Quarterly Report (10-q)

Date : 08/14/2019 @ 8:36PM
Source : Edgar (US Regulatory)
Stock : BioLargo Inc (QB) (BLGO)
Quote : 0.26  0.01 (4.00%) @ 9:14PM

Quarterly Report (10-q)

 

 

Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 


 

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

 

For the quarterly period ended June 30, 2019.

 

or

 

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

 

For the transition period from              to             

 

Commission File Number 000-19709

 


BIOLARGO, INC.

(Exact name of registrant as specified in its charter)  

 


 

     

Delaware

 

65-0159115

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

14921 Chestnut St.

Westminster, CA 92683

(Address of principal executive offices)

 

(888) 400-2863

(Registrant’s telephone number, including area code)

 


 

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

 

Title of each class

Trading symbol(s)

Name of each exchange on which registered

Common stock

BLGO

OTC Markets (OTCQB)

 


 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐

 

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

 

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

 

Large accelerated filer     ☐

Accelerated filer ☐

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

 

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

 

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

 

The number of shares of the Registrant’s Common Stock outstanding as of August 12, 2019 was 157,380,022 shares.

 

 

 

BIOLARGO, INC.

FORM 10-Q

INDEX

 

PART I

 

   

Item 1

Financial Statements

   

Item 2

Management's Discussion and Analysis and Financial Condition and Results of Operations 

   

Item 4

Controls and Procedures

 

PART II

 

   

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

   

Item 5

Other Information

   

Item 6

Exhibits

   
 

Signatures

   
 

Exhibit Index

 

 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

 

BIOLARGO, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

AS OF DECEMBER 31, 2018 AND JUNE 30, 2019

(in thousands, except for per share data)

 

   

DECEMBER 31,
2018

   

JUNE 30, 2019

(unaudited)

 

Assets

 

Current assets:

               

Cash and cash equivalents

  $ 655     $ 706  

Accounts receivable

    257       232  

Inventories, net of allowance

    26       38  

Prepaid expenses and other current assets

    17       25  

Total current assets

    955       1,001  

In-process research and development (Note 8)

    1,893       1,893  

Equipment, net of depreciation

    126       108  

Other non-current assets

    35       35  

Right-of-use, operating lease, net of amortization

          370  

Deferred offering cost

    176       176  

Total assets

  $ 3,185     $ 3,583  

Liabilities and stockholders’ equity (deficit)

 

Current liabilities:

               

Accounts payable and accrued expenses

  $ 501     $ 676  

Clyra Medical note payable (Note 8)

          1,007  

Notes payable

    400       534  

Line of credit

    430       430  

Convertible notes payable

    1,365       2,863  

Discount on convertible notes payable, and line of credit, net of amortization

    (205 )     (1,180 )

Lease liability

          116  

Customer deposit

          28  

Total current liabilities

    2,491       4,474  

Long-term liabilities:

               

Convertible notes and note payable

    285       210  

Clyra Medical note payable (Note 8)

    1,007        

Liability to Clyra Medical shareholder (Note 8)

    643       643  

Discount on convertible notes payable, net of amortization

    (118 )     (79 )

Lease liability

          254  

Total long-term liabilities

    1,817       1,028  

Total liabilities

    4,308       5,502  

COMMITMENTS, CONTINGENCIES (Note 11)

               

STOCKHOLDERS’ EQUITY (DEFICIT):

               

Preferred Series A, $.00067 Par Value, 50,000,000 Shares Authorized, -0- Shares Issued and Outstanding, at December 31, 2018 and June 30, 2019, respectively.

           

Common stock, $.00067 Par Value, 400,000,000 Shares Authorized, 141,466,071 and 152,054,904 Shares Issued, at December 31, 2018 and June 30, 2019, respectively.

    95       102  

Additional paid-in capital

    110,222       114,745  

Accumulated other comprehensive loss

    (90 )     (98 )

Accumulated deficit

    (111,723 )     (116,876 )

Total BioLargo Inc. and Subsidiaries stockholders’ equity (deficit)

    (1,496 )     (2,127 )

Non-controlling interest (Note 8)

    373       208  

Total stockholders’ equity (deficit)

    (1,123 )     (1,919 )

Total liabilities and stockholders’ equity (deficit)

  $ 3,185     $ 3,583  

 

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

 

 

 

BIOLARGO, INC. AND SUBSIDIAR IES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2018 AND 2019

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

(unaudited)

 

   

THREE MONTHS

   

SIX MONTHS

 
   

JUNE 30,

2018

   

JUNE 30,

2019

   

JUNE 30,

2018

   

JUNE 30,

2019

 

Revenues

                               

Product revenue

  $ 316     $ 316     $ 540     $ 617  

Service revenue

    11       110       50       173  

Total revenue

    327       426       590       790  
                                 

Cost of revenue

                               

Cost of goods sold

    (194 )     (136 )     (328 )     (276 )

Cost of service

    (7 )     (92 )     (36 )     (143 )

Gross profit

    126       198       226       371  
                                 

Selling, general and administrative expenses

    1,316       1,302       2,486       2,696  

Research and development

    425       367       947       793  

Depreciation

    13       16       23       31  

Operating loss:

    (1,628 )     (1,487 )     (3,230 )     (3,149 )

Other (expense) income:

                               

Interest expense

    (1,729 )     (498 )     (2,561 )     (1,483 )

Debt conversion expense

    (276 )           (276 )      

Loss on debt extinguishment

          (44 )           (228 )

Grant income

    33       42       38       124  

Total other expense:

    (1,972 )     (500 )     (2,799 )     (1,587 )

Net loss

    (3,600 )     (1,987 )     (6,029 )     (4,736 )
                                 

Net loss attributable to noncontrolling interest

    (95 )     (192 )     (202 )     (365 )

Net loss attributable to common shareholders

  $ (3,505 )   $ (1,795 )   $ (5,827 )   $ (4,371 )
                                 

Net loss per share attributable to common shareholders:

                               

Loss per share attributable to shareholders – basic and diluted

  $ (0.03 )   $ (0.01 )   $ (0.05 )   $ (0.03 )

Weighted average number of common shares outstanding:

    118,748,451       145,700,515       111,760,954       143,983,182  
                                 

Comprehensive loss:

                               

Net loss

  $ (3,600 )   $ (1,987 )   $ (6,029 )   $ (4,736 )

Foreign currency translation

    13       (4 )     1       (8 )

Comprehensive loss

    (3,587 )     (1,991 )     (6,028 )     (4,744 )

Comprehensive loss attributable to noncontrolling interest

    (95 )     (192 )     (202 )     (365 )

Comprehensive loss attributable to common stockholders

  $ (3,492 )   $ (1,799 )   $ (5,826 )   $ (4,379 )

 

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

 

 

 

BIOLARGO, INC. AND SUBSIDIARIES  

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (DEFICIT)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2018 AND 2019

(in thousands, except for share data)

(unaudited)

 

   

Common stock

   

Additional

paid-in

   

Accumulated

   

Accumulated

other

comprehensive

   

 

Non-

controlling

         
   

Shares

   

Amount

   

capital

   

deficit

   

loss

   

interest

   

Total

 

Balance, December 31, 2017

    104,164,465     $ 70     $ 97,093     $ (101,205 )   $ (62 )   $ 695     $ (3,409 )

Issuance of common stock for services

    714,436             196                         196  

Issuance of common stock for interest

    617,072             165                         165  

Financing fee in stock

    252,385             85                         85  

Sale of stock for cash

    658,226             168                         168  

Stock option compensation expense

                320                         320  

Warrants and beneficial conversion feature issued as discount on convertible notes payable, note payable and line of credit

                282                         282  

Deemed dividend

                297       (297 )                  

Net loss

                      (2,323 )           (107 )     (2,430 )

Foreign currency translation

                            8             8  
                                                         

Balance, March 31, 2018

    106,406,584     $ 70     $ 98,606     $ (103,825 )   $ (54 )   $ 588     $ (4,615 )

Conversion of notes

    19,298,723       13       6,215                         6,228  

Issuance of common stock for services

    733,821             250                         250  

Issuance of common stock for interest

    1,302,734       1       327                         329  

Sale of stock for cash

    617,145             212                         212  

Warrant exercise price reduction for cash

                149                         149  

Stock option compensation expense

                376                         376  

Warrants and beneficial conversion feature issued as discount on convertible notes payable, note payable and line of credit

                32                         33  

Net loss

                      (3,505 )           (95 )     (3,600 )

Foreign currency translation

                            (7 )           (7 )
                                                         

Balance, June 30, 2018

    128,359,007     $ 84     $ 106,167     $ (107,330 )   $ (61 )   $ 493     $ (645 )

 

 

   

Common stock

   

Additional

paid-in

   

Accumulated

   

Accumulated

other

comprehensive

   

 

Non-

controlling

   

Total stockholders’

 
   

Shares

   

Amount

   

capital

   

deficit

   

Loss

   

interest

   

equity (deficit)

 

Balance, December 31, 2018

    141,466,071     $ 95     $ 110,222     $ (111,723 )   $ (90 )   $ 373     $ (1,123 )

Conversion of notes

    1,638,479       1       218                         219  

Issuance of common stock for service

    1,229,541       1       205                         206  

Issuance of common stock for interest

    139,362             25                         25  

Stock option compensation expense

                352                         352  

Warrants and conversion feature issued as discount on convertible notes payable and line of credit

                1,115                         1,115  

Issuance of Clyra Medical common stock

                21                   89       110  

Fair value of warrants for extension of debt

                56                         56  

Deemed dividend for the change in accounting for derivative liability

                342       (342 )                  

Net loss

                      (2,576 )           (173 )     (2,749 )

Foreign currency translation

                            (4 )           (4 )

Balance, March 31, 2019

    144,473,453       97       112,556       (114,641 )     (94 )     289       (1,793 )

Conversion of notes

    2,767,833       2       294                         296  

Issuance of common stock for service

    981,684             213                         213  

Issuance of common stock for interest

    87,748             15                         15  

Warrant exercise

    3,744,456       3       101                         104  

Stock issuance to officer (see note 7)

    500,000                                      

Stock option compensation expense

                296                         296  

Warrants and conversion feature issued as discount on convertible notes payable and line of credit

                756                         756  

Issuance of Clyra Medical common stock

                74                   111       185  

Deemed dividend for the change in accounting for derivative liability

                440       (440 )                  

Net loss

                      (1,795 )           (192 )     (1,987 )

Foreign currency translation

                            (4 )           (4 )

Balance, June 30, 2019

    152,555,174     $ 102     $ 114,745     $ (116,876 )   $ (98 )   $ 208     $ (1,919 )

 

 

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

 

 

 

BIOLARGO, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2018 AND 2019

(in thousands, except for per share data)

(unaudited)

 

   

JUNE 30,

2018

   

JUNE 30,

2019

 

Cash flows from operating activities

               

Net loss

  $ (6,029 )   $ (4,736 )

Adjustments to reconcile net loss to net cash used in operating activities:

               

Stock option compensation expense

    696       648  

Common stock issued in lieu of salary to officers and fees for services from vendors

    446       419  

Common stock issued for interest

    484       40  

Interest expense related to amortization of the discount on convertible notes payable and line of credit and deferred financing costs

    2,019       1,254  

Interest expense related to the fair value of warrants issued as consent for variable debt

          54  

Debt conversion expense

    276        

Loss on extinguishment of debt

          229  

Bad debt expense

    1        

Deferred offering expense

    8        

Depreciation expense

    23       31  

Changes in assets and liabilities:

               

Accounts receivable

    3       24  

Inventories

    28       (12 )

Accounts payable and accrued expenses

    31       178  

Prepaid expenses and other current assets

    (39 )     (8 )

Customer deposits

          28  

Net cash used in operating activities

    (2,053 )     (1,851 )

Cash flows from investing activities

               

Leasehold improvements

    (26 )     (14 )

Net cash used in investing activities

    (26 )     (14 )

Cash flows from financing activities

               

Proceeds from convertible notes payable

    463       1,825  

Proceeds from conversion inducement

    357        

Proceeds from warrant exercise-price reduction

    148        

Proceeds from warrant exercise

          104  

Proceeds from the sale of stock in Clyra Medical

          295  

Repayment of note payable

          (300 )

Proceeds from sale of stock to Lincoln Park Capital

    381        

Proceeds from line of credit

    390        

Net cash provided by financing activities

    1,739       1,924  

Net effect of foreign currency translation

    1       (8 )

Net change in cash

    (339 )     51  

Cash at beginning of year

    990       655  

Cash at end of period

  $ 651     $ 706  

Supplemental disclosures of cash flow information

               

Cash paid during the year for:

               

Interest

  $ 5     $ 40  

Income taxes

  $ 5     $ 3  

Non-cash investing and financing activities

               

Fair value of warrants issued with convertible notes

  $ 225     $ 1,817  

Conversion of convertible notes payable into common stock

  $ 530     $ 515  

Convertible Notes issued with Original Issue Discount

  $     $ 373  

Exercise of stock options

  $ 2     $  

Fair value of stock issued for financing fees

  $ 85     $  

Right of use, operating lease and liability

  $     $ 370  

Deemed dividend

  $ 297     $ 782  

 

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

 

 

BIOLARGO, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

 

Note 1. Business and Organization

 

Description of Business  

 

BioLargo, Inc. delivers innovative and sustainable technology-based products and services, as well as environmental engineering expertise, across a broad range of industries with an overriding mission to “make life better” with a focus on clean water, clean air, and advanced wound care. 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 six months ended June 30, 2019, we had a net loss of $4,736,000, used $1,851,000 cash in operations, and at June 30, 2019, had a working capital deficit of $3,473,000 and current assets of $1,001,000. We do not have sufficient working capital and do not believe gross profits will be sufficient to fund our current level of operations or pay our debt due prior to December 31, 2019, and will have to obtain further investment capital to continue to fund operations and seek to refinance our existing debt. We have been, and anticipate that we will continue to be, limited in terms of our capital resources. During the year ended December 31, 2018, and the six months ended June 30, 2019, we generated revenues of $1,364,000 and $790,000 through our business segments (Odor-No-More and BLEST – see Note 10, “Business Segment Information”). Neither generated enough revenues to fund their operations. We have $2,119,000 in debt obligations due in the next 12 months (see Notes 4 and 12): (i) $1,724,000in notes that are convertible at the option of the holder, (ii) a $145,000 note due September 6, 2019, and (iii) a line of credit in the amount of $250,000 due on 30-day demand beginning September 1, 2019. We intend to either refinance or renegotiate these obligations, as our cash position is insufficient to maintain our current level of operations and pay these liabilities. Thus, we will be required to raise additional capital. We continue to raise money through private securities offerings, and continue to negotiate for more substantial financings from private and institutional investors. During the six months ended June 30, 2019, we received $1,924,000 net cash provided by financing activities, and at June 30, 2019 had cash of $706,000. Subsequent to June 30, 2019, we received $2,540,000 from new financing activities. No assurance can be made of our success at raising money through private or public offerings.

 

The foregoing factors raise substantial doubt about our ability to continue as a going concern. Ultimately, our ability to continue as a going concern is dependent upon our ability to attract significant new sources of capital, attain a reasonable threshold of operating efficiencies and achieve profitable operations by licensing or otherwise commercializing products incorporating our technologies. The consolidated financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern.

 

Organization

 

We are a Delaware corporation formed in 1991. We have five wholly-owned subsidiaries: BioLargo Life Technologies, Inc., organized under the laws of the State of California in 2006; Odor-No-More, Inc., organized under the laws of the State of California in 2009; BioLargo Water Investment Group Inc., which wholly owns BioLargo Water, Inc., organized under the laws of Canada in 2014; BioLargo Development Corp., organized under the laws of the State of California in 2016; and BioLargo Engineering Science and Technologies, LLC, organized under the laws of the State of Tennessee in 2017 (“BLEST”). Additionally, we own 41.4% of Clyra Medical Technologies, Inc. (“Clyra Medical”), organized under the laws of the State of California in 2012, and consolidate their financial statements (see Notes 2 and 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 six months ended June 30, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019, 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, 2018 filed with the Securities and Exchange Commission (the “SEC”) on March 29, 2019, as amended.

 

 

BIOLARGO, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

 

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 Clyra Medical. Management believes Clyra Medical’s financial statements are appropriately consolidated with that of the Company after reviewing the guidance of ASC Topic  810,  “Consolidation”, and concluding that BioLargo controls Clyra Medical. While BioLargo does not have voting interest control through a majority stock ownership of Clyra Medical (it owns 41% of the outstanding voting stock), it does exercise control under the “Variable Interest Model”: there is substantial board overlap, BioLargo is the primary beneficiary since it has the power to direct Clyra Medical’s activities that most significantly impact Clyra Medical’s performance, and it has the obligation to absorb losses or receive benefits (through royalties and licensing) that could be potentially significant to Clyra Medical. BioLargo has consolidated Clyra Medical’s operations for all periods presented. All intercompany accounts and transactions have been eliminated (see Note 8).

 

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 December 31, 2018 and June 30, 2019, our cash balances were made up of the following (in thousands):

 

   

December 31,

2018

   

June 30,

2019

 

BioLargo, Inc. and wholly owned subsidiaries

  $ 193     $ 553  

Clyra Medical Technologies, Inc.

    462       153  

Total

  $ 655     $ 706  

 

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 December 31, 2018 and June 30, 2019 was zero.

 

 

BIOLARGO, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Credit Concentration

 

We have a limited number of customers that account for significant portions of our revenue. During the six months ended June 30, 2018 and 2019, we had two customers that each accounted for more than 10% of consolidated revenues in the respective periods, as follows:

 

   

June 30,
2018

   

June 30,

2019

 

Customer A

    43 %     18 %

Customer B

    15 %     10 %

 

We had four customers that accounted for more than 10% of consolidated accounts receivable at December 31, 2018 and at June 30, 2019 as follows:

 

   

December 31,

2018

   

June 30,

2019

 
                 

Customer W

    12 %     11 %

Customer X

    31 %  

<10

%

Customer Y

 

<10

%     10 %

Customer Z

 

<10

%     10 %

 

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 December 31, 2018 and June 30, 2019 was $3,000. As of December 31, 2018 and June 30, 2019, inventories consisted of (in thousands):

 

   

December 31,

2018

   

June 30,

2019

 
                 

Raw material

  $ 14     $ 26  

Finished goods

    12       12  

Total

  $ 26     $ 38  

 

Other Assets

 

Other assets consisted of security deposits of $35,000 related to our real estate leases.

 

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. As of December 31, 2018 and June 30, 2019, management determined that there was no impairment of its long-lived assets.

 

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 the loss attributable to common shareholders 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 and six months ended June 30, 2018 and 2019, 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.

 

 

BIOLARGO, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Share-Based Compensation Expense

 

We recognize compensation expense for stock option awards on a straight-line basis for employees over the applicable service period of the award, which is the vesting period. We recognize compensation expense for stock option awards for non-employees at the fair value on the grant date. Generally, the options issued to non-employees have been earned upon issuance. For the instances that options are issued to non-employees with a vesting schedule, the fair value is recorded on each vesting 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 six months ended June 30, 2018 and 2019:

 

   

2018

   

2019

 
   

Non Plan

 

2018 Plan

   

Non Plan

 

2018 Plan

 

Risk free interest rate

   2.43 -

2.91%

    2.91 %   2.00 -

2.65%

   2.00 -

2.65%

 

Expected volatility

   548 -

563%

    548 %    147 -

152%

   147 -

152%

 

Expected dividend yield

                         

Forfeiture rate

                         

Life in years

    7       7       7       7    

 

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.

 

 

BIOLARGO, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

The convertible note issued with the warrant is recorded at its 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 promissory note is examined for any intrinsic beneficial conversion feature (“BCF”) of which the convertible price of the note is less than the closing common stock price on date of issuance. If the relative fair value method is used to value the convertible promissory note 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. As presented, 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 adopted ASU 2014-09, “Revenue from Contracts with Customers”, Topic 606, on January 1, 2018. The guidance focuses on the core principle for revenue recognition.

 

The core principle of the guidance 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, 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.

 

For product revenue, we identify the contract with the customer through a written purchase order (which may be part of a national purchasing agreement), 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. We recognize revenue at a point in time when the order for its goods are shipped if the agreement with our customer is FOB our warehouse facility, and when goods are delivered to its customer if the agreement with our customer is FOB destination. Revenue is recognized with a reduction for sales discounts, as appropriate and negotiated in the customer’s purchase order.

 

For service revenue, we identify 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. Service contracts typically call for invoicing for time and materials incurred for that contract. To date, there have been no discounts or other financing terms for the contracts.

 

In the future, we may generate revenues from royalties or license fees from our intellectual property. In the event we do so, 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.

 

 

BIOLARGO, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Government Grants

 

We have been awarded multiple research grants from governmental and quasi-governmental institutions. The grants received are considered “other income” and are included in our Consolidated Statements of Operations and Comprehensive Loss. We received our first grant in 2015 and have been awarded over 60 grants totaling over $3.6 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.

 

Fair Value of Financial Instruments

 

Management believes the carrying amounts of the Company’s financial instruments (excluding debt and equity instruments) as of December 31, 2018 and June 30, 2019 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.

 

Recent Accounting Pronouncements

 

In August 2018, the FASB issued Accounting Standards Update No. 2018-13, “Fair Value Measurement (Topic 820), Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement.” The amendments in this update modify the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement. The amendments in this update are effective for public business entities for fiscal years beginning after December 15, 2019, including interim periods within that fiscal year. Management has not concluded its evaluation of the guidance. Its initial analysis is that it does not believe the new guidance will substantially impact the Company’s financial statements.

 

 

BIOLARGO, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

In June 2018, The FASB issued Accounting Standards Update No. 2018-07, “Compensation – Stock Compensation (topic 718): Improvements to Nonemployee Share-Based Payment Accounting”. The amendments in this update expand the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. An entity should apply the requirements of Topic 718 to nonemployee awards except for specific guidance on inputs to an option pricing model and the attribution of cost (that is, the period of time over which share-based payment awards vest and the pattern of cost recognition over that period). The amendments specify that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. The amendments also clarify that Topic 718 does not apply to share-based payments used to effectively provide (1) financing to the issuer or (2) awards granted in conjunction with selling goods or services to customers as part of a contract accounted for under Topic 606, Revenue from Contracts and Customers. The amendments in this update are effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. This new guidance did not materially impact our stock compensation expense.

 

In February 2016, the FASB issued ASU Update No. 2016-02, “Leases,” which will require lessees to recognize most leases on their balance sheets as a right-of-use asset with a corresponding lease liability, and lessors to recognize a net lease investment. Additional qualitative and quantitative disclosures will also be required. We adopted this standard effective January 1, 2019 using the modified retrospective transition method approved by the FASB in July 2018, which resulted in a $399,000 gross up of assets and liabilities; this balance may fluctuate over time as we enter into new leases, extend or terminate current leases.  As of June 30, 2019, the gross up of our balance sheet related to our operating leases totals $370,000.

 

 

Note 3. Lincoln Park Financing

 

On August 25, 2017, we entered into a stock purchase agreement (“LPC Purchase Agreement”) with Lincoln Park Capital Fund, LLC (“Lincoln Park”), pursuant to which Lincoln Park agreed to purchase from us at our request up to an aggregate of $10 million of our common stock (subject to certain limitations) from time to time over a period of three years. The LPC Purchase Agreement allows us, from time to time and 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 Purchase 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 in the LPC Purchase Agreement or LPC RRA other than a prohibition on entering into a “Variable Rate Transaction,” as defined in the Purchase Agreement. Lincoln Park may not assign or transfer its rights and obligations under the Purchase Agreement.

 

We did not sell any shares to Lincoln Park during the six months ended June 30, 2019. During the six months ended June 30, 2018, we elected to sell to Lincoln Park 1,256,751 shares of our common stock for which we received $381,000. Additionally, we issued Lincoln Park 18,260 “additional commitment” shares.

 

We record stock sales in our equity statement and the additional commitment shares issued reduce the deferred offering costs on our balance sheet.  

 

 

BIOLARGO, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

 

Note 4. Debt Obligations

 

The following table summarizes our debt obligations outstanding as of December 31, 2018 and as of June 30, 2019 (in thousands). The Company raised $2,360,000 new financing after June 30, 2019, and refinanced some of the obligations in the table (see Note 12).

 

   

December 31,

2018

   

June 30,
2019

 

Current liabilities:

               

Notes payable and line of credit

               

Notes payable, mature September 6, 2019

  $ 400     $ 484  

Note payable, due on demand 60 days’ notice (or March 8, 2023)

          50  

Line of credit, due on demand 30 days’ notice after September 1, 2019

    430       430  

Note payable issued by Clyra Medical to Scion, matures June 17, 2020 (Note 8)

          1,007  

Total notes payable and line of credit

  $ 830     $ 1,971  
                 

Convertible notes payable:

               

Convertible note, matured January 11, 2019

    300        

Convertible notes, mature December 31, 2019 (1)

    75       75  

Convertible note, matures July 15, 2019

    550       125  

Convertible note, matures July 20, 2019 (1)

    440       440  

Convertible note, matures October 7, 2019

          370  

Convertible notes, mature November 5, 2019 and December 7, 2019

          554  

Convertible nine-month OID notes, mature beginning October 2019

          213  

Convertible note, matures April 18, 2020

          220  

Convertible notes, mature February 14 and March 17, 2020

          200  

Convertible note, matures March 4, 2020

          110  

Convertible 12-month OID notes, mature beginning June 2020

          531  

Convertible notes payable, mature June 20, 2020 (1)

          25  

Total convertible notes payable

  $ 1,365     $ 2,863  
                 

Total current liabilities

  $ 2,195     $ 4,834  
                 

Long-term liabilities:

               

Note payable issued by Clyra Medical to Scion, matures June 17, 2020 (See Note 8)

    1,007        

Convertible notes payable, mature June 20, 2020 (1)

    25        

Convertible notes payable, mature April 20, 2021 (1)

    100       100  

Convertible notes, mature June 15, 2021 (1)

    110       110  

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

    50        

Total long-term liabilities

  $ 1,292     $ 210  
                 

Total

  $ 3,487     $ 5,044  

 

(1) These notes are convertible at our option at maturity.

 

The following discussion includes debt instruments to which amendments were made during the three months ended June 30, 2019, and includes 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 Annual Report filed March 29, 2019.

 

 

BIOLARGO, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Notes payable, mature September 6, 2019

 

On June 4, 2019, we exercised our right to extend the maturity dates of two promissory notes due June 5, 2019 which were originally issued September 19, 2018 to Vernal Bay Investments, LLC (“Vernal”) and Chappy Bean, LLC (“Chappy Bean”). Our election to extend the maturity dates increased the principal amount of each note by 10%, such that the aggregate principal balance of the two notes increased to $484,000 as of June 4, 2019. Subsequent to June 30, 2019, we refinanced one of the two notes (see Note 12).

 

Convertible Note, matures July 15, 2019 (Vista Capital)

 

On January 7, 2019, we and Vista Capital agreed to amend the convertible promissory note originally issued December 14, 2017 (“Vista 2017 Note”) and extend its maturity date to April 15, 2019. The principal amount of the note was increased to $605,100. The note will continue to earn interest at the rate of five percent per annum. The amendment re-defined the conversion price to equal 80% of the lowest closing bid price of the Company’s common stock during the 25 consecutive trading days immediately preceding the conversion date. The amendment also reduced the prepayment penalty from 20% to 15%, such that a prepayment requires the payment of an additional 15% of the then outstanding balance, and reduced the penalty for a default from 30% to 25% of the outstanding balance. The intrinsic value of the beneficial conversion feature resulted in a fair value totaling $487,000, all of which was recorded as interest expense during the six months ended June 30, 2019.

 

On March 28, 2019, we and Vista agreed to further extend the maturity date of the Vista 2017 Note, to July 15, 2019. In consideration for the extension, we agreed to increase the principal balance of the note by 10 percent, to $420,000. The increase in principal totaling $38,000 was recorded as a loss on debt extinguishment on our statement of operations. On July 16, 2019, we and Vista further agreed to extend the maturity date to August 31, 2019. No additional consideration was given for the extension (see Note 12).

 

During the six months ended June 30, 2019, Vista Capital elected to convert $515,000 of the outstanding principal of the Vista 2017 Note, and we issued 4,406,312 shares of our common stock to Vista pursuant to the conversions.  As of June 30, 2019, the outstanding balance on the Vista Note totaled $125,000. Subsequent to June 30, 2019, we and Vista agreed to extend the maturity date of the Note to February 28, 2020 (see Note 12).

 

Convertible Note, matures October 7, 2019 (Vista Capital)

 

On January 7, 2019, Vista Capital invested $300,000 and we issued a convertible promissory note (the “Vista 2019 Note”) in the principal amount of $330,000, maturing nine months from the date of issuance (October 7, 2019). The Vista 2019 Note earned a one-time interest charge of 12%, recorded as a discount on convertible notes and will be amortized over the term of the note. The Vista 2019 Note allows Vista Capital to convert the note to our common stock at any time at a price equal to 65% of the lowest closing bid price of the Company’s common stock during the 25 consecutive trading days immediately preceding the conversion date. The Vista 2019 Note contains standard provisions of default, and precludes the issuance of shares to the extent that Vista Capital would beneficially own more than 4.99% of our common stock. The Vista 2019 Note also includes a term that allows Vista Capital to adopt any term of a future financing more favorable than what is provided in the note. For example, these provisions could include a more favorable interest rate, conversion price, or original issue discount. The Vista 2019 Note also requires that we include the shares underlying conversion of the note on the next registration statement we file with the SEC (but not the registration statement filed November 6, 2018).  The intrinsic value of the beneficial conversion feature resulted in a fair value totaling $300,000, and is recorded as a discount on convertible notes on our balance sheet.  This discount will be amortized over the term of the note as interest expense, all of which will be recorded in 2019. Subsequent to June 30, 2019, we and Vista agreed to extend the maturity date of the Note to April 7, 2020 (see Note 12).

 

Convertible Notes, mature November 5, 2019 and December 7, 2019 (Tangiers)

 

On January 31, 2019, we issued a 12% Convertible Promissory Note to Tangiers Global, LLC (“Tangiers”) in the aggregate principal amount of up to $495,000 (the “Tangiers Note”). The note allows for two payments, each due in nine months after receipt, and incurs a guaranteed interest of 12% at inception. The initial payment of $300,000 was received on February 5, 2019, representing a $330,000 principal amount and 10% original issue discount. It is due November 5, 2019. We received the second payment, in the amount of $150,000, on March 7, 2019, increasing the principal amount due under the note to $495,000. This second amount, plus guaranteed interest, is due December 7, 2019. In the aggregate, the principal amount of the note, plus guaranteed interest, totals $554,000.

 

 

BIOLARGO, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

The Tangiers Note is convertible at the option of Tangiers at a conversion price equal to 75% of the lowest closing bid price of the Company’s common stock during the 25 consecutive trading days prior to the conversion date. The intrinsic value of the beneficial conversion feature resulted in a fair value totaling $185,000, and is recorded as a discount on convertible notes on our balance sheet. This discount will be amortized over the term of the note as interest expense, all of which will be recorded in 2019.

 

We may prepay the Tangiers Note up to 180 days after the effective date. If a prepayment is made within 90 days, we must pay a prepayment penalty of 25%; from 91 to 180 days, we must pay a prepayment penalty of 30%. We may pay such prepayment penalties, if we so choose, by issuing common stock at the conversion price. If such shares are not eligible for removal of restrictions pursuant to a registration statement or Rule 144 within 10 trading days following the six-month anniversary of the effective date, Tangiers may rescind the stock issuance and force the Company to pay the prepayment penalty in cash. Upon the occurrence of an event of default, as such term is defined under the Tangiers Note, additional interest will accrue from the date of the event of default at a rate equal to the lower of 22% per annum or the highest rate permitted by law, and an additional 25% shall be added to the principal amount of the note.

 

In connection with the Tangiers Note, the Company caused its transfer agent to reserve 3,000,000 shares of the Company’s common stock, in the event that the Tangiers Note is converted.

 

On July 29, 2019, Tangiers elected to convert $369,600 into equity, and subsequently agreed to invest an additional $350,000 (see Note 12).

 

Convertible Nine-Month OID Notes

 

During the three months ended March 31, 2019, we issued convertible promissory notes (each, an “OID Note”) in the aggregate principal amount of $213,000, with a 25% original issue discount. These notes were initially convertible into shares of the Company’s common stock at a conversion price of $0.25 per share, and mature nine months from the date of issuance. Our agreement with the investors provided that the initial conversion price may be adjusted downward in the event the Company subsequently issues a convertible promissory note at a lower conversion rate (with this lower conversion rate becoming the adjusted conversion rate under the OID Note), or conducts an equity offering at a per-share price less than $0.25. Each investor also received a stock purchase warrant equal to 75% of the principal amount, divided by the conversion price of $0.25 (see Note 6).

 

On June 7, 2019, we began issuing twelve-month OID notes at a lower conversion price ($0.17; see “Convertible Twelve-month OID notes”, below). As such, we reduced conversion prices of these notes to $0.17, resulting in an increase of 300,000 shares available for purchase under the warrants.

 

Convertible Note, matures April 18, 2020

 

On April 18, 2019, we received $188,000 and issued a convertible note to Bellridge Capital, LP (“Bellridge”) in the principal amount of $220,000 (the “Bellridge Note”), representing a 10% original issue discount, and a deduction of $10,000 for legal fees paid to the investor. The note is due April 18, 2020 and earns interest at 10% per annum. We and Bellridge concurrently entered into a Securities Purchase Agreement through which, upon our mutual consent, Bellridge may invest up to an additional $400,000 (in two tranches) that would be reflected in two additional notes, each of which would mature one year from the date of issuance.

 

The Bellridge Note is convertible at the option of Bellridge at a conversion price equal to 70% of the lowest closing bid price of the Company’s common stock during the 25 trading days prior to the conversion date. We may prepay the Bellridge Note at any time. If we do so up to 90 days after the effective date, the amount due is equal to 125% of the unpaid principal amount of the note along with any accrued interest, and thereafter, the amount due is 130% of the unpaid principal amount of the note along with any accrued interest. Upon the occurrence of an event of default, as such term is defined under the Bellridge Note, additional interest will accrue from the date of the event of default at a rate equal to the lesser of 24% per annum or the highest rate permitted by law. The intrinsic value of the beneficial conversion feature resulted in a fair value totaling $120,000, and is recorded as a discount on convertible notes on our balance sheet. This discount will be amortized over the twelve-month term of the note as interest expense.

 

 

BIOLARGO, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Convertible notes, mature February 14 and March 17, 2020

 

On May 14, 2019, we received $95,000 and issued a convertible note to Crossover Capital Fund I, LP (“Crossover Capital”) in the principal amount of $110,000 , representing a 10% original issue discount, and a deduction of $5,000 for legal fees and due diligence. The note is due nine months from the date of issuance, on February 14, 2020.

 

On June 17, 2019, we received a second investment from Crossover Capital in the amount of $77,000 and issued a convertible note in the principal amount of $90,000, representing a 10% original issue discount, and a deduction of $5,000 for legal fees and due diligence. The note is due nine months from the date of issuance, March 17, 2020.

 

Concurrently with these two investments, we and Crossover Capital entered into Securities Purchase Agreements. The notes are convertible at the option of Crossover Capital at a conversion price equal to 70% of the lowest closing bid price of our common stock during the 25 trading days prior to the conversion date. We may prepay the notes up to 180 days after issuance, by paying a prepayment penalty that increases from 5% within the first 30 days, to 30% during the last 30. Upon the occurrence of an event of default, as such term is defined under the note, additional interest will accrue from the date of the event of default at a rate equal to the lesser of 24% per annum or the highest rate permitted by law. The intrinsic value of the beneficial conversion features resulted in an aggregate fair value of $134,000, and is recorded as a discount on convertible notes on our balance sheet. This discount will be amortized over the nine-month terms of the notes as interest expense.

 

Convertible note, matures March 4, 2020

 

On June 4, 2019, we received $95,000 and issued a convertible note to EMA Financial, LLC (“EMA”) in the principal amount of $110,000 (the “EMA Note”), representing a 10% original issue discount, and a deduction of $5,000 for legal and diligence fees. The note is due nine-months from the date of issuance, on March 4, 2020, and earns interest at a rate of 10% per annum.

 

The EMA Note is convertible at the option of EMA at a conversion price equal to 70% of the lowest closing bid price of the Company’s common stock during the 25 trading days prior to the conversion date. We may prepay the EMA Note at any time. If we do so up to 90 days after the effective date, the amount due is equal to 125% of the unpaid principal amount of the note along with any accrued interest, and thereafter, the amount due is 130% of the unpaid principal amount of the note along with any accrued interest. Upon the occurrence of an event of default, as such term is defined under the EMA Note, additional interest will accrue from the date of the event of default at a rate equal to the lesser of 24% per annum or the highest rate permitted by law. The intrinsic value of the beneficial conversion feature resulted in a fair value totaling $77,000, and is recorded as a discount on convertible notes on our balance sheet. This discount will be amortized over the nine-month term of the note as interest expense.

 

Convertible Twelve-month OID notes

 

During the three months ended June 30, 2019, we received $425,000 and issued convertible promissory notes (each, a “12-Month OID Note”) in the aggregate principal amount of $531,000, with a 25% original issue discount, to four accredited investors. The original issuance discount totaled $106,000 and is recorded as a discount on convertible notes payable on our balance sheet. The intrinsic value of the beneficial conversion features resulted in an aggregate fair value of $425,000, and is recorded as a discount on convertible notes on our balance sheet. The discounts will be amortized and recorded to interest expense over the term of the notes. These notes mature twelve months from the date of issuance. The earliest maturity date is June 7, 2020.

 

Each Twelve-month OID Note is convertible by the investor at any time at $0.17 per share. This initial conversion price shall be adjusted downward in the event the Company subsequently issues a convertible promissory note at a lower conversion rate (with this lower conversion rate becoming the adjusted conversion rate under the note), or conducts an equity offering at a per-share price less than $0.17. The notes earn interest at a rate of five percent (5%) per annum, due at maturity. The Company may prepay the notes only upon 10 days’ notice to the investor, during which time the investor may exercise his/her right to convert the note to stock.

 

We must prepay the OID Notes upon the conclusion of a “qualifying offering” (an offering raising $3.5 million or more); in the event a qualified offering is not concluded prior to the maturity date, or the Note is otherwise not paid in full, the Company shall redeem the notes by issuing the number of shares of common stock equal to the outstanding balance divided by the lower of (i) the current conversion price and (ii) seventy percent (70%) of the lowest daily volume weighted average price (“VWAP”) during the 25 trading days immediately preceding the conversion.

 

In addition to the note, each OID investor will receive a warrant to purchase common stock exercisable at $0.25 per share (see Note 6).

 

Subsequent to June 30, 2019, we issued additional 12-month OID notes and closed the offering (see Note 12).

 

 

BIOLARGO, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

 

Note 5. Share-Based Compensation

 

Issuance of Common Stock in exchange for payment of payables

 

Payment of Officer Salaries

 

On March 29, 2019, we issued 579,996 shares of our common stock in lieu of $93,000 of accrued salary and unreimbursed business expenses owed to two of our officers. The price-per-share of $0.16 was based on the closing price of our common stock on the last business day of the month. These shares were issued pursuant to our 2018 Equity Incentive Plan.

 

On June 28, 2019, we issued 465,875 shares of our common stock in lieu of $107,000 of accrued salary and unreimbursed business expenses owed to two of our officers. The price-per-share of $0.23 was based on the closing price of our common stock on the last business day of the month. These shares were issued pursuant to our 2018 Equity Incentive Plan.

 

On March 31, 2018, we issued 323,030 shares of our common stock in lieu of $84,000 of accrued salary and unreimbursed business expenses owed to two of our officers. The price-per-share of $0.26 was based on the closing price of our common stock on the last business day of the month.

 

On June 29, 2018, we issued 176,947 shares of our common stock in lieu of $76,000 of accrued salary and unreimbursed business expenses owed to two of our officers. The price-per-share of $0.43 was based on the closing price of our common stock on the last business day of the month.

 

Payment of Consultant Fees

 

During the three months ended June 30, 2019, we issued 515,809 shares of our common stock at a range of $0.16 – $0.23 per share in lieu of $107,000 accrued and unpaid obligations to consultants.

 

During the three months ended June 30, 2018, we issued 556,874 shares of our common stock, at prices ranging between $0.17 - $0.23 per share, in lieu of $174,000 of accrued and unpaid obligations to consultants.

 

Payment of Interest on Notes

 

During the three months ended June 30, 2019, we issued 87,478 shares of our common stock, at prices ranging between $0.23 - $0.43 per share, in lieu of $15,000 of accrued interest due on promissory notes.

 

During the three months ended June 30, 2018, we issued 1,302,734 shares of our common stock, at prices ranging between $0.23 - $0.45 per share, in lieu of $329,000 of accrued interest due on promissory notes.

 

Restricted Stock Units

 

On May 28, 2019, our Compensation Committee, in conjunction with the approval of a new employment agreement for our Vice President of Operations and President of our subsidiary Odor-No-More, granted Joseph L. Provenzano a restricted stock unit of 500,000 shares of common stock, subject to the execution of a “lock-up agreement” whereby the shares remain unvested unless and until the earlier of (i) a sale of the Company, (ii) the successful commercialization of the Company’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 resulting in his termination.

 

Stock Option Expense

 

During the six months ended June 30, 2018 and 2019, we recorded an aggregate $696,000 and $648,000, respectively, in selling general and administrative expense related to the issuance and vesting of stock options. We issued options through our 2018 Equity Incentive Plan, and outside of this plan.

 

 

BIOLARGO, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

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 was 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 from inception through June 30, 2018 and from December 31, 2018 through the six months ended June 30, 2019, is as follows:

 

                   

Weighted

         
                   

Average

   

Aggregate

 
   

Options

   

Exercise

   

Price per

   

intrinsic

 

As of June 30, 2018:

 

Outstanding

   

Price per share

   

share

   

Value (1)

 

Inception, June 22, 2018

                         

Granted

    296,976       0.43       0. 43          

Balance, June 30, 2018

    296,976     $ 0.43     $ 0.43     $  

 

 

                     

Weighted

         
                     

Average

   

Aggregate

 
   

Options

   

Exercise

   

Price per

   

intrinsic

 

As of June 30, 2019:

 

Outstanding

   

Price per share

   

share

   

Value (1)

 

Balance, December 31, 2018

    1,318,517     $0.22 0.43     $ 0.30          

Granted

    3,728,366      0.16 0.22       0.18          

Expired

                           

Balance, June 30, 2019

    5,046,833     $0.16 0.43     $ 0.21     $ 109,000  

(1) – Aggregate intrinsic value based on closing common stock price of $0.23 at June 30, 2019.

 

The options to purchase 3,528,366 shares granted during the six months ended June 30, 2019 are comprised of options issued to employees, consultants, officers, and directors. We issued options to purchase 513,012 shares of our common stock to employees and consultants in lieu of salary and fees due at an exercise price on the respective grant dates ranging between $0.16 - $0.25 per share. The fair value of these options totaled $93,000 and is recorded as selling, general and administrative expense. We issued options to purchase 715,354 shares of our common stock to members of our board of directors for services performed, in lieu of cash, at an exercise price on the respective grant date of $0.16 and $0.23 per share. We issued options to purchase 300,000 shares of our common stock at an exercise price on the respective grant date of $0.22 per share to our Chief Financial Officer as described immediately below. We issued options to purchase 1,000,000 shares of our common stock at an exercise price on the respective grant date of $0.17 per share to our Vice President of Operations as described below. We issued options to purchase 1,200,000 shares of our common stock at an exercise price on the respective grant date of $0.17 per share to our Vice President of Sales as described below. The fair value of the 2018 Plan options issued during the six months ended June 30, 2019, totaled $137,000 and is recorded as selling, general and administrative expenses.

 

Chief Financial Officer Contract Extension

 

On January 16, 2019, we agreed to extend the engagement agreement dated February 1, 2008 (the “Engagement Agreement”, which had been previously extended multiple times) with our Chief Financial Officer, Charles K. Dargan, II. The Engagement Extension Agreement dated as of January 16, 2019 (the “Engagement Extension Agreement”) provides for an additional term to expire September 30, 2019 (the “Extended Term”), and is retroactively effective to the termination of the prior extension on September 30, 2018. Mr. Dargan has been serving as the Company’s Chief Financial Officer since such termination pursuant to the terms of the December 31, 2018 extension.

 

 

BIOLARGO, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

For the Extended Term, Mr. Dargan was issued an option (“Option”) to purchase 300,000 shares of the Company’s common stock, at a strike price equal to the closing price of the Company’s common stock on January 16, 2019 of $0.22, to expire January 16, 2029, and to vest over the term of the engagement with 75,000 shares having vested as of June 30, 2019, and the remaining shares to vest 25,000 shares monthly beginning January 31, 2019, and each month thereafter, so long as the Engagement Agreement is in full force and effect. The Option was issued pursuant to the Company’s 2018 Equity Incentive Plan. The fair value of the option totaled $67,000, of which $50,000 was recorded as selling, general and administrative expense during the six months ended June 30, 2019.

 

The issuance of the Option is Mr. Dargan’s sole source of 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 this 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.

 

Vice President of Operations Contract Extension

 

On May 28, 2019, the Compensation Committee of the Board of Directors approved the terms of an employment agreement for our Vice President of Sales and issued him options to purchase an aggregate 1,200,000 shares of the Company’s common stock pursuant to the terms of our 2018 Plan. The exercise price of the first option to purchase 200,000 shares is equal to the closing price of our common stock on the May 28 grant date, at $0.17 per share. One-third of the option vests upon grant, the next third at the first anniversary of the grant, and the final third upon the second anniversary of the grant. Fair value of $34,000 was recorded as selling, general and administrative expenses at issuance.  The remaining options to purchase an aggregate 1,000,000 shares are unvested at grant date, and contingent upon certain performance metrics based on sales of our Odor-No-More subsidiary, none of which have been met.  As such, no additional fair value was recorded and we are unable to estimate at this time if these metrics will be met. Upon execution of his employment agreement on July 5, 2019, an additional option to purchase 300,000 shares was granted, with an exercise price as of July 5 ($0.25), vesting 100,000 shares on the first, second and third anniversary of the agreement.

 

Vice President of Sales

 

On May 28, 2019, the Compensation Committee of the Board of Directors approved the terms of an employment agreement for our Vice President of Sales and issued him options to purchase an aggregate 1,200,000 shares of the Company’s common stock pursuant to the terms of our 2018 Plan. The exercise price of the first option to purchase 200,000 shares is equal to the closing price of our common stock on the May 28 grant date, at $0.17 per share. One-third of the option vests upon grant, the next third at the first anniversary of the grant, and the final third upon the second anniversary of the grant. Fair value of $34,000 was recorded as selling, general and administrative expenses at issuance.  The remaining options to purchase an aggregate 1,000,000 shares are unvested at grant date, and contingent upon certain performance metrics based on sales of our Odor-No-More subsidiary, none of which have been met.  As such, no additional fair value was recorded and we are unable to estimate at this time if these metrics will be met. Upon execution of his employment agreement on July 5, 2019, an additional option to purchase 300,000 shares was granted, with an exercise price as of July 5 ($0.25), vesting 100,000 shares on the first, second and third anniversary of the agreement.

 

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 six months ended June 30, 2018 and 2019 is as follows:

 

                       

Weighted

         
                       

Average

   

Aggregate

 
   

Options

     

Exercise

   

Price per

   

intrinsic

 

As of June 30, 2018:

 

Outstanding

     

price per share

   

share

   

Value (1)

 

Balance, December 31, 2017

    9,831,586       $0.23 1.89     $ 0.44          

Expired

    (70,000 )      1.45 1.89       1.79          

Balance, June 30, 2018

    9,761,586       $0.23 1.65     $ 0.43     $  
                                     
As of June 30, 2019:                                    

Balance, December 31, 2018

    9,691,586       $0.23 0.94     $ 0.43          

Expired

    (842,136 )      0.28 0.70       0.49          

Balance, June 30, 2019

    8,849,451       $0.23 1.65     $ 0.46     $  

(1) – Aggregate intrinsic value based on closing common stock price of $0.23 at June 30, 2019.

 

 

BIOLARGO, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Non-Plan Options issued

 

During the six months ended June 30, 2019, we issued options to purchase 970,380 shares of our common stock at exercise prices ranging between $0.16 – $0.25 per share to vendors for fees for service resulting in a fair value totaling $194,000. The fair value of the options issued and vested during the six months ended June 30, 2019 totaled $367,000, is recorded in our selling, general and administrative expense.

 

During the six months ended June 30, 2018, we issued options to purchase 1,008,268 shares of our common stock at exercise prices ranging between $0.23 – $0.43 per share to vendors and to members of our board of directors in exchange for unpaid obligations for their services. The fair value of the options totaled $261,000 and is recorded as selling, general and administrative expenses.

 

Activity of our non-plan stock options issued for the six months ended June 30, 2018 and 2019 is as follows:

 

                       

Weighted

         
    Non-plan                

average

   

Aggregate

 
    Options       Exercise    

price per

    intrinsic  
As of June 30, 2018:   outstanding       price per share     share    

value (1)

 

Balance, December 31, 2017

    20,018,408       $0.25 1.00     $ 0.51          

Granted

    1,008,268        0.23 0.43       0.26          

Expired

    (2,400,000

)

      0.99         0.99          

Balance, June 30, 2018

    18,626,676       $0.25 1.00     $ 0.45     $  
                                     
As of June 30, 2019:                                    

Balance, December 31, 2018

    19,319,496       $0.23 1.00     $ 0.43          

Granted

    970,380         0.16 0.25       0.19          

Expired

    (691,975 )       0.55         0.55          

Balance, June 30, 2019

    19,597,901       $0.16 1.00     $ 0.42     $ 34,000  

(1) – Aggregate intrinsic value based on closing common stock price of $0.23 at June 30, 2019.

 

 

 

Note 6. Warrants

 

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

 

                       

Weighted

         
                       

average

   

Aggregate

 
   

Warrants

     

Exercise

   

price per

   

intrinsic

 

As of June 30, 2018:

 

outstanding

     

price per share

   

share

   

value (1)

 

Balance, December 31, 2017

    22,104,817       $0.125 1.00     $ 0.45          

Issued

    2,611,513        0.25 0.48       0.35          

Expired

    (2,683,400

)

      0.40         0.40          

Balance, June 30, 2018

    22,032,930       $0.125 1.00     $ 0.44          
                                     
As of June 30, 2019:                                    

Balance, December 31, 2018

    26,872,430       $0.25 1.00     $ 0.42          

Issued

    9,031,871        0.10 0.25       0.15          

Exercised

    (5,205,746 )      0.10 0.12       0.11          

Balance, June 30, 2019

    30,698,555        $0.10 1.00     $ 0.39     $ 547,000  

 

 

BIOLARGO, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Warrants issued as part of debt extension

 

On March 5, 2019, we executed amendments extending the maturity dates of notes issued to Vernal Bay and Chappy Bean (see Note 4, subsection titled “ Notes payable, mature September 6, 2019 ”). As consideration for this extension, we agreed to reduce the exercise price, and increase the number of shares purchasable, by the warrants held by Vernal Bay and Chappy Bean. Vernal Bay had been issued a warrant to purchase 1,387,500 shares at $0.25 per share, expiring September 19, 2023. We agreed to lower the exercise price to $0.20 per share, and proportionately increase the number of shares in the warrant to 1,734,375. By doing so, the maximum investment amount under the warrant of $346,875 remained the same. Chappy Bean’s warrant to purchase 600,000 shares was similarly modified, such that it now allows for the purchase of 750,000 shares at $0.20 per share. The reduction in warrant exercise price resulted in a fair value of $56,000 recorded as loss on debt extinguishment in the three months ended March 31, 2019. In the aggregate, the number of shares purchasable under these two warrants increased by 496,875.

 

Warrants issued as consent for variable rate debt

 

On January 7 and January 31, 2019, Lincoln Park Capital Fund, LLC agreed to waive the provisions of the Purchase Agreement dated August 25, 2017, prohibiting variable rate transactions. As consideration for the waivers, we issued to Lincoln Park a warrant to purchase 300,000 shares of our common stock at $0.25 per share, expiring five years from the date of grant. In the event the shares underlying the warrant are not registered, the warrant allows the holder to do a “cashless” exercise. The fair value of these warrants totaled $54,000 and was recorded as a discount on note payable on our consolidated balance sheet and will amortize to interest expense in 2019 over the term of the notes. (See Note 4).

 

Warrants Issued concurrently with the Nine-month OID notes

 

In conjunction with the issuance of our nine-month OID notes (see Note 4), we issued each investor a warrant to purchase common stock for $0.25 per share, expiring 5 years from the date of issuance. During the three months ended March 31, 2019, we issued warrants to purchase 637,500 shares of our common stock to the three investors. The fair value of these warrants totaled $89,000 and was recorded as a discount on note payable on our consolidated balance sheet and will amortize to interest expense over the term of the notes. During the three months ended June 30, 2019, we reduced the conversion prices of the notes from $0.25 to $0.17, and this resulted in an increase in the number of warrants purchasable by the investors by 300,000 to 937,500, which resulted our recording the fair value of $85,000, which is recorded as a deemed dividend.

 

Warrants Issued concurrently with Twelve-month OID notes

 

During the three-months ended June 30, 2019, we issued warrants to purchase 2,619,485 shares of our common stock to purchasers of our Twelve-month OID Notes (see Note 4). The warrants allow the holder to purchase common stock for $0.25 per share, expiring 5 years from the date of issuance. The number of shares purchasable under each warrant was equal to the 75% of the principal balance of the investor’s note, divided by $0.17 (thus, for example, a $300,000 investment would yield a note with principal balance of $375,000, and a warrant allowing for the purchase of up to 1,654,412 shares). The warrant will allow for cashless exercise after 18 months so long as the shares underlying the warrant are not registered. The Company does not have the obligation to register the shares underlying the warrant, but intends to dos o The fair value of these warrants totaled $252,000 and was recorded as a discount on note payable on our consolidated balance sheet and will amortize to interest expense over the term of the notes.

 

Warrants exercised

 

During the three months ended June 30, 2019, we received $104,000 from the exercise of a warrant to purchase 866,666 shares.

 

During the three months ended June 30, 2019, Vista Capital exercised its stock purchase warrant issued September 12, 2018, electing to utilize the cashless exercise features in the warrant. As a result, we issued Vista Capital 2,877,790 shares of common stock. A previous adjustment to the number of shares available for purchase under the warrant resulted in a fair value totaling $355,000, recorded as a deemed dividend in our statement of stockholders’ equity.

 

 

BIOLARGO, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Fair Value

 

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:

 

   

June 30,

2018

   

June 30,

2019

 

Risk free interest rate

    2.54%

 

     1.70

2.62%

 

Expected volatility

    252%

 

     86

110%

 

Expected dividend yield

               

Forfeiture rate

               

Expected life in years

   5 10      2 5  

 

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):

 

   

December 31,

2018

   

June 30,

2019

 

Accounts payable and accrued expense

  $ 302     $ 328  

Accrued interest

    122       209  

Accrued payroll

    77       139  

Total accounts payable and accrued expenses

  $ 501     $ 676  

 

 

 

Note 8. Noncontrolling Interest – Clyra Medical

 

We consolidate the operations of our partially owned subsidiary Clyra Medical (see Note 2).

 

Acquisition of In-process Research and Development

 

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

 

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

 

 

BIOLARGO, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Scion Solutions – Note Payable and Clyra Liability

 

The promissory note in the principal amount of $1,250,000 issued by Clyra Medical to Scion on September 26, 2018 (“Clyra-Scion Note”) accrues interest at the rate of 5%. Principal and interest due under the note are to be paid periodically at a rate of 25% of investment proceeds received by Clyra Medical. If the note is not paid off within 18 months after the date of issuance, it is automatically extended for additional 12-month periods until the note is repaid in full. Payments after the initial 18-month maturity date are required to be made in annual installments in an amount equal to the greater of (i) 25% of investment proceeds received during the 12-month period, and (ii) 5% of Clyra Medical’s gross revenues. At June 30, 2019, the balance due on the Clyra-Scion Note equaled $1,007,000.

 

Non-Controlling Interest

 

During the six months ended June 30, 2019, Clyra sold $295,000 of its common stock at a price of $200 per share. The shares of BioLargo common stock held by Clyra for the benefit of Scion (the redemption shares) are recorded on our balance sheet as a liability to “Clyra Medical Shareholder”.

 

As of June 30, 2019, Clyra Medical had the following common and preferred shares outstanding:

 

Shareholder

 

Shares

   

Percent

 

BioLargo, Inc.

  28,053     41.4%  

Sanatio Capital (1)

  11,520     17.0%  

Scion Solutions (2)

  15,500     22.9%  

Other

  12,697     18.7%  

Total

  67,770        

 

Notes:

 

(1) Includes 9,830 Series A Preferred shares (see below), and 1,690 common shares.

 

(2) Does not include an additional 15,500 shares held in escrow subject to performance metrics.

 

Sanatio Capital purchased Series A Preferred shares in 2015. Sanatio Capital is owned by Jack B. Strommen, who subsequently joined BioLargo’s board of directors. Preferred Shares accrue an annual dividend of 8% for a period of five years. Although the dividends began to accrue immediately, Clyra Medical has no obligation to declare a dividend until a product of the company has received a premarket approval by the United States Federal Drug Administration (“FDA”), or for which a premarket notification pursuant to form 510(k) has been submitted and for which the FDA has given written clearance to market the product in the United States (either, “FDA Approval”). After FDA Approval, annually on December 20, and unless prohibited by California law governing distributions to shareholders, Clyra Medical is required to declare and pay any accruing dividends to holders of Preferred Shares then accrued but unpaid. As the declaration and payment of such dividends is contingent on an uncertain future event, no liability has been recorded for the dividends. The accumulated and undeclared dividend balance as of June 30, 2019 is $215,000.

 

Holders of Preferred Shares are entitled to preferential payments in the event of a liquidation, dissolution or winding up of the company, in an amount equal to any accrued and unpaid dividends. After such preference, any remaining assets are distributed pro-rata between holders of Clyra Medical common stock and Preferred Shares as if the Preferred Shares had converted to Clyra Medical common stock. Holders of Preferred Shares may convert the shares to Clyra Medical common stock initially on a one-to-one basis. The conversion formula is subject to change in the event Clyra Medical sells stock at a lower price than the price paid by Sanatio.

 

Preferred shares may be converted to common shares on a one-to-one basis, and have voting rights equal to common shares on a one-to-one basis.

 

 

BIOLARGO, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

 

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 a three-year office lease in the Knoxville, Tennessee area, and entered into employment agreements with seven scientists and engineers. (See Note 10 “Business Segment Information”.) The company was capitalized with two classes of membership units: Class A, 100% owned by BioLargo, and Class B, held by management of BLEST, and which initially have no “profit interest,” as that term is defined in Tennessee law. However, over the succeeding five years, the Class B members can earn up to a 30% profit interest. They also have been granted options to purchase up to an aggregate 2 million shares of BioLargo, Inc. common stock. The profit interest and option shares are subject to a five year vesting schedule tied to the performance of the subsidiary, including gross revenue targets that increase over time, obtaining positive cash flow by March 31, 2018 (which was not met), collecting 90% of its account receivables, obtaining a profit of 10% in its first year (and increasing in subsequent years), making progress in the scale-up and commercialization of our AOS system, and using BioLargo research scientists (such as our Canadian team) for billable work on client projects. These criteria are to be evaluated annually by BLEST’s compensation committee (which includes BioLargo’s president, CFO, and BLEST’s president). 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. No such units have been issued.

 

 

 

Note 10. Business Segment Information

 

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

 

1. Odor-No-More (“ONM”) -- which is selling odor and volatile organic control products and services (located in Westminster, California);

2. Clyra Medical (“Clyra”) -- which is engaged in developing medical products and preparing launch into commercial activity with approval of its FDA 510 (K) application in process;

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

4. BioLargo Water (“Water”) -- which has now shifted its focus from R&D/product development to commercializing the AOS technology (located in Edmonton, Alberta Canada).

 

Historically, none of our operating business units 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 Odor-No-More, 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. For example, during the year ended December 31, 2018, we provided Odor-No-More with approximately $417,000 in cash to supplement its operations. As this subsidiary’s sales have increased (from approximately $500,000 in calendar year 2017 to over $1 million in calendar year 2018), and its gross margins have improved, it has generated more cash for its operations and relied less on corporate to supplement its cash to pay its bills. For the six months ended June 30, 2019, we provided it with approximately $54,000 in cash to supplement its operations.

 

 

BIOLARGO, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

The segment information for the three and six months ended June 30, 2018 and 2019, is as follows (in thousands):

 

   

Three months ended June 30,

   

Six months ended June 30,

 
   

2018

   

2019

   

2018

   

2019

 

Revenue

                               

Odor-No-More

  $ 316     $ 315     $ 540     $ 616  

BLEST

    161       241       350       424  

BLEST - Intercompany revenue

    (150 )     (130 )     (300 )     (250 )

Total

  $ 327     $ 426     $ 590     $ 790  
                                 
                                 

Operating loss

                               

BioLargo corporate

  $ (1,052 )   $ (956

)

  $ (2,145 )   $ (1,904 )

Odor-No-More

    (145 )     (51

)

    (254 )     (141 )

Clyra

    (177 )     (319

)

    (376 )     (606 )

BLEST

    (70 )     (27

)

    (115 )     (137 )

Water

    (184 )     (134

)

    (340 )     (361 )

Total

  $ (1,628 )   $ (1,487

)

  $ (3,230 )   $ (3,149 )
                                 
                                 

Interest expense

                               

BioLargo Corporate

  $ (1,729 )   $ (485

)

  $ (2,559 )   $ (1,458 )

Clyra

          (13

)

    (2 )     (25 )

Total

  $ (1,729 )   $ (498

)

  $ (2,561 )   $ (1,483 )
                                 
                                 

Research and development expense

                               

BioLargo Corporate

  $ (281 )   $ (210

)

  $ (624