmental problems like PFAS contamination, advanced water and wastewater treatment, industrial odor and VOC control, air quality control, infection control, and myriad environmental remediation challenges. Having conducted continual and extensive research and development, BioLargo holds a wide array of issued patents, maintains a robust pipeline of products, and provides full-service environmental engineering. We invent or acquire novel technologies and develop them to maturity through our operating subsidiaries using cutting-edge scientific and engineering methodologies. With a keen emphasis on partnerships with academic, government, and commercial organizations and associations, BioLargo has proven itself by executing on challenging environmental engineering projects, demonstrating its powerful technologies through pilots, trials, and early commercial adoption, publishing high-impact academic and industry publications, and winning over 90 grants. We monetize our innovations through direct sales and recurring service contracts, as well as through channel partnerships, meaning licensing agreements, exclusive and non-exclusive distribution agreements, brand development partnerships, sale referral partnerships, strategic joint venture formation, and/or the sale of the IP. Channel partnerships allow us to extend the commercial reach of our products and services disproportionately to our core infrastructure and staffing.

The past year held a shift in focus at BioLargo toward the development and commercial execution of several key business initiatives with the potential to generate significant organizational and revenue growth for the company. Three of these projects in particular represent the dominant catalysts for near-term monetization of our core technologies and engineering services: 1) the advancement of our PFAS removal system (the AEC, or “Aqueous Electrostatic Concentrator”) toward commercial trials with a Southern California municipal water agency and a federal government agency, 2) the design, manufacture, pre-trial testing, and preparation for field trials with first customers of a novel “minimal liquid discharge” wastewater treatment system in partnership with Garratt-Callahan, the largest privately held water treatment company in America with more than 100 years history, and 3) the manufacture and successful launch of a new pet odor control product based on BioLargo’s intellectual property launched by our partners at Ikigai Marketing Works, LLC, a venture aimed at building a national pet odor-control brand with distribution through big-box retailers to position for sale of the brand to a multi-national consumer products company. Additionally, our engineering services division has begun the initial phase of a large capital project in the cleantech and environmental technologies space - a waste-to-energy conversion plant in South America (see Waste-to-Energy Conversion Plant Project below).

Three main factors differentiate this past year from the years that preceded it for BioLargo. First, we have built our credibility as cleantech technology innovators and environmental engineering service providers to the point where industry stakeholders, clients, and prospective partners rightfully view us as an effective and reliable means to solve their challenges. This has resulted in what we believe will continue advancing to become high-revenue and profit generating projects with channel partners such as Garratt-Callahan and Ikigai. This “critical mass” of credibility as a cleantech solutions provider is a result of our investments in our talented team of engineers and scientists with a track record of executing complex engineering projects, and our history of developing creative and powerful new technologies. Secondly, our core patented water treatment technologies, the BioLargo Advanced Oxidation System (AOS) and Aqueous Electrostatic Concentrator (AEC), have now been demonstrated in successful pilot projects, either on-site at a prospective client’s facility, or in-house with client-provided contaminated waters. Both of these technologies are now primed for commercialization and monetization. Third, our multi-year effort to remove debt from our balance sheet has almost concluded, with only one $50,000 fixed-price convertible note due in 2023 remaining, along with covid-related low-interest U.S. Small Business Administration loans (not including debt owed by our partially owned subsidiary Clyra Medical Technologies).

In the first quarter of 2022, our subsidiary ONM Environmental generated net operating income of $187,000, as compared with a net operating loss in the first quarter of 2021 of $176,000, and our engineering subsidiary reduced its operating loss from $183,000 in the first quarter of 2021, to only $35,000 in this most recent quarter. Several factors contributed to this: 1) each subsidiary benefited from significant organic growth of contracts within its main target market, 2) both executed some larger projects as compared to prior experience, and 3) in the case of ONM Environmental, license royalties on products based on our intellectual property began to generate a larger amount of revenue. Of the Company’s other two subsidiaries, Clyra Medical Technologies is presently working to raise capital to support the marketing and sales of its newly launched Bioclynse product, and BioLargo Water is working to land the first commercial accounts for its innovative low-energy water treatment technology the BioLargo AOS. After years of investing heavily in research and development of our patented cleantech technologies (roughly $1.5 million in 2021 alone), we are at a turning point where our core assets are either seeing early fruits of commercialization or are now ready for monetization.

Formula for Success: Technology, Talent and Purpose

Technology

BioLargo has continually advanced its robust portfolio of technologies since the first acquisition of early iterations of the BioLargo technology in the spring of 2007. Our innovations have primarily been developed through our internal resources, and some through acquisition. These include patents, patents pending, and trade secrets that include solutions for:

Talent

We have steadily grown our team to 31 team members and numerous other part-time consultants, including highly qualified PhDs, engineers, MDs and medical professionals, construction professionals, field service technicians, innovators, sales marketing specialists, entrepreneurial and executive leadership.

Purpose

Our mission to make life better drives us to serve others with integrity, knowledge, technology, and solutions that protect the environment, improve quality of life, and protect lives. All our technologies were developed from the ground-up to be sustainable, practical solutions to significant global challenges. We are unique in our ability to tailor our offerings to serve our customers with proven expertise, proven technology and, if needed, we often have the ability to develop new technical solutions to meet our customer’s needs.

Combating the PFAS Forever-Chemical  Crisis – the AEC

One of the most significant and timely innovations in our portfolio is our PFAS removal and collection/disposal solution we call the Aqueous Electrostatic Concentrator (AEC). Our engineers developed and are now preparing to commercialize the AEC, which is a novel water treatment system that removes per- and poly-fluoroalkyl substances (PFAS) from water at a fraction of the operating cost and generating only a fraction of the PFAS-laden waste of the most common currently used solutions (carbon filtration, ion exchange, and reverse osmosis). PFAS chemicals have been linked to cancer, immune disorders, liver dysfunction, and many other human health problems, and are contained in a vast range of manufactured goods, common household products (e.g., cleaning products, cookware), and electronics, and contaminate drinking water in unsafe levels all over the globe.

PFAS is often referred to as the “contaminant of the decade”, and as such, it is considered a multi-billion dollar commercial market opportunity. The White House has named the PFAS crisis as a top policy agenda item and the EPA has and will continue to tighten the regulatory requirements to mitigate and manage and limit human exposure to PFAS, all of which will continue to push the market to find and adopt commercially viable solutions. Notably, some emerging regulations on PFAS in the U.S. are expected to skew the market toward seeking treatment technologies that produce as little PFAS-laden solid waste as possible, a favorable trend for our AEC that generates very little PFAS-laden waste. Detection of unsafe levels of PFAS around the world has given rise to a number of market opportunities, including in drinking water, industrial wastewater, municipal wastewater, solid waste, organic foods and more. 

We have successfully validated the AEC as an effective system to selectively extract and collect PFAS chemicals from contaminated water including performance testing that shows “non-detect” levels of removal. We have recently demonstrated more than six months of continuous operation showing no materially significant degradation of the AEC system’s components or performance over time. We have also successfully demonstrated that the AEC is scalable and functional to a commercial scale and that our engineering team has the experience and proven experience to successfully deliver commercial systems to meet the needs of a commercial installation and sale. Our team has a history of successful execution in the environmental remediation industry and the knowhow to successfully commercialize the AEC.

Equipped with a comprehensive set of data, including removal of PFAS chemicals to “non-detect” levels utilizing client-provided contaminated water, we have expanded our initial marketing of the AEC over the past six months and, through that process, have created a prospective list of commercial opportunities and projects that has provided critical affirmation for our value proposition for the customer market. The process has allowed us to learn from our prospective customers how to tailor our offering to best meet their needs, while at the same time it has created an ever-expanding list of commercial prospects that exceeds $90 million in total revenue potential, subject to our ability to stage in this level of growth. While these potential customers are considering other competing solutions (like carbon filtration, ion exchange and reverse osmosis systems), each of which have serious negative features, they are actively seeking an alternative like our AEC. Although we are highly encouraged and working to turn these prospective customers into clients, we are still at the early stage of the commercial process on each.

We are also currently negotiating with three channel partners and a number of prospective industrial customers to contract for revenue-generating projects to treat their PFAS.  Having completed our initial testing of client water (to “non-detect” levels) from a leading water district in southern California, we are working on a proposal to proceed with a commercial field trial. We are preparing a comprehensive plan for review with the agency to be delivered in the near future.

ONM Environmental – Industrial Odor and VOC Solutions

ONM Environmental, Inc. is BioLargo’s subsidiary that delivers robust and comprehensive products and services to control and mitigate odor and volatile organic compounds (“VOCs”) emitted from a variety of industrial activities, including landfills and other waste handling facilities. Its flagship product, CupriDyne® Clean, reduces and eliminates tough odors and VOCs in various industrial settings. CupriDyne Clean is delivered through misting systems, sprayers, water trucks and similar water delivery systems designed, manufactured and installed by ONM. We believe the product is the number-one performing odor-control product in the market, and that it offers substantial savings to our customers compared with competing products. In response to customer demand for expanded services, ONM Environmental now holds General, Electrical, Plumbing and Low Voltage contractor licenses issued by the California Contractors State License Board, and offers a menu of services to landfills, transfer stations, wastewater treatment facilities as well as facilities in non-waste related industries. These services include engineering design, construction, installation, ongoing maintenance and on-site support services to assist our clients in the implementation and continued use of the various systems that deliver our liquid products in the field (such as misting systems). 

ONM Environmental offers a deodorizing and sanitizing technology, called EcoMist®, that can be installed directly onto waste collection vehicles and automatically sprays odor control products and/or sanitizer into refuse bins or dumpsters during the waste collection process. EcoMist® is an “out-of-the-box” product, allowing customers to install the system themselves, and will thus not require a significant investment in logistics and servicing to support sales. ONM Environmental is focusing on selling the product to its current customers and garbage truck manufacturers.

We have been and expect to continue selling product to the largest solid waste handling companies in the country, with a portion of chemistry product sales resulting from national purchasing agreements (NPAs) with large waste handling companies. ONM Environmental also is currently servicing an exclusive three-year supply contract with a large municipality in Southern California for the delivery of CupriDyne Clean, which will provide a steady source of chemistry supply revenue for the company over the next three years.

In addition to growing its revenues organically through the sale of odor and VOC control chemistry and air quality control systems to its primary market segment (municipal solid waste handling in California), ONM Environmental aims to accelerate its growth through development of new sales and distribution channels. Some of these, including our partnership with Ikigai Marketing Works, LLC (see Consumer Products below) and our joint venture with BKT Co. Ltd. in South Korea (see South Korean Joint Venture) are already actively advancing toward their end-goal, which is to foster new distribution opportunities for our patented odor and VOC control chemistry without being limited by our own sales and distribution infrastructure. Additional new opportunities for distribution channels are presently being developed, including in new vertical market segments such as pulp and paper, wastewater, oil and gas, construction, and the auto industry, as well as in new geographical markets including South and Central America. Company management will provide more information on each of these emerging partnerships as they each become finalized.

Consumer Private-Label Products

Ikigai Marketing Works, LLC, which was founded by accomplished industry executives from the consumer-packaged goods industry who have executed successful launches of at least five blockbuster products, has licensed from us a CupriDyne-based household pet odor removal product and a laundry additive for pet related odors. After development of television commercials and a successful test marketing campaign, they have begun a national advertising campaign, and plan to launch the products in major retailers in the United States (e.g., Walmart, Target, etc.). Initial sales volume for the product has exceeded early expectations.

South Korean Joint Venture

On February 12, 2020, we executed a “Joint Venture Framework Agreement” with a leading wastewater treatment solution provider based in South Korea (BKT Co. Ltd., “BKT”), to create a South Korean entity that would manufacture odor and VOC control products based on our CupriDyne Clean products. We own 40% of the joint venture. Although the joint venture established manufacturing and is marketing the product, the COVID-19 pandemic significantly impacted the expected growth of the company, and continues to do so as the country of South Korea continues implementing measures to reduce infections. Management at Odin reports that while initial sales have required extraordinary efforts, continued testing and trial success has reinforced its confidence in continued expansion of sales for the future.

Full Service Environmental Engineering

Our subsidiary BioLargo Engineering, Science & Technologies, LLC (“BLEST”) offers full service environmental engineering to third parties and provides engineering support services to our internal teams to accelerate the commercialization of our technologies. Its website is found at www.BioLargoEngineering.com.

BLEST focuses its efforts in three areas:

The subsidiary is located in Oak Ridge (a suburb of Knoxville, Tennessee), and employs a group of scientists and engineers who collectively worked together for almost 30 years and experience in diverse engineering fields. The team is led by Randall Moore, who served as Manager of Operations for Consulting and Engineering for the Knoxville office of CB&I Environmental & Infrastructure and was formerly a leader at The Shaw Group, Inc., a Fortune 500 global engineering firm. The other team members are also former employees of CB&I and Shaw. The team is highly experienced across multiple industries and they are considered experts in their respective fields, including chemical engineering, wastewater treatment (including design, operations, data gathering and data evaluation), process safety, energy efficiency, air pollution, design and control, technology evaluation, technology integration, air quality management & testing, engineering management, permitting, industrial hygiene, applied research and development, air testing, environmental permitting, HAZOP review, chemical processing, thermal design, computational fluid dynamics, mechanical engineering, mechanical design, NEPDES permitting, RCRA/TSCA compliance and permitting, project management, storm water design & permitting, computer assisted design (CAD), bench chemistry, continuous emission monitoring system operator, data handling and evaluation and decommissioning and decontamination of radiological and chemical contaminated facilities. The engineering team also has developed an extended network of trusted engineering subcontractors that assist in serving specific client projects as needed, from time to time.

In association with Garratt-Callahan, a national industrial water treatment company, BLEST is developing a “minimal liquid discharge” wastewater treatment system based on Garratt-Callahan proprietary technology that would industrial wastewater discharge and therefore reduce wastewater discharge fees for customers. Garratt-Callahan is currently preparing to launch the MLD system to its customers. BLEST will serve as the manufacturing partner and Garratt Callahan will serve as the selling distributor to leverage their national sales force and over one hundred years of providing services and products to customers. BioLargo’s engineers finished building the first full-scale prototype of this new technology and tested it with Garratt-Callahan client provided water, with Garratt-Callahan technical staff present on-site at BLEST’s facility. In this “factory acceptance” testing, the system removed over 98% of the target contaminants from water provided by a Garratt-Callahan client in continuous operation, in line with results achieved by Garratt-Callahan’s original bench-scale and batch processing tests. This factory acceptance testing was a necessary step before commercial trials with Garratt-Callahan customers can begin. The first customer has already been identified, and initially the plan was to conduct an on-site field trial for that customer. Now, in collaboration with the technical team at Garratt-Callahan, we are recommending that a field trial is not required given the level of validation that has been done. We are working on contractual agreements to move the project forward to first sales.

Waste-to-Energy Conversion Plant Project

In April, our engineering subsidiary (BLEST) was hired to conduct a comprehensive project plan (i.e., “feasibility”) study by a Southern California based sustainable energy services company intending to build a waste-to-energy conversion plant in South America. The site of the proposed conversion plant is approximately 296 acres, where it is planned to process over two million tons of municipal solid waste annually. A feasibility study is typically the first step in the design process for a new project of this size, and will address multiple fundamental factors that will influence the design and operation of the anticipated facility, including technology options, rough costs to construct and operate, environmental impacts, and rough equipment sizing. The feasibility study would then inform and facilitate the development of a design basis document, then conceptual design, and ultimately the front-end engineering design. It is important to note that the term feasibility as used in this context does not involve any sort of technology trials to determine if they are workable, rather the comprehensive plan being prepared is to assist the developer in proper planning, permitting, budgeting for a very large project. Thus far, BioLargo’s engineers have been contracted on the feasibility study only, but expect to be involved in subsequent phases should the project move forward as planned. ONM Environmental was critical in bringing this project to the company and will work with BioLargo’s engineers to execute this project. ONM Environmental brings to the table a team with extensive expertise surrounding the design and operation of waste handling facilities, and BLEST brings a team of veteran engineers with decades of experience designing and integrating complex projects as well as specific expertise in the area of waste-to-energy conversion.

BioLargo Water and the Advanced Oxidation System – AOS

BioLargo Water is our wholly owned subsidiary located in Edmonton, Alberta, Canada, that developed and is commercializing our Advanced Oxidation water treatment system (AOS). The AOS is our patented water treatment device that generates highly oxidative and energetic species of iodine and other molecules which allow it to rapidly and effectively eliminate pathogenic organisms and organic contaminants as water passes through the device. The key value proposition of the AOS is its ability to reduce or eliminate a wide variety of waterborne contaminants with high performance while using very little electricity and input chemicals. This is made possible by the highly oxidative iodine compounds and reactive oxygen species generated within the AOS reactor as well as the unique and proprietary physical constitution and geometry of the reactor. Our proof-of-concept studies and on-site pilot projects have generated results that project the AOS will be more cost- and energy-efficient than commonly used advanced water treatment technologies such as UV, electro-chlorination, and ozonation. Furthermore, our technology has been proven capable of removing hard-to-treat organic micropollutants such as pharmaceuticals from water more quickly and energy-efficiently than other technologies. Together, these characteristics make the AOS an economical and versatile tool to enable wastewater treatment and reuse in the face of emerging water contaminants and increasing regulatory scrutiny on industrial wastewater discharge. The capabilities of the AOS as a sustainable water treatment technology have been the subject of several high-impact academic papers in scientific journals. The company pursues a policy of publishing about the technology in academic journals as much as possible in order to promote transparency about the technology’s safety and efficacy while also contributing to the field of advanced water treatment science.

BioLargo’s AOS water treatment technology has completed several pre-commercial demonstration pilots, including one at a poultry farm in Alberta, one at a microbrewery in Southern California, and another in Southern California where stormwater was treated by the AOS. It has an ongoing pilot near Montreal to treat municipal wastewater. It is our belief that once these pre-commercial pilots have concluded with the AOS, our ability to entice major water industry players to partner with BioLargo Water to accelerate market adoption of the AOS will be increased dramatically. Our team in Canada is in discussions with potential early adopters in the agriculture space, and has secured significant provincial and federal grant funding to help defray the cost of a first commercial project.

In the first quarter of 2022, BioLargo Water received a grant from Next Generation Manufacturing Canada (NGen) to support the company’s collaboration with a specialized electrical component designer to assist in optimizing the electrical performance of the AOS with the ultimate goal of maximizing the lifespan of the AOS’ components.

Municipal Wastewater Treatment Pilot – Montreal

Our commercial-scale AOS demonstration pilot (run in partnership with acclaimed water experts at the Centre des Technologies de L’Eau) at a municipal wastewater treatment plant near Montreal, Quebec, is ongoing and providing important data that shows the AOS is removing five target pharmaceuticals from the wastewater faster and using less electricity than the ultraviolet disinfections system used in the facility. Notably, the pilot project also showed that the AOS was able to also remove total coliforms (bacteria) from the municipal wastewater more effectively than the UV disinfection system currently in use at the facility.

Recently, BioLargo Water was awarded a grant from the government of Canada’s Natural Sciences and Engineering Research Council (NSERC) that allowed for the extension of the pilot project to allow for use of a new, higher flow-rate AOS system, as well as the installation of an AEC system at the pilot to assess its removal of PFAS chemicals from the municipality’s wastewater.  

Clyra Medical Technologies

Clyra Medical Technologies, Inc. is our partially owned subsidiary creating medical products based on our technology. It is launching a product to be used by surgeons generally, with a first target market aimed toward orthopedic surgeons for use as a wound irrigation solution and to help manage patient care and outcomes. Clyra has secured its first two hospital customers for the product, established a robust quality control system for FDA compliance, recruited a national director of sales, and is negotiating with three separate channel partners to form a commercial alliance. Its other product designs are on hold until such time as it is able to secure the capital and resources to complete any final development and support additional inventory, technical support and sales for these products. In March 2022, Clyra and BioLargo finalized an agreement with Scion Solutions, LLC, whereby the intellectual property (primarily, the SkinDisc) acquired in September 2018 was returned to Scion, and in exchange Scion forgave the outstanding principal and interest due on the promissory note owed by Clyra with an outstanding principal amount of $1,007,000, returned all its shares of Clyra common stock, and its two principals forgave $305,000 in accounts payable owed to them. In addition to the SkinDisc intellectual property, Scion received 2,000,000 of the 5,000,000 shares it had earned from the September 2018 sale of SkinDisc to Clyra/BioLargo. There are channel partnerships in development for Clyra’s BioClynse product in three separate healthcare markets.

Conclusion

In the past quarter, our company:

BioLargo has advanced its technologies and infrastructure to achieve a critical mass to capitalize on its commercial efforts and have a positive impact around the world with clean water, clean air, and infection control solutions. The company presents a scalable business model that targets high-impact cleantech market opportunities. We leverage our considerable scientific, engineering, and entrepreneurial talent to monetize our technologies and ensure high-quality customer service and increased revenue potential. We seek to unlock the value of our portfolio of disruptive technologies to advance our mission to “make life better” and continue creating shareholder value.

Results of Operations

We operate our business in distinct business segments:

Consolidated revenue for the three months ended March 31, 2022, was $965,000, which is a 69% increase over the same period in 2021. Our service revenue increased 180%, while revenue from product sales and related services increased by 37%. Our product revenue includes sales of our CupriDyne Clean industrial odor control product, and sales of private-label products based on our CupriDyne formula.

ONM Environmental

Our wholly-owned subsidiary ONM Environmental generates revenues through (i) sales of our flagship product CupriDyne Clean, including related design, installation, and maintenance services on the systems that deliver CupriDyne Clean at its clients’ facilities, and (ii) sale of private-label products to third parties.

Revenue (ONM Environmental)

ONM Environmental’s revenues for the three months ended March 31, 2022, were $598,000, an increase of $278,000 or 87% from the same period in 2021. The increase in revenues was due to an increase in the volume of sales of private label odor-control products, and an increase in license royalties. Because ONM Environmental has no control over the marketing and sales activity or levels of its private-label clients, it cannot predict sales volumes related to these clients in future periods. One client has indicated it intends to continue to increase the number of products it is purchasing from ONM Environmental in future periods.

Cost of Goods Sold (ONM Environmental)

ONM Environmental’s cost of goods sold includes costs of raw materials, contract manufacturing, and portions of depreciation, salaries and expenses related to the manufacturing and installation of its products. As a percentage of revenue, ONM Environmental’s costs of goods increased 6% in 2022, to 51%, compared to the same period in 2021. The increase in cost of goods is due to lower margins in the private-label products, and increases in raw material costs.

Selling, General and Administrative Expense (ONM Environmental)

ONM Environmental’s selling, general and administrative expenses decreased by 8% ($26,000) during the three months ended March 31, 2022, as compared with the same period in 2021. These expenses decreased due to a reduction of sales and support staff. We expect these expenses to remain consistent in the year ending December 31, 2022.

Operating Income (Loss) (ONM Environmental)

ONM Environmental generated $598,000 in revenue, a gross margin of $309,000, and had total costs and expenses of $292,000, resulting in operating income of $13,000, compared with an operating loss of $176,000 for the three months ended March 31, 2021. Provided that its private-label clients continue to purchase product, we expect this trend to continue.

BLEST (engineering division)

Revenue (BLEST)

Our engineering segment (BLEST) generated $355,000 of revenue from third parties in the three months ended March 31, 2022, compared to $128,000 in 2021, representing a 177% increase from the prior year. The increase is due to completion of projects within our budgeted amount, an increased number of client contracts, and the recognition of $119,000 of deferred revenue for ongoing projects that had achieved certain completion milestones.

In addition to providing service to third party clients, BLEST provides services to BioLargo and its subsidiaries for internal BioLargo projects. These services are billed internally, are considered intersegment revenue, and are eliminated in the consolidation of our financial statements. In the three months ended March 31, 2022, it totaled $188,000, primarily used to further engineer and develop our flagship AOS water filtration system and our AEC PFAS treatment system. In addition, BLEST engineers are performing a critical role in the AOS pilot projects, some of which are supported by third-party research grants and has been instrumental in developing and supporting a professional engineered design service for misting systems being sold by our ONM operating unit.

Cost of Goods (Services) Sold (BLEST)

BLEST’s cost of services includes employee labor as well as subcontracted labor costs. In the three months ended March 31, 2022, its cost of services were 42% of its revenues, versus 82% in 2021. This decrease is due to recognition of deferred revenue, and contracts with better margins. Without the recognition of deferred revenue, its cost of services were 63% of revenues.  We expect the cost of services to increase in 2022 based on the contracts currently in progress.

Selling, General and Administrative Expense (BLEST)

BLEST's SG&A expenses were $134,000 in the three months ended March 31, 2022, compared to $100,000 in the same period in 2021. We expect these expenses to remain flat in 2022; increases in engineering staff are included in cost of services.

Operating Loss (BLEST)

BLEST generated $357,000 in revenue from third parties, a gross margin of $207,000, and had total costs and expenses of $242,000, resulting in an operating loss of $35,000, compared with an operating loss of $183,000 in 2021.

BLEST provides substantial support to BioLargo’s other operations, including BioLargo Water and Odor-No-More. While we are unable to record revenues generated from services by the engineering group to other BioLargo operating divisions for important project such as the development of the AOS and AEC technologies, it is important to note that its net loss would be eliminated if it were selling these services to a third party at fair market value.

Because the subsidiary had a net loss, we invested cash during the year to allow it to maintain operations. BLEST’s need for a cash subsidy to support its operations has decreased over time. We expect that in 2022 its sales and thus its gross profit will continue to increase. Our goal for this operation is that it produces a profit and contributes to corporate overhead in a significant way, although predicting when that will happen given the uncertainties in the market, and our limited resources, is difficult.

Selling, General and Administrative Expense – consolidated

Our Selling, General and Administrative expense (“SG&A”) include both cash (for example, salaries to employees) and non-cash (for example, stock option compensation expense) expenses. Our consolidated SG&A increased in the aggregate by 4% ($75,000) in the three months ended March 31, 2022, to $1,839,000. Our non-cash expenses (through the issuance of stock and stock options) were relatively flat 2022 compared with 2021 ($818,000 compared to $696,000). The largest components of our SG&A expenses included (in thousands):

Research and Development

In the three months ended March 31, 2022, we spent $392,000 in the research and development of our technologies and products. This was an increase of 20% (+$65,000) compared to 2021.

Interest expense

Our interest expense for the three months ended March 31, 2022, was $13,000, a decrease of 86% compared with 2021. The significant decrease in interest expense is related to the significant decrease of our debt obligations and a reduction of debt issued during 2022 versus 2021. Of our total interest expense in 2022, $7,000 was paid in cash, and the remainder, comprised primarily of non-cash debt discounts related to warrants issued in conjunction with debt instruments being amortized over the life of the debt instrument; for the three months ended March 31, 2022, non-cash interest expense totaled $4,000.

Our outstanding debt as of March 31, 2022, was lower than as of December 31, 2021. We expect our interest expense in the year ending December 31, 2022, to be in line with the prior year, provided we do not issue debt with attached warrants during the remainder of the year. Additionally, we record the relative fair value of the warrants and the intrinsic value of the beneficial conversion feature sold with the convertible notes payable which typically results in a full discount on the proceeds from the convertible notes. This discount is amortized as interest expense over the term of the convertible notes. We also are currently selling units of common stock and warrants instead of using convertible debt for financing our working capital needs, which if continued, will continue to reduce our ongoing interest expense as compared with prior years.

Other Income

ONM Environmental’s total net income of $187,000 for the three months ended March 31, 2022, includes a one-time recognition of $174,000 in income attributed to the cancellation (forgiveness) of a portion of its Paycheck Protection Program (“PPP”) loan.

Primarily through our wholly owned Canadian subsidiary, we have been awarded more than 80 research grants over the years from various public and private agencies, including the Canadian National Research Institute – Industrial Research Assistance Program (NRC-IRAP), the National Science and Engineering Research Council of Canada (NSERC), and the Metropolitan Water District of Southern California’s Innovative Conservation Program “ICP”. The research grants received are considered reimbursement grants related to costs we incur and therefore are included as Other Income. The amount of grant income decreased $25,000 in the three months ended March 31, 2022, to $5,000.  Grant funds paid directly to third parties are not included as income in our financial statements.

Although we are continuing to apply for government and industry grants, and indications from the various grant agencies is highly encouraging, we cannot be certain of continuing those successes in the future. We are very active in both the US and Canada, pursuing grant support for various uses of our products.

Net Loss

Net loss for the three months ended March 31, 2022, was $1,544,000 a loss of $0.01 per share, compared to a net loss for the three months ended March 31, 2021, of $1,878,000 a loss of $0.01 per share. Our net loss this year declined primarily because of an increase in sales, a reduction of interest expense, and the ONM Environmental’s recognition $174,000 in income attributed to the cancellation (forgiveness) of a portion of a Paycheck Protection Program loan.

The net income (loss) per business segment is as follows (in thousands):

In the three months ended March 31, 2022, approximately 53% of our net loss was due to non-cash expenses, including $4,000 in interest expense, $801,000 of stock option compensation expense, and $17,000 of services paid by the issuance of stock options.

In the three months ended March 31, 2021, approximately 46% of our net loss was due to non-cash expenses, including $464,000 in interest expense, $585,000 of stock option compensation expense, and $111,000 of services paid by the issuance of common stock.

We believe that ONM Environmental and BLEST (engineering) can achieve net income and positive cash flow from operations in the future, although predicting when that will happen is difficult given numerous uncertainties in the market, our limited capital resources, and our lack of history achieving current results. We expect the Company to continue to incur a aggregate net loss on a consolidated basis for the foreseeable future, even if these two subsidiaries show net income rather than a net loss. 

Liquidity and Capital Resources

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, 2022, we had a net loss of $1,544,000, used $1,140,000 cash in operations, and at March 31, 2022, we had working capital of $804,000, and current assets of $2,048,000. During the three months ended March 31, 2022, we generated revenues of $965,000. (See Note 9.)  Only one of our subsidiaries – ONM Environmental – generated positive operating income. None of our other operational subsidiaries did so.

We do not believe gross profits in the year ended December 31, 2022, will be sufficient to fund our current level of operations, and therefore believe we will have to obtain further investment capital to continue to fund operations, such as through our purchase agreement with Lincoln Park Capital, and private sales of our securities. (See Note 3.) We have been, and anticipate that we will continue to be, limited in terms of our capital resources.

If we are unable to rely on our current arrangement with Lincoln Park to fund our working capital requirements, we will 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.

The foregoing factors raise substantial doubt about our ability to continue as a going concern, unless we are able to continue to raise funds through stock sales to Lincoln Park or other private financings, and in the long term, our ability to 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.

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 offerings of debt with equity or derivative features which include the valuation of the warrant component, any beneficial conversion feature and potential derivative treatment, 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.

Note 2, “Summary of Significant Accounting Policies” in Part I, Item 1 of this Form 10-Q and in the Notes to Consolidated Financial Statements in Part II, Item 8 of the Form 10-K filed with the SEC on March 31, 2022, and “Critical Accounting Policies and Estimates” in Part II, Item 7 of the Form 10-K, describe the significant accounting policies and methods used in the preparation of the Company’s consolidated financial statements. There have been no material changes to the Company’s critical accounting policies and estimates since the filing of the Company’s Form 10-K on March 31, 2022.

Item 4.         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 – the “Exchange Act”) as of the end of the period covered by this Report. There were no changes in our internal control over financial reporting during the quarter ended March 31, 2022, which were identified in connection with management’s evaluation required by paragraph (d) of Rules 13a-15 and 15d-15 under the Exchange Act, that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

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. However, our Company is continuing to grow and evolve, as our product and services sales continues to grow, and as we diversify our clients to include municipalities, increasing strain on our accounting systems. These activities put stress on our overall controls and procedures. As our operations do not yet generate enough cash to fund operations, and we rely on financing activities to maintain our level of operations and fund our anticipated growth, we do not yet have the ability to implement the more sophisticated control systems used by larger companies. Although we have made some improvements, our chief executive officer and chief financial officer have concluded that, as of the evaluation date, our disclosure controls and procedures were not effective, due to the material weakness identified below.

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.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Our internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements.

Under the supervision and with the participation of our management, including our chief executive officer and the chief financial officer, we have established internal control procedures in accordance with the guidelines established in the 2013 Framework —Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Management evaluated the effectiveness of our internal controls, and concluded that due to our limited financial and personal resources, the fact that we operate our business in three distinct locations in the U.S. and Canada, and the lack of sophisticated reporting systems, we continue to have a material weakness in our internal controls with respect to the closing our financial statements. Until the company has the financial resources to implement more robust automated systems, or to hire additional dedicated accounting personal, we expect this material weakness to continue.

Our management, including our chief executive officer and chief financial officer, does not expect that our disclosure controls or our internal control over financial reporting, or any system we design or implement in the future, will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of any system of controls is based in part on 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.

PART II

OTHER INFORMATION

Item 2.          Unregistered Sales of Equity Securities and Use of Proceeds

The following is a report of the sales of unregistered securities during the period covered by this report not previously reported in an annual report on Form 10-K, a Quarterly Report on Form 10-Q, or a Current Report on Form 8-K.

On April 19, 2022, we sold 3,723,077 shares of our common stock to four investors and received $726,000 in gross and net proceeds. Each investor received two stock purchase warrants: (i) a warrant expiring six months after the investment date allowing for the purchase of the number of shares the investor purchased, for $0.234 per share, and (ii) a warrant expiring five years after the investment date allowing for the purchase of the number of shares the investor purchased, for $0.925 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.

Item 5.         Other Information

None.

Item 6.         Exhibits

See the Exhibit Index for a list of exhibits filed as part of this report and incorporated herein by reference.

Exhibit Index