BIOLARGO, INC. - Quarter Report: 2023 September (Form 10-Q)

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

BIOLARGO, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

AS OF September 30, 2023 AND December 31, 2022

(in thousands, except for share and 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 and Nine Months Ended September 30, 2023 AND 2022

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

(unaudited)

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

BIOLARGO, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

FOR THE Three and Nine Months Ended September 30, 2023 AND 2022

(in thousands, except for share and per 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 Nine Months Ended September 30, 2023 AND 2022

(in thousands, except for share and 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. (“BioLargo”, or the “Company”) invents, develops, and commercializes innovative platform technologies to solve challenging environmental problems like PFAS contamination (per- and polyfluoroalkyl substances), advanced water and wastewater treatment, industrial odor control, air quality control, infection control, and myriad environmental remediation challenges. 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.

Organization

We are a Delaware corporation formed in 1991. We have six 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 Equipment and Technologies, Inc., organized under the laws of the State of California in 2022; BioLargo Water, Inc. (“Water”), organized under the laws of Canada in 2014; BioLargo Equipment and Solutions Technologies, Inc., organized under the laws of the State of California in 2022; and BioLargo Development Corp., organized under the laws of the State of California in 2016. Additionally, we own 53% of Clyra Medical Technologies, Inc. (“Clyra” or “Clyra Medical”), organized under the laws of the State of California in 2012 (see Note 8), 82% of BioLargo Engineering Science and Technologies, LLC (“BLEST”), organized under the laws of the State of Tennessee in 2017 (see Note 9), and 96% of BioLargo Energy Technologies, Inc. (“BETI”) organized under the laws of the State of California in 2022 (see Note 10). We consolidate the financial statements of our partially owned subsidiaries (see Note 2, subheading “Principles of Consolidation,”).

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 nine months ended September 30, 2023, we generated revenues of $7,860,000 through our business segments (see Note 11), had a net loss of $3,628,000, used $2,363,000 cash in operations, and at September 30, 2023, we had working capital of $2,951,000, and current assets of $4,691,000.

During the nine months ended September 30, 2023, we sold (i) $502,000 of our common stock to Lincoln Park Capital Fund, LLC (“Lincoln Park”) (see Note 3), (ii) $995,000 of our common stock and warrants to accredited investors (see Notes 3 and 6), (iii) $1,575,000 of Clyra Medical Series A Preferred Stock (see Note 8), and (iv) $905,000 of BETI common stock (see Note 10). Subsequent to September 30, 2023, we continued selling stock to Lincoln Park (see Note 13). As of September 30, 2023, our cash and cash equivalents totaled $3,042,000. Our total liabilities included a $71,000 vehicle loan, $140,000 due in U.S. Small Business Administration (SBA) loans issued pursuant to the Paycheck Protection Program (see Note 4), $148,000 due to the SBA issued pursuant to the Economic Injury Disaster program (see Note 4), and $234,000 owed by Clyra Medical due in 2024 (see Note 8). We have been, and anticipate that we will continue to be, limited in terms of our capital resources, and expect to continue to need further investment capital to fund operations. 

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, or attain a reasonable threshold of operating efficiencies and achieve profitable operations. The consolidated financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern.

Note 2. Summary of Significant Accounting Policies

Principles of Consolidation

The consolidated financial statements include the accounts of the Company, its wholly owned subsidiaries, and partially owned subsidiaries BETI, 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, Bank of America. 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 September 30, 2023, and December 31, 2022, our cash balances were made up of the following (in thousands):

Accounts Receivable

In June 2016, the FASB issued ASU 2016-13, which sets out the principles for the recognition of measurement of credit losses on financial instruments, including trade receivables. The standard eliminates the probable initial recognition threshold and requires an entity to reflect its current estimate of all expected credit losses. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial assets to present the net amount expected to be collected. The new standard was effective for the Company beginning January 1, 2023 and primarily impacted trade accounts receivable. 

Accounts receivable are customer obligations that are unconditional. Accounts receivable are presented net of an allowance for doubtful accounts for expected credit losses, which represents an estimate of amounts that may not be collectible. The Company performs ongoing credit evaluations of its customers and, if necessary, provides an allowance for doubtful accounts and expected credit losses. A provision to the allowances for doubtful accounts for expected credit losses is recorded based on factors including the length of time the receivables are past due, the current business environment, and the Company’s historical experience. Provisions to the allowances for doubtful accounts for expected credit losses are recorded to general and administrative expenses. The Company writes off accounts receivable against the allowance when it determines a balance is uncollectible and no longer actively pursues collection of the receivable. The Company does not have any off-balance-sheet credit exposure related to customers. As of September 30, 2023, and December 31, 2022, the allowance for doubtful accounts for expected credit losses was $113,000 and $12,000, respectively.

Credit Concentration

We have a limited number of customers that account for significant portions of our revenue. During the three and nine months ended September 30, 2023 and 2022, the following customers accounted for more than 10% of consolidated revenues:

At September 30, 2023, one customer accounted for more than 10% of consolidated accounts receivable, and at December 31, 2022, three customers accounted for more than 10% of consolidated accounts receivable:

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  September 30, 2023, and December 31, 2022, was $212,000 and $158,000, respectively. Inventories consisted of (in thousands):

Other Non-Current Assets

Other non-current assets consisted of (i) security deposits related to our business offices, (ii) three patents acquired on  October 22, 2021, for $34,000, and (iii) tax credit receivables from the Canadian government related to a research and development credit from our Canadian subsidiary for which we’ve applied for and received in prior periods.

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. based 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 of the recorded balance by our percentage ownership of the profits or losses in the joint venture. The joint venture has incurred a loss since inception and our 40% ownership share reduced our investment interest. For the three and nine months ended September 30, 2023, the reduction of our investment interest totaled $6,000 and $18,000, respectively, and for the same periods in 2022, reduced our investment interest $15,000 and $23,000, 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. There were no impairment losses related to intangible assets during the three or nine months ended September 30, 2023 or 2022.

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 convertible notes payable, stock options and warrants were exercised into common stock. For the three and nine months ended September 30, 2023, and 2022, the denominator in the diluted EPS computation is the same as the denominator for basic EPS due to the Company’s net loss which creates an anti-dilutive effect of the convertible notes payable, warrants and stock options.

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, impairment expense, 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 nine months ended September 30, 2023, and 2022:

Expected price volatility is the measure by which our stock price is expected to fluctuate during the expected term of an option. The 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.

Warrants

Warrants issued with our convertible and non-convertible debt instruments 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. The warrant relative fair values are also recorded as a discount to the convertible promissory notes.

Non-Cash Transactions

We determine the value assigned to each intangible we acquire, and/or services or products received for non-cash consideration of our common stock 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.

The Company’s products are sold through a contract with the customer and 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 goods are shipped if the agreement is FOB manufacturer, and when goods are delivered if FOB destination. Revenue is recognized with a reduction for sales discounts, as appropriate and negotiated in the customer’s purchase order.

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

The Company has outstanding contract liability obligations of $2,000 as of September 30, 2023, recorded as deferred revenue. We recognized $15,000 in revenue and reduced the deferred revenue balance by the same amount as performance obligations were satisfied in the nine months ended September 30, 2023. The outstanding balance will be recognized over the remaining life of the contracts. Our Canadian subsidiary had a customer deposit outstanding at September 30, 2023, totaling $111,000, that was awarded as part of a grant for a particular project that has been delayed.

As we generate revenues from royalties or license fees from our intellectual property, a licensee will 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. We have entered into a licensing agreement for the CupriDyne Clean product, and we recognize royalty and license fees on a quarterly basis as the product is sold through to third parties and reported to us.

Government Grants

We have been awarded multiple research grants from the private and public Canadian research programs. The income we receive directly from grants is recorded as other income. We have been awarded over 80 grants since our first in 2015. 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 September 30, 2023, and December 31, 2022.

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 September 30, 2023, and December 31, 2022. Accordingly, a 100% 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 as of September 30, 2023, and December 31, 2022 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, line of credit, and other assets and liabilities. The carrying amount of debt instruments are believed to approximate fair value as the stated interest rates are reflective of the prevailing market rates.

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.

During the three months ended  September 30, 2023, our subsidiary, Clyra, received $41,000 of Employ Retention Tax Credits.

Leases

At inception of a lease contract, we assess whether the contract is, or contains, a lease. Our assessment is based on: (1) whether the contract involves the use of a distinct identified asset, (2) whether we obtain the right to substantially all the economic benefit from the use of the asset throughout the period of the contract, and (3) whether we have the right to direct the use of the asset during such time period. At inception of a lease, we allocate the consideration in the contract to each lease component based on its relative stand-alone price to determine the lease payments. Leases are classified as either finance leases or operating leases. A lease must be classified as a finance lease if any of the following criteria are met: the lease transfers ownership of the asset by the end of the lease term, the lease contains an option to purchase the asset that is reasonably certain to be exercised, the lease term is for a major part of the remaining useful life of the asset or the present value of the lease payments equals or exceeds substantially all of the fair value of the asset. A lease is classified as an operating lease if it does not meet any of these criteria. We have no leases classified as finance leases. As of September 30, 2023, the weighted average remaining lease term for our operating leases was nine years.  For all leases at the lease commencement date, a right-of-use asset and a lease liability are recognized. The right-of-use asset represents the right to use the leased asset for the lease term. The lease liability represents the present value of the lease payments under the lease. The right-of-use asset is initially measured at cost, which primarily comprises the initial amount of the lease liability, plus any initial direct costs incurred, consisting mainly of brokerage commissions, less any lease incentives received. All right-of-use assets are reviewed for impairment. The lease liability is initially measured at the present value of the lease payments, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, management estimates the incremental borrowing rate, which currently is estimated to be 18%. Lease payments included in the measurement of the lease liability comprise the following: the fixed noncancelable lease payments, payments for optional renewal periods where it is reasonably certain the renewal period will be exercised, and payments for early termination options unless it is reasonably certain the lease will not be terminated early. Lease components are included in the measurement of the initial lease liability. Additional payments based on a change in our portion of the operating expenses, including real estate taxes and insurance, are recorded as a period expense when incurred. Lease modifications result in remeasurement of the lease liability. Lease expense for operating leases consists of the lease payments plus any initial direct costs, primarily brokerage commissions, and is recognized on a straight-line basis over the lease term. We have elected not to recognize right-of-use assets and lease liabilities for short-term leases that have a term of 12 months or less. The effect of short-term leases on our right-of-use asset and lease liability was not material.

As of September 30, 2023, the right-of-use assets totaled $777,000 and the lease liability totaled $792,000 on our balance sheet related to our operating leases.

Property and Equipment

Property and equipment includes machinery and leasehold improvements and is stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, which range from 3 - 5 years or the remaining lease term. Newly built leaseholds, additions, renewals, and betterments that significantly extend the life of the asset are capitalized. The Company is currently constructing a facility and purchasing equipment for producing sodium sulfur batteries. Expenditures for repairs and maintenance are charged to expense as incurred. For assets sold or otherwise disposed of, the cost and related accumulated depreciation and amortization are removed from the accounts, and any related gain or loss is reflected in income for the period.

Recent Accounting Pronouncements

Currently there are no recently released pronouncements that are considered applicable to the Company’s financial statements.

Note 3. Sale of Stock for Cash

Lincoln Park Financing

On December 13, 2022, we entered into a stock purchase agreement (the “2022 LPC Purchase Agreement”) with Lincoln Park, pursuant to which Lincoln Park agreed to purchase from us at our request up to an aggregate of $10,000,000 of our common stock (subject to certain limitations) from time to time over a period of three years. The agreement allows us, at our sole discretion, to direct Lincoln Park to purchase shares of our common stock, subject to limitations in both volume and dollar amount. The purchase price of the shares that may be sold to Lincoln Park under the agreement is the lower of (i) the lowest sale price on the date of purchase, or (ii) the average of the three lowest closing prices in the prior 12 business days. There are no restrictions on future financings, rights of first refusal, participation rights, penalties, or liquidated damages other than a prohibition on entering into a “Variable Rate Transaction,” as defined in the agreement. Concurrently with the 2022 LPC Purchase Agreement, we entered into a Registration Rights Agreement, pursuant to which we filed a registration statement on Form S-1 with the SEC on December 23, 2022. This registration statement was declared effective on January 19, 2023.

During the three and nine months ended September 30, 2023, we sold 1,190,223 and 2,833,846 shares of our common stock to Lincoln Park, and received $203,000 and $502,000, respectively, in gross and net proceeds.

During the three and nine months ended September 30, 2022, pursuant to a prior (similar) arrangement, we sold 2,440,958 and 4,353,919 shares of our common stock to Lincoln Park, and received $485,000 and $903,000, respectively, in gross and net proceeds.

Unit Offerings

We did not sell any shares in our Unit Offerings during the three months ended September 30, 2023. During the nine months ended September 30, 2023, we sold 5,234,948 shares of our common stock and received $995,000 in gross and net proceeds from 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 Unit Offering”.)

During the three and nine months ended  September 30, 2022, pursuant to our unit offerings, we sold 3,766,126 and 13,568,524 shares of our common stock and received $632,000 and $2,364,000 in gross and net proceeds from thirty 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 Unit Offering”.)

Note 4. Debt Obligations

The following table summarizes our debt obligations outstanding as of September 30, 2023, and December 31, 2022 (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 and nine months ended September 30, 2023, we recorded $12,000 and $72,000, respectively, of interest expense related to the amortization of discounts on convertible notes payable and coupon interest from our convertible notes and lines of credit.

For the three and nine months ended September 30, 2022, we recorded $14,000 and $42,000, respectively, of interest expense related to the amortization of discounts on convertible notes payable and coupon interest from our convertible notes and lines of credit.

Vehicle loan

On February 7, 2023, we entered a loan agreement with Bank of America for the purchase of a vehicle used in operations totaling $80,000, at 5.29% annual interest which matures March 7, 2029. The loan agreement requires monthly payments of $1,000.

Convertible note payable, matures March 1, 2023

On March 6, 2023, we entered into an agreement with the holder of a $50,000 note to convert that note into common stock of BETI (see note 10). As payment for interest, a warrant to purchase 200,000 shares of BioLargo common stock at $0.21 was issued to the investor, expiring five years from the grant date. (See Note 6).

SBA Program Loans

On  February 7, 2022, we received notice that the SBA had forgiven $174,000 of the ONM Environmental $217,000 Paycheck Protection Program (PPP) loan. As of September 30, 2023, the outstanding balance on this loan totals $43,000. The partial forgiveness decision has been appealed, and during such time, loan payments are deferred.

On May 12, 2022, we received notice that the SBA had denied the forgiveness application of BLEST’s $97,000 PPP loan. We have appealed that decision. During the period upon which a forgiveness decision is on appeal, loan payments are deferred. The maturity date of the BLEST PPP loan was officially extended on our request to May 2025. 

In July 2020, ONM Environmental received an Economic Injury Disaster Loan from the SBA in the amount of $150,000. The note has a 3.75% annual interest rate, requires monthly payments of $731, and matures July 2050.

Note 5. Share-Based Compensation

Issuance of Common Stock in exchange for Services

Payment of Officer Salaries

On September 30, 2023, two officers agreed to convert an aggregate $12,000 of accrued and unpaid salary into 69,563 shares of our common stock at $0.17 per share. On June 30, 2023, an officer agreed to convert an aggregate $12,000 of accrued and unpaid salary into 68,541 shares of our common stock at $0.18 per share.  On March 31, 2023, an officer agreed to convert an aggregate $6,000 of accrued and unpaid salary into 30,747 shares of our common stock at $0.20 per share.

On  September 30, 2022, we issued 167,781 shares of our common stock at $0.27 per share in lieu of $72,000 of accrued and unpaid salary to our officers.

Shares issued to Officers are unvested at the date of grant and subject to a lock-up agreement restricting vesting and sale until the earlier of (i) the consummation of a sale (in a single transaction or in a series of related transactions) of BioLargo by means of a sale of (a) a majority of the then outstanding common stock of BioLargo (whether by merger, consolidation, sale or transfer of common stock, reorganization, recapitalization or otherwise) or (b) all or substantially all of the assets of BioLargo; and (ii) the successful commercialization of BioLargo’s products or technologies as demonstrated by its receipt of at least $3,000,000 in cash, or the recognition of $3,000,000 in revenue, over a 12-month period from the sale of products and/or the license of technology; and (iii) the Company’s breach of the employment agreement between the Company and Officer and resulting in Officer’s termination.

Payment of Consultant and Vendor Fees

On  September 30, 2023, we issued 146,123 shares of our common stock at $0.17 per share in lieu of $25,000 of accrued and unpaid obligations to consultants and vendors. On  June 30, 2023, we issued 352,370 shares of our common stock at $0.18 per share in lieu of $63,000 of accrued and unpaid obligations to consultants and vendors. On  March 31, 2023, we issued 899,743 shares of our common stock at $0.20 per share in lieu of $201,000 of accrued and unpaid obligations to consultants and vendors.

On  September 30, 2022, we issued 211,047 shares of our common stock at $0.27 per share in lieu of $24,000 of accrued and unpaid obligations to consultants. On  June 30, 2022, we issued 76,996 shares of our common stock at $0.18 per share in lieu of $60,000 of accrued and unpaid obligations to consultants. On  March 31, 2022, we issued 86,752 shares of our common stock at $0.23 per share in lieu of $31,000 of accrued and unpaid obligations to consultants.

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.

Stock Option Expense

During the three and nine months ended September 30, 2023, we recorded an aggregate $725,000 and $1,269,000, and during the three and nine months ended September 30, 2022, we recorded an aggregate $338,000 and $1,455,000, in selling general and administrative expense related to the issuance of stock options. We issued options through our 2018 Equity Incentive Plan, and outside of this plan. Included in these totals is option expense related to issuances by our subsidiary, Clyra Medical, totaling $45,000 and $172,000 in the three and nine months ended September 30, 2023, and $85,000 and $308,000 in the three and nine months ended September 30, 2022. (See Note 8.)

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. It is set to expire on its terms on June 22, 2028. 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. As of September 30, 2023, 50,000,000 shares are authorized under the plan.

Activity for our stock options under the 2018 Plan during the nine months ended September 30, 2023, and 2022, is as follows:

(1) – Aggregate intrinsic value based on closing common stock price of $0.17 at September 30, 2023.

The options granted to purchase 8,219,920 shares during the nine months ended September 30, 2023 with an aggregate fair value of $1,370,000 were issued to an officer, board of directors, employees and a consultant. The exercise price for all options were issued on their respective grant date of March 31, 2023 ($0.20 per share) and June 30, 2023 ($0.18 per share) and September 30, 2023 ($0.17 per share): (i) we issued options to purchase 1,565,858 shares of our common stock to members of our board of directors for services performed, in lieu of cash; the fair value of these options totaled $266,000; (ii) we issued options to purchase 1,784,140 shares of our common stock to employees as part of an employee retention plan; the fair value of employee retention plan options totaled $306,000 and will vest quarterly over four years as long as they are retained as employees; (iii) we issued options to purchase 4,069,922 shares of our common stock to consultants in lieu of cash and for expiring options totaling $657,000, and (iv) we issued 800,000 options to our Chief Financial Officer with a fair value of $141,000 (see “Chief Financial Officer Contract Extension” immediately below). Of the 800,000 issued to the CFO, 500,000 were issued for expiring options. All stock option expense is recorded on our consolidated statement of operations as selling, general and administrative expense.

The options granted to purchase 4,748,212 shares during the nine months ended  September 30, 2022 were issued to officers, board of directors, employees and consultants: (i) we issued options to purchase 290,135 shares of our common stock at an exercise price on the respective grant date of $0.22 and $0.23 per share to our CFO and President to replace options that had expired; (ii) we issued options to purchase 1,134,356 shares of our common stock at an exercise price on the respective grant date ranging between $0.18 – $0.27 per share to members of our board of directors for services performed, in lieu of cash; the fair value of these options totaled $246,000; (iii) we issued options to purchase 2,340,730 shares of our common stock to employees as part of an employee retention plan at an exercise price on the respective date ranging between $0.18 – $0.27 per share; the fair value of employee retention plan options totaled $492,000 and will vest quarterly over four years as long as they are retained as employees; (iv) we issued options to purchase 682,991 shares of our common stock to consultants in lieu of cash for expiring options and per agreement totaling $145,000, and (v) we issued options to our Chief Financial Officer (see “Chief Financial Officer Contract Extension” immediately below). All stock option expense is recorded on our consolidated statement of operations as selling, general and administrative expense.

Chief Financial Officer Contract Extension

On March 21, 2023, we and our Chief Financial Officer Charles K. Dargan, II formally agreed to extend the engagement agreement dated February 1, 2008 (the “Engagement Agreement”, which had been previously extended multiple times), pursuant to which Mr. Dargan has been and continues to serve as the Company’s Chief Financial Officer. The Engagement Extension Agreement dated as of March 21, 2023 (the “Engagement Extension Agreement”) provides for an additional one-year term to expire January 31, 2024 (the “Extended Term”), at which time Mr. Dargan will continue to serve as CFO, unless and until either party terminates the agreement.

As the sole compensation for the Extended Term, Mr. Dargan was issued an option (“Option”) to purchase 25,000 shares of the Company’s common stock for each month during the Extended Term (thus, an option to purchase 300,000 shares reflecting an extended term of 12 months). The Option vests over the period of the Extended Term, with 25,000 shares having vested as of March 21, 2023, and the remaining shares to vest 25,000 shares monthly beginning March 31, 2023, and each month thereafter, so long as the agreement is in full force and effect. The Option is exercisable at $0.20 per share, the closing price of BioLargo’s common stock on the March 21, 2023, grant date, expires ten years from the grant date, and was issued pursuant to the Company’s 2018 Equity Incentive Plan.

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

2007 Equity Incentive Plan

On September 7, 2007, and as amended April 29, 2011, the BioLargo, Inc. 2007 Equity Incentive Plan (“2007 Plan”) was adopted as a means of providing our directors, key employees and consultants additional incentive to provide services. Both stock options and stock grants may be made under this plan for a period of 10 years, which expired on September 7, 2017. The Board’s Compensation Committee administers this plan. As plan administrator, the Compensation Committee has sole discretion to set the price of the options. As of September 2017, the Plan was closed to further stock option grants.

Activity for our stock options under the 2007 Plan for the nine months ended September 30, 2023 and 2022 is as follows:

⁽¹⁾ – Aggregate intrinsic value based on closing common stock price of $0.17 at September 30, 2023.

Non-Plan Options

Activity of our non-plan stock options issued for the nine months ended September 30, 2023 and 2022 is as follows:

(1) – Aggregate intrinsic value based on closing common stock price of $0.17 at September 30, 2023.

During the nine months ended September 30, 2023, we issued options to purchase an aggregate 60,040 shares of our common stock at prices on the grant date ranging $0.18 – $0.20 per share to vendors for fees for services. The fair value of the options issued totaled an aggregate $11,000 and is recorded in our selling, general and administrative expense.

During the nine months ended  September 30, 2022, we issued options to purchase 105,797 shares of our common stock at prices on the grant date ranging $0.23 – $0.27 per share to a vendor for services. The fair value of these options total $36,000 and is recorded in our selling, general and administrative expense.

Note 6. Warrants

We have certain warrants outstanding to purchase our common stock, at various prices, as described in the following table:

(1) – Aggregate intrinsic value based on closing common stock price of $0.17 at September 30, 2023.

Warrants issued in Unit Offerings

During the nine months ended September 30, 2023, pursuant to our Unit Offerings (see Note 3), we issued six-month stock purchase warrants to purchase an aggregate 5,234,948 shares of our common stock at $0.23 per share, and five-year stock purchase warrants to purchase an aggregate 5,234,948 shares of our common stock at $0.29 per share. The fair value of these warrants totaled $913,000.

During the nine months ended  September 30, 2022, pursuant to our Unit Offerings (see Note 3), we issued nine-month stock purchase warrants to purchase an aggregate 13,568,524 shares of our common stock at $0.19 - $0.23 per share, and five-year stock purchase warrants to purchase an aggregate 13,568,524 shares of our common stock at $0.24 - $0.33 per share. The fair value of these warrants totaled $2,898,000.

Warrant issued in conjunction with amendment to note payable

On March 6, 2023, we entered into an agreement with the holder of a $50,000 note (see Note 4, “Convertible note payable, matures March 1, 2023”) to convert that note into common stock of BETI. As payment for interest, a warrant to purchase 200,000 shares of BioLargo common stock at $0.21 was issued to the investor, expiring five years from the grant date. The fair value of this warrant totaled $30,000 and was recorded as interest expense on our statement of operations.

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

As of September 30, 2023, accounts payable and accrued expenses included the following (in thousands):

As of December 31, 2022, accounts payable and accrued expenses included the following (in thousands):

See Note 8, “Accounts Payable and Accrued Expenses”, for the accounts payable and accrued expenses of Clyra Medical.

Note 8. Noncontrolling Interest – Clyra Medical

As discussed in Note 2 above, we consolidate the operations of our partially owned subsidiary Clyra Medical.

Debt Obligations of Clyra Medical

Promissory Note

On  April 8, 2022, Clyra Medical issued a promissory note in the principal amount of $100,000 to an individual investor, payable  April 8, 2024, and bearing 8% annual interest. The note  may be converted by its holder at any time prior to the maturity date, and automatically converts to stock upon (i) Clyra’s sale of $5,000,000 or more of its common or preferred stock, or (ii) the maturity date, at a conversion price equal to 70% of the lowest price-per-share of shares sold to a future investor prior to the maturity date.

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. Since inception, Clyra Medical received $260,000 in draws and made repayments totaling $126,000. Clyra issued Vernal Bay 322 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.

On December 13, 2022, Clyra Medical entered into an amendment of the Revolving Line of Credit Agreement whereby the maturity date of the line of credit was extended to September 30, 2024, and the payment terms were modified such that amounts of principal due in each month are capped at a maximum of 15% of the principal amount then due under the note. Additionally, BioLargo agreed to allow Vernal Bay to elect to convert, any time prior to the note’s maturity date, the 322 shares of Clyra common stock it received as consideration for the line of credit into shares of Biolargo common stock at the then market price of BioLargo’s common stock. On January 9, 2023, Vernal Bay elected to convert Clyra shares to 527,983 BioLargo shares of common stock.

As of September 30, 2023, the balance outstanding on this line of credit totals $134,000. As of December 31, 2022, the balance outstanding on this line of credit totaled $161,000.

Equity Transactions

As of September 30, 2023, Clyra had 99,501 shares issued and outstanding, of which 92,035 were common shares, and 7,466 were preferred shares. As of December 31, 2022, Clyra had 91,145 shares issued and outstanding, of which 89,070 were common shares, and 2,075 were preferred shares. As of September 30, 2023, of the outstanding amount, BioLargo owned 51,571 common shares and 1,660 Series A Preferred shares.  As of December 31, 2022, of the outstanding amount, BioLargo owned 51,571 common shares and 1,352 Series A Preferred shares.

BioLargo Conversion of Intercompany Balances

In July 2023, BioLargo converted $96,000 owed to it by Clyra into 308 shares of Clyra Series A preferred shares.  On March 2, 2022, BioLargo converted $633,000 owed to it by Clyra into 2,042 shares of Clyra common stock.

Sales of Series A Preferred Stock

During the three months ended September 30, 2023, Clyra sold 928 shares of its Series A Preferred Stock, and in exchange received $288,000 in gross and net proceeds from seven accredited investors. During the nine months ended September 30, 2023, Clyra sold 5,081 shares of its Series A Preferred Stock, and in exchange received $1,575,000 in gross and net proceeds from 35 accredited investors. Purchasers of the Series A Preferred Stock also received a 3-year warrant to purchase the same number of additional shares of common stock for $372 per share. The fair value of the warrants issued totaled $410,000 and is 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 Series A Preferred Stock. Shares of Series A Preferred Stock earn a dividend of 15% each year, compounding annually; the company is under no obligation to pay such dividends in cash, and such dividends automatically convert to common stock upon conversion of the Series A Preferred Stock to common stock. Each share of Series A Preferred stock can be converted by the holder at any time for one share of common stock, and automatically convert upon the completion of a public offering of shares in which at least $5,000,000 of gross proceeds is received by the company. Accrued dividends may be converted to common stock at a conversion rate of $310 per share.

Each investor also entered into an agreement with BioLargo whereby the investor may exchange some or all of its Series A Preferred stock, plus accrued dividends, into shares of BioLargo common stock, at a price equal to a 20% discount of the volume weighted average price over the 30 prior trading days. Elections may made beginning January 1, 2025, and ending on June 30, 2026. 

Clyra Stock Options

Clyra issues options to its employees and consultants in lieu of compensation owed on a regular basis.  The fair value of the options issued totaled $45,000 and $172,000 in the three and nine months ended September 30, 2023, and $85,000 and $308,000 in the three and nine months ended September 30, 2022. The Black-Scholes model is used to calculate the initial fair value, assuming a stock price on date of grant of $271 per share. Because Clyra is a private company with no secondary market for its common stock, the resulting fair value was discounted by 30%.

During the three months ended September 30, 2023, two option holders elected to exercise their stock options; Clyra received $2,964 and issued 2,964 shares of its common stock.

Accounts Payable and Accrued Expenses

At September 30, 2023, and December 31, 2022, Clyra had the following accounts payable and accrued expenses (in thousands):

Note 9. BioLargo Engineering, Science and Technologies, LLC

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

The BLEST Compensation Committee has met regularly since the subsidiary commenced operations. In 2018, it reviewed the operating performance and determined that the performance metrics were not met and as a result, did not award any Class B units or stock options. As of December 31, 2021, BLEST employees had earned 13% in profits interests and had earned (vested) 455,000 option shares. In January 2022, the committee again reviewed the operating performance and determined that a portion of the performance metrics were met. It was agreed that an additional one-half and one-quarter of the eligible profits interests would be vested (11% in the aggregate), and therefore an additional half of the option interests would be vested (525,000 options shares in the aggregate). The vesting of option shares resulted in a fair value totaling $65,000, recorded on our consolidated statement of operations as selling, general and administrative expense for the year ended December 31, 2021.  In December 2022, the committee again reviewed the operating performance and determined that a portion of the performance metrics were met. It was agreed that an additional one-half and one-quarter of the eligible profits interests would be vested (18% in the aggregate), and therefore an additional half of the option interests would be vested (1,242,500 options shares in the aggregate).  The vesting of option shares resulted in a fair value totaling $135,000 and is recorded on our consolidated statement of operations as selling, general and administrative expense for the year ended December 31, 2022.

Note 10. BioLargo Energy Technologies, Inc.

BioLargo Energy Technologies, Inc. (“BETI”) was formed for the purpose of commercializing a sodium-sulfur battery technology. BioLargo purchased 9,000,000 shares of its common stock upon its formation, and was its sole stockholder.

During the three months ended September 30, 2023, BETI sold 10,000 shares of its common stock to one accredited investor and received $25,000 in gross and net proceeds. During the nine months ended September 30, 2023, BETI sold 467,000 shares of its common stock to 16 accredited investors, and in exchange received gross and net proceeds totaling $1,005,000. Of that amount, $100,000 in shares were purchased by BioLargo. Each investor also entered into an agreement with BioLargo whereby the investor may exchange some or all of its shares of BETI common stock into shares of BioLargo common stock, at a price equal to a 20% discount of the volume weighted average price over the 20 trading days prior to the election to exchange. Elections must be made during calendar year 2024.

As of September 30, 2023, BETI had 9,467,000 issued and outstanding shares, of which BioLargo holds 9,050,000.

Note 11. Business Segment Information

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

Other than ONM Environmental, during the last three quarterly periods none of our operating business units have operated at a profit, and therefore each required additional cash to meet its monthly expenses, funded through BioLargo’s sales of debt or equity, research grants, and tax credits. BETI and Clyra Medical have also been funded by third party investors who invest directly in exchange for equity ownership in that entity.

The segment information for the three and nine months ended September 30, 2023, and 2022, is as follows (in thousands):