We have audited the accompanying consolidated balance sheets of BioLargo, Inc. and Subsidiaries (the “
Company”) as of December 31, 2016 and 2017, and the related consolidated statements of operations, stockholders’ equity (deficit), and cash flows each of the two years in the period ended December 31, 2017, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2016 and 2017, and the consolidated results of its operations and its cash flows for each of the two years in the period ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.
BIOLARGO, INC. AND SUBSIDIAR
IES
CONSOLIDATED
BALANCE SHEETS
AS OF
DECEMBER 31, 2016
AND
DECEMBER 31, 2017
|
|
DECEMBER
31,
2016
|
|
|
DECEMBER
3
1
,
2017
|
|
Assets
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,910,153
|
|
|
$
|
990,457
|
|
Accounts receivable
, net of allowance
|
|
|
67,994
|
|
|
|
94,413
|
|
Inventories
|
|
|
34,446
|
|
|
|
53,973
|
|
Prepaid expenses and other current assets
|
|
|
4,089
|
|
|
|
20,000
|
|
Total current assets
|
|
|
2,016,682
|
|
|
|
1,158,843
|
|
|
|
|
|
|
|
|
|
|
Equipment, net of depreciation
|
|
|
59,315
|
|
|
|
108,865
|
|
Other non-current assets, net of amortization
|
|
|
36,729
|
|
|
|
32,530
|
|
Deferred offering cost
|
|
|
—
|
|
|
|
195,182
|
|
Total assets
|
|
$
|
2,112,726
|
|
|
$
|
1,495,420
|
|
Liabilities and stockholders
’
equity (deficit)
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
200,103
|
|
|
$
|
224,105
|
|
Accrued officer bonus
|
|
|
80,000
|
|
|
|
—
|
|
Convertible notes payable
|
|
|
560,000
|
|
|
|
5,248,847
|
|
Discount on convertible notes payable, net of amortization
|
|
|
(398,910
|
)
|
|
|
(1,257,182
|
)
|
Derivative warrant liability
|
|
|
663,560
|
|
|
|
—
|
|
Line of credit
|
|
|
50,000
|
|
|
|
—
|
|
Total current liabilities
|
|
|
1,154,753
|
|
|
|
4,215,770
|
|
|
|
|
|
|
|
|
|
|
Long-term liabilities:
|
|
|
|
|
|
|
|
|
Convertible notes payable
|
|
|
5,250,668
|
|
|
|
1,539,271
|
|
Discount on convertible notes payable
and line of credit, net of amortization
|
|
|
(3,522,497
|
)
|
|
|
(850,000
|
)
|
Total liabilities
|
|
|
2,882,924
|
|
|
|
4,905,041
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS
, CONTINGENCIES (Note 12)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS
’ EQUITY (DEFICIT):
|
|
|
|
|
|
|
|
|
Preferred Series
A, $.00067 Par Value, 50,000,000 Shares Authorized, -0- Shares Issued and Outstanding, at December 31, 2016 and December 31, 2017, respectively.
|
|
|
—
|
|
|
|
—
|
|
Common
stock, $.00067 Par Value, 200,000,000 Shares Authorized, 92,975,970 and 104,164,465 Shares Issued, at December 31, 2016 and December 31, 2017, respectively.
|
|
|
62,179
|
|
|
|
69,871
|
|
Additional paid-in capital
|
|
|
90,609,774
|
|
|
|
97,093,144
|
|
Accumulated other comprehensive loss
|
|
|
(81,694
|
)
|
|
|
(62,489
|
)
|
Accumulated deficit
|
|
|
(91,915,426
|
)
|
|
|
(101,204,846
|
)
|
Total Biolargo Inc. and Subsidiaries stockholders
’ equity (deficit)
|
|
|
(1,325,167
|
)
|
|
|
(4,104,320
|
)
|
Non-controlling interest (Note 10)
|
|
|
554,969
|
|
|
|
694,699
|
|
Total stockholders
’ equity (deficit)
|
|
|
(770,198
|
)
|
|
|
(3,409,621
|
)
|
Total liabilities and stockholders
’ equity (deficit)
|
|
$
|
2,112,726
|
|
|
$
|
1,495,420
|
|
See accompanying notes to consolidated financial statements
and report of Independent Registered Public Accounting Firm.
BIOLARGO, INC. AND SUBSIDIAR
IES
CONSOLIDATED
STATEMENTS OF OPERATIONS
FOR THE
YEARS
ENDED
DECEMBER 31, 2016
AND
2017
|
|
DECEMBER
31,
2016
|
|
|
DECEMBER
31,
2017
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
Product revenue
|
|
$
|
226,106
|
|
|
$
|
503,982
|
|
Service revenue
|
|
|
—
|
|
|
|
12,231
|
|
License revenue
|
|
|
55,000
|
|
|
|
—
|
|
Total revenue
|
|
|
281,106
|
|
|
|
516,213
|
|
Cost of revenue
|
|
|
(105,877
|
)
|
|
|
(322,717
|
)
|
Gross profit
|
|
|
175,229
|
|
|
|
193,496
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
3,714,398
|
|
|
|
4,429,100
|
|
Research and development
|
|
|
1,381,956
|
|
|
|
1,629,580
|
|
Depreciation and a
mortization
|
|
|
13,736
|
|
|
|
29,841
|
|
Operating loss
|
|
|
(4,934,861
|
)
|
|
|
(5,895,025
|
)
|
|
|
|
|
|
|
|
|
|
Other (expense) income
|
|
|
|
|
|
|
|
|
Grant income
|
|
|
161,430
|
|
|
|
139,549
|
|
Tax credit income
|
|
|
—
|
|
|
|
71,130
|
|
Interest expense
|
|
|
(3,129,104
|
)
|
|
|
(3,862,173
|
)
|
Change in derivative liability
|
|
|
(171,800
|
)
|
|
|
—
|
|
Total Other (expense) income
|
|
|
(3,139,474
|
)
|
|
|
(3,651,494
|
)
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(8,074,335
|
)
|
|
|
(9,546,519
|
)
|
|
|
|
|
|
|
|
|
|
Net loss attributable to noncontrolling interest
|
|
|
(234,604
|
)
|
|
|
(429,215
|
)
|
Net loss attributable to
common shareholders
|
|
$
|
(7,839,731
|
)
|
|
$
|
(9,117,304
|
)
|
|
|
|
|
|
|
|
|
|
Net
loss per share attributable to common stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share attributable to shareholders
– basic and diluted
|
|
$
|
(0.09
|
)
|
|
$
|
(0.10
|
)
|
Weighted average number of common shares outstanding:
|
|
|
87,936,783
|
|
|
|
98,941,169
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss attributable to common shareholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(8,074,335
|
)
|
|
$
|
(9,546,519
|
)
|
Foreign translation adjustment
|
|
|
(41,127
|
)
|
|
|
19,205
|
|
Comprehensive loss
|
|
|
(8,115,462
|
)
|
|
|
(9,527,314
|
)
|
|
|
|
|
|
|
|
|
|
Comprehensive
loss attributable to noncontrolling interest
|
|
|
(234,604
|
)
|
|
|
(429,215
|
)
|
Comprehensive
loss attributable to shareholders
|
|
$
|
(7,880,858
|
)
|
|
$
|
(9,098,099
|
)
|
See accompanying notes to consolidated financial statements
and report of Independent Registered Public Accounting Firm
.
BIOLARGO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS
’ EQUITY (DEFICIT)
FOR THE
YEARS ENDED DEC
EMBER 3
1, 2016 AND
2017
|
|
Common stock
|
|
|
Additional
paid-in
|
|
|
Accumulated
|
|
|
Accumulated
other comprehensive
|
|
|
Non-
controlling
|
|
|
Total
stockholders
’
|
|
|
|
Shares
|
|
|
Amount
|
|
|
capital
|
|
|
deficit
|
|
|
loss
|
|
|
interest
|
|
|
equity (deficit)
|
|
Balance, December 31, 2015
|
|
|
85,648,015
|
|
|
$
|
57,236
|
|
|
$
|
84,410,821
|
|
|
$
|
(84,075,695
|
)
|
|
$
|
40,567
|
|
|
$
|
789,573
|
|
|
$
|
1,141,368
|
|
Issuance of common stock to vendors and interest to note holders
|
|
|
2,342,264
|
|
|
|
1,599
|
|
|
|
991,479
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
993,078
|
|
Conversion of 2015 Unit offering notes into shares of common stock
|
|
|
2,167,420
|
|
|
|
1,452
|
|
|
|
587,919
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
589,371
|
|
Exercise of warrants
|
|
|
2,818,271
|
|
|
|
1,892
|
|
|
|
862,117
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
864,009
|
|
Stock option compensation expense
|
|
|
—
|
|
|
|
—
|
|
|
|
751,113
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
751,113
|
|
Warrants and conversion feature issued as discount on convertible notes payable
and line of credit
|
|
|
—
|
|
|
|
—
|
|
|
|
3,006,325
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,006,325
|
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(7,839,731
|
)
|
|
|
—
|
|
|
|
(234,604
|
)
|
|
|
(8,074,335
|
)
|
Foreign currency translation
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(41,127
|
)
|
|
|
—
|
|
|
|
(41,127
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2016
|
|
|
92,975,970
|
|
|
$
|
62,179
|
|
|
$
|
90,609,774
|
|
|
$
|
(91,915,426
|
)
|
|
$
|
(81,694
|
)
|
|
$
|
554,969
|
|
|
$
|
(770,198
|
)
|
Issuance of common s
tock for service
|
|
|
984,070
|
|
|
|
670
|
|
|
|
460,643
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
461,313
|
|
Issuance of common stock for
interest
|
|
|
1,436,751
|
|
|
|
1,149
|
|
|
|
673,161
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
674,310
|
|
Stock to CEO
|
|
|
1,500,000
|
|
|
|
1,005
|
|
|
|
(1,005
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Conversion of notes
|
|
|
2,316,748
|
|
|
|
1,553
|
|
|
|
889,697
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
891,250
|
|
Exercise of warrants
|
|
|
510,000
|
|
|
|
343
|
|
|
|
152,657
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
153,000
|
|
Exercise of stock options
|
|
|
2,501,937
|
|
|
|
1,677
|
|
|
|
(1,677
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Financing fee in stock
|
|
|
738,998
|
|
|
|
496
|
|
|
|
304,004
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
304,500
|
|
Sale of stock for cash
|
|
|
1,199,991
|
|
|
|
799
|
|
|
|
510,286
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
511,085
|
|
Stock option
compensation expense
|
|
|
—
|
|
|
|
—
|
|
|
|
1,103,090
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,103,090
|
|
Warrants and conversion feature issued as discount on convertible notes payable
and line of credit
|
|
|
—
|
|
|
|
—
|
|
|
|
1,145,383
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,145,383
|
|
Purchase of Clyra shares
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(40,000
|
)
|
|
|
(40,000
|
)
|
Issuance of Clyra shares
|
|
|
—
|
|
|
|
—
|
|
|
|
411,455
|
|
|
|
—
|
|
|
|
—
|
|
|
|
608,945
|
|
|
|
1,020,400
|
|
Deemed dividend for the change in accounting for derivative liability
|
|
|
—
|
|
|
|
—
|
|
|
|
343,916
|
|
|
|
(343,916
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Cumulative effect of change in accounting for derivative liability
(Note 3)
|
|
|
—
|
|
|
|
—
|
|
|
|
491,760
|
|
|
|
171,800
|
|
|
|
—
|
|
|
|
—
|
|
|
|
663,560
|
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(9,117,304
|
)
|
|
|
—
|
|
|
|
(429,215
|
)
|
|
|
(9,546,519
|
)
|
Foreign currency translation
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
19,205
|
|
|
|
—
|
|
|
|
19,205
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2017
|
|
|
104,164,465
|
|
|
$
|
69,871
|
|
|
$
|
97,093,144
|
|
|
$
|
(101,204,846
|
)
|
|
$
|
(62,489
|
)
|
|
$
|
694,699
|
|
|
$
|
(3,409,621
|
)
|
See accompanying notes to consolidated financial statements
and report of Independent Registered Public Accounting Firm
.
BIOLARGO, INC. AND SUBSIDIAR
IES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR
THE YEARS
ENDED
DECEMBER 31, 2016
AND
2017
|
|
DECEMBER
31, 2016
|
|
|
DECEMBER
31, 2017
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(8,074,335
|
)
|
|
$
|
(9,546,519
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Stock option compensation expense
|
|
|
751,113
|
|
|
|
1,103,090
|
|
Common stock issued for interest, in lieu of salary to officers and fees for services from vendors
|
|
|
993,078
|
|
|
|
1,095,623
|
|
Interest expense related to amortization of the discount on convertible notes payable and line of credit and deferred financing costs
|
|
|
2,610,764
|
|
|
|
3,058,108
|
|
Change in fair value of derivative liability
|
|
|
171,800
|
|
|
—
|
|
Deferred offering expense
|
|
|
—
|
|
|
|
10,818
|
|
Amortization and depreciation expense
|
|
|
15,887
|
|
|
|
29,841
|
|
Bad debt expense
|
|
|
—
|
|
|
|
2,500
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(26,563
|
)
|
|
|
(28,919
|
)
|
Inventories
|
|
|
2,989
|
|
|
|
(19,527
|
)
|
Accounts payable and accrued expenses
|
|
|
(124,880
|
)
|
|
|
114,402
|
|
Accrued officer bonus
|
|
|
80,000
|
|
|
|
(80,000
|
)
|
Deposits
|
|
|
(135,000
|
)
|
|
|
—
|
|
Prepaid expenses and other assets
|
|
|
14,235
|
|
|
|
(22,432
|
)
|
Net cash used in operating activities
|
|
|
(3,720,912
|
)
|
|
|
(4,283,015
|
)
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
Equipment purchases
|
|
|
(61,931
|
)
|
|
|
(28,671
|
)
|
Net cash used in investing activities
|
|
|
(61,931
|
)
|
|
|
(28,671
|
)
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
Proceeds from convertible notes payable
|
|
|
2,307,000
|
|
|
|
1,798,700
|
|
Proceeds from the sale of stock in Clyra
|
|
|
—
|
|
|
|
750,000
|
|
Proceeds from sale of stock to Lincoln Park Capital
|
|
|
—
|
|
|
|
511,085
|
|
Proceeds from notes payable
|
|
|
500,000
|
|
|
|
—
|
|
Proceeds from line of credit
|
|
|
300,000
|
|
|
|
250,000
|
|
Proceeds from warrant exercise
|
|
|
864,009
|
|
|
|
153,000
|
|
Repurchase of Clyra shares
|
|
|
—
|
|
|
|
(40,000
|
)
|
Repayment of letter of credit
|
|
|
—
|
|
|
|
(50,000
|
)
|
Net cash provided by financing activities
|
|
|
3,971,009
|
|
|
|
3,372,785
|
|
Net effect of foreign currency translation
|
|
|
(41,127
|
)
|
|
|
19,205
|
|
Net change in cash
|
|
|
147,039
|
|
|
|
(919,696
|
)
|
Cash at beginning of year
|
|
|
1,763,114
|
|
|
|
1,910,153
|
|
Cash at end of
year
|
|
$
|
1,910,153
|
|
|
$
|
990,457
|
|
Supplemental disclosures of cash flow information
|
|
|
|
|
|
|
|
|
Cash paid during the
year for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
6,731
|
|
|
$
|
8,708
|
|
Income taxes
|
|
$
|
7,681
|
|
|
$
|
5,350
|
|
Non-cash investing and financing activities
|
|
|
|
|
|
|
|
|
Fair value of warrants issued
with convertible notes and letter of credit
|
|
$
|
3,006,325
|
|
|
$
|
1,145,383
|
|
Conversion of lines of credit into convertible notes payable
|
|
$
|
250,000
|
|
|
$
|
—
|
|
Conversion of convertible notes payable into common stock
|
|
$
|
589,371
|
|
|
$
|
891,250
|
|
Convertible Notes issued with Original Issue Discount
|
|
$
|
—
|
|
|
$
|
70,000
|
|
Fair value of stock issued for equipment
|
|
$
|
—
|
|
|
$
|
40,000
|
|
Fair value of stock issued for financing fees
|
|
$
|
—
|
|
|
$
|
304,500
|
|
Fair value of stock issued for conversion of Clyra line of credit
|
|
$
|
—
|
|
|
$
|
250,000
|
|
Stock grant to CEO
|
|
$
|
—
|
|
|
$
|
1,005
|
|
Exercise of stock options
|
|
$
|
—
|
|
|
$
|
1,677
|
|
Issuance of Clyra shares
|
|
$
|
—
|
|
|
$
|
411,455
|
|
Deemed dividend
|
|
$
|
—
|
|
|
$
|
343,916
|
|
Cumulative effect of change in account for derivative liability
|
|
$
|
—
|
|
|
$
|
663,560
|
|
See accompanying notes to consolidated financial statements
and report of Independent Registered Public Accounting Firm
BIOLARGO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note
1.
Business and Organization
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 year ended
December 31,
2017,
we had a net loss of
$9,546,519,
and, at
December 31, 2017,
we had a working capital deficit of
$3,056,927,
and current assets of
$1,158,843.
We have convertible debt obligations with an aggregate principal balance of
$6,788,118,
an accumulated deficit of
$101,204,846,
and a net stockholders’ deficiency. 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 generating revenue from commercializing products incorporating our BioLargo technology. These consolidated financial statements do
not
include any adjustments that might be necessary if we are unable to continue as a going concern.
We have been, and anticipate that we will continue to be, limited in terms of our capital resources. Our total cash and cash equivalents were $
990,457
at
December 31, 2017.
During the year ended
December 31, 2017,
we received
$3,462,785
net proceeds from note payables and our private securities offerings, including the exercise of warrants issued in prior offerings. We generated revenues of
$516,213
in the year ended
December 31, 2017.
Although this was an increase over the prior year, it was
not
sufficient to fund our operations. We believe our cash position is insufficient to maintain our current level of operations and research/development, and that we will be required to raise substantial additional capital to expand our operations and fund our future business plans. We intend to continue to raise money through private securities offerings for the foreseeable future, and through our agreement with Lincoln Park (see Note
4
).
Organization
We were initially organized under the laws of the State of Florida in
1989,
and in
1991
merged into a
Delaware corporation. We have
seven
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 USA, Inc., organized under the laws of the State of California in
2013,
BioLargo Water, Inc., organized under the laws of Canada in
2014,
BioLargo Maritime Solutions, Inc. organized under the laws of the State of California in
2016,
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.
Additionally, we own
46.3%
of Clyra Medical Technologies, Inc. (“Clyra”), organized under the laws of the State of California in
2012
(see Note
10
).
Business Overview
We feature
three
patent protected platform technologies with diverse product opportunities across multiple industries
–AOS, CupriDyne, and Isan. Each features the use of the all-natural iodine molecule. While they all use iodine, they are quite different in terms of the methods by which they exploit the use of iodine, the form and composition of iodine used, and therefore their function and value proposition can be quite different for each commercial application.
Note
2.
Summary of Significant Accounting Policies
In the opinion of management, the accompanying balance sheets 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.
BIOLARGO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Principles of Consolidation
The consolidated financial statements include the accounts of the Compan
y, its majority owned subsidiaries, and Clyra. Management believes Clyra’s financial statements are appropriately consolidated with that of the Company because the Company is Clyra’s largest shareholder, owning
46.3%
of its outstanding voting stock at
December 31, 2017,
and
two
members of BioLargo’s board of directors are
two
of
three
members of Clyra’s board of directors (see Note
10
). All intercompany accounts and transactions have been eliminated.
Foreign
Currency
The Company has designated the functional currency of Biolargo Water, Inc., our Canadian subsidiary, to be the Canadian dollar. Therefore, trans
lation 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.
Our cash balances were made up of the following:
|
|
DECEMBER
31, 201
6
|
|
|
DECEMBER
3
1
, 201
7
|
|
|
|
|
|
|
|
|
|
|
Biolargo, Inc. and wholly owned subsidiaries
|
|
$
|
1,671,857
|
|
|
$
|
461,914
|
|
Clyra Medical Technologies, Inc.
|
|
|
238,296
|
|
|
|
528,543
|
|
Total
|
|
$
|
1,910,153
|
|
|
$
|
990,457
|
|
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, 2016
and
2017
was
$0
and
$2,500,
respectively.
Inventory
Inventories are stated at the lower of cost or net realizable value using the average cost method. Inventories consisted of:
|
|
DECEMBER
31,
2016
|
|
|
DECEMBER
31,
2017
|
|
|
|
|
|
|
|
|
|
|
Raw material
|
|
$
|
14,555
|
|
|
$
|
34,104
|
|
Finished goods
|
|
|
19,891
|
|
|
|
19,869
|
|
Total
|
|
$
|
34,446
|
|
|
$
|
53,973
|
|
Other Assets
Other Assets consisted
of payments made to purchase patents related to our commercialization efforts of the Isan system and a security deposit of
$32,530
related to our business offices.
For each of the years ended
December 31,
2016
and
2017,
we recorded amortization expense totaling
$10,920
and
$10,920.
As of
December 31, 2017,
the patents have been fully amortized.
BIOLARGO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Impairment
Long-lived and definite lived intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset
may
not
be recoverable. If the sum of the expected future undiscounted cash flows from the use of the asset and its eventual disposition is less than the carrying amount of the asset, then an impairment loss is recognized. The impairment loss is measured based on the fair value of the asset. Any resulting impairment is recorded as a reduction in the carrying value of the related asset in excess of fair value and a charge to operating results. For the years ended
December 31,
2016
and
2017,
management determined that there was
no
impairment of its long-lived assets.
Business
segment information
During
2016
the Company operated as
one
business segment.
During
2017,
the Company determined that it operates
three
business segments consisting of Odor-
No
-More, Clyra and Biolargo/other based on the manner in which the chief operating decision maker now manages these businesses, including resource allocation and performance assessment.
Odor-
No
-More is engaged in developing and selling products using the Biolargo technology. Clyra is engaged in developing medical products using the BioLargo technology, with an emphasis in advanced wound care.
Biolargo/Other includes certain functional roles that do
not
engage in revenue generating activities, such as corporate operations and oversight, research and development, and general corporate and administrative functions, including finance, human resources, marketing and legal. It also includes the Company’s engineering subsidiary, as it only recently commenced operations and does
not
have substantial activity as of
December 31, 2017.
The
2017
Company segment
information is as follows:
|
|
Odor-No-More
|
|
|
Clyra
|
|
|
BioLargo /
Other
|
|
|
Total
|
|
Revenues
|
|
$
|
503,982
|
|
|
$
|
—
|
|
|
$
|
12,231
|
|
|
$
|
516,213
|
|
Cost of goods/services
|
|
|
(315,203
|
)
|
|
|
—
|
|
|
|
(7,514
|
)
|
|
|
(322,717
|
)
|
Depreciation and amortization
|
|
|
27,843
|
|
|
|
—
|
|
|
|
1,998
|
|
|
|
29,841
|
|
Interest expense
|
|
|
—
|
|
|
|
20,476
|
|
|
|
3,841,697
|
|
|
|
3,862,173
|
|
Expenditures for assets
|
|
|
4,200
|
|
|
|
—
|
|
|
|
24,471
|
|
|
|
28,671
|
|
Equipment, net of depreciation
|
|
|
46,392
|
|
|
|
—
|
|
|
|
62,473
|
|
|
|
108,865
|
|
Net loss
|
|
|
(500,000
|
)
|
|
|
(914,622
|
)
|
|
|
(8,267,912
|
)
|
|
|
(9,546,519
|
)
|
Tangible assets, net
|
|
|
210,725
|
|
|
|
528,543
|
|
|
|
756,152
|
|
|
|
1,495,420
|
|
Earnings (Loss) Per Share
We report basic and diluted earnings (loss)
per share (“EPS”) for common and common share equivalents. Basic EPS is computed by dividing reported earnings by the weighted average shares outstanding. Diluted EPS is computed by adding to the weighted average shares the dilutive effect if stock options and warrants were exercised into common stock. For the years ended
December 31, 2016
and
2017,
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, and payroll taxes, among others.
BIOLARGO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The methods, estimates and judgments we use in applying these most critical accounting policies have a significant impa
ct on the results of our financial statements.
Share-based Payments
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 options model.
For equity instruments issued and outstanding where performance is
not
complete, but the instrument has been recorded, those instruments are measured again at their then current fair market values at each of the reporting dates (they are “marked-to market”) until the performance and the contract are complete.
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
Revenues are recognized as risk and title to products transfers to the customer (which generally occurs at the time shipment is made), the sales price is fixed or determinable, and collectability is reasonably assured. We also
may
generate revenues from royalties and license fees from our intellectual property. Licensees typically pay a license fee in
one
or more installments and ongoing royalties based on their sales of products incorporating or using our licensed intellectual property. License fees are recognized over the estimated period of future benefit to the average licensee
.
We are obligated to share any revenues under our license agreement on an equal basis with Peter Holdings Pty. Ltd. On
July 1, 2016,
per the terms of the agreement the
$100,000
deposit received in
2014
was recorded to license revenue, offset by the
$45,000
share paid to Peter Holdings Pty. Ltd.
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.
BIOLARGO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2016
and
2017
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.
Government Grants
We have been awarded
multiple research grants from the Canadian National Research Institute – Industrial Research Assistance Program (NRC-IRAP) and the National Science and Engineering Research Council of Canada (NSERC). The grants received are considered other income and are included in our consolidated statements of operations. We received our
first
grant in
2015
and have been awarded over
50
grants totaling approximately
$1,300,000.
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.
Tax Credits
Our research and development activities in Canada
may
entitle our Canadian subsidiary to claim benefits under the “Scientific Research and Experimental Development (SR&ED) 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 as Other Income on our statement of operations.
Recent Accounting Pronouncements
In
July 2017,
the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update (“ASU”)
No.
2017
-
11,
“Earnings Per Share (Topic
260
), Distinguishing Liabilities from Equity (Topic
480
), Derivatives and Hedging (Topic
815
).” The relevant section for Biolargo is Topic
815
where it pertains to accounting for certain financial instruments with down round features. Until the issuance of this ASU, financial instruments with down round features required fair value measurement and subsequent changes in fair value were recognized in earnings. As a result of this ASU, financial instruments with down round features are
no
longer treated as a derivative liability measured at fair value. Instead, when the down round feature is triggered, the effect is treated as a dividend and as a reduction of income available to common shareholders in basic EPS. For public entities, the ASU is effective for fiscal years and interim periods within those fiscal years, beginning after
December 15, 2018.
Early adoption is permitted, including adoption in an interim period. Biolargo has elected early adoption as of
July 1, 2017. (
See Note
3.
)
BIOLARGO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In
May 2017,
the FASB issued ASU
2017
-
09,
“Compensation
– Stock Compensation (topic
718
)”. The amendments in this Update provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic
718.
An entity should account for the effects of a modification unless all the following are met: (i) the fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the modified award is the same as the fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the original award immediately before the original award is modified, (ii) The vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified and (iii) the classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified. The amendments in this Update are effective for all entities for annual periods, and interim periods within those annual periods, beginning after
December 15, 2017.
Management has analyzed the new guideline and it will
not
substantially impact our accounting for stock compensation awards.
In
April 2016,
the FASB issued ASU
2016
-
10,
“Revenue from Contracts with Customers (Topic
606
): Identifying Performance Obligations and Licensing”. The amendments in this Update affect the guidance in Accounting Standards Update
2014
-
09,
Revenue from Contracts with Customers (Topic
606
), which we are required to apply for annual and interim periods beginning after
December 15, 2017.
Management’s current analysis is that the new guidelines currently will
not
substantially impact our revenue recognition. However, future licenses, if any, will require specific contract terms for the basis of royalty payments and for support and maintenance of the intellectual property that is the subject of the license.
In
March 2016,
the FASB issued ASU
No.
2016
-
09,
“Improvements to Employee Share-Based Payment Accounting,” which simplifies several aspects of the accounting for share-based award transactions and adds
two
practical expedients for nonpublic entities. The new standards are effective for annual periods beginning after
December 15, 2017.
Management
’s current analysis is that the new guidelines will
not
substantially impact our accounting for share-based payments.
In
February 2016,
the FASB issued ASU
No.
2016
-
02,
"Leases". The new standard establishes a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than
12
months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after
December 15, 2018,
including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. Although management is still evaluating the potential impact of the adoption of this standard, its preliminary analysis is that the new guidelines will create a ROU asset and lease liability for the
Company’s lease agreements in place at the time the standard goes into effect. Currently, the Company has
two
real property leases with terms longer than
12
months (see Note
12
).
Note
3.
Change in Derivative Liability Treatment
As discussed in Note
2,
“Recent Accounting Pronouncements,
” Biolargo has adopted ASU
2017
-
11
as of
July 1, 2017.
With this adoption, we eliminated the derivative liability, and the changes in the fair value of the derivative liability, related to negative covenants in multiple warrants issued that required a reduction of warrant exercise price under certain circumstances. The Company made a cumulative effect adjustment to the balance sheet as of
January 1, 2017,
which adjusted the beginning balance in the accumulated deficit account by
$663,560.
During
2017,
we adjusted downward the warrant exercise price
three
times, and each time a divided was recognized in equity, as follows: (i)
May 2017,
a
$216,000
dividend was recognized; (ii) in
September 2017,
a
$83,111
dividend was recognized; and, (iii) in
December 2017,
a
$44,805
dividend was recognized.
BIOLARGO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note
4.
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
$10,000,000
of our common stock (subject to certain limitations) from time to time over a period of
three
years. Concurrently, we entered into a registration rights agreement with Lincoln Park (“LPC RRA”), pursuant to which we were required to file with the Securities and Exchange Commission (“SEC”) a registration statement on Form S-
1
to register for resale under the Securities Act of
1933,
as amended, the shares of common stock that have been or
may
be issued to Lincoln Park under the LPC Purchase Agreement. The registration statement was filed, and on
September 22, 2017,
it was deemed effective by the SEC. 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 volume of shares is limited to a maximum of
50,000
shares if our stock closes at less than
$0.50
per share,
75,000
if it closes from
$0.50
to
$0.74
per share,
100,000
if it closes from
$0.75
to
$1.24
per share, and
200,000
if it closes at or above
$1.25
per share. The maximum dollar amount for any single purchase is
$500,000.
There are
no
trading volume requirements under the LPC Purchase Agreement, and we alone control the timing and amount of any sales of our common stock to Lincoln Park. 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. The purchase price per share will be equitably adjusted for any reorganization, recapitalization, non-cash dividend, stock split, or other similar transaction occurring during the business days used to compute such price. We
may
at any time in our sole discretion terminate the LPC Purchase Agreement without fee, penalty or cost upon
one
business day notice. 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.
In consideration for entering into the LPC Purchase Agreement, on
August 25, 2017,
we issued to Lincoln Park
488,998
shares of common stock as an “initial commitment fee.” For
no
additional consideration, when and if Lincoln Park purchases (at the Company
’s discretion) any portion of the
$10,000,000
aggregate commitment, we are required to issue up to
488,998
shares, pro-rata, as “additional commitment shares”. For example, if we elect, at our sole discretion, to require Lincoln Park to purchase
$25,000
of our stock, then we would issue
1,222
additional commitment shares, which is the product of
$25,000
(the amount we have elected to sell) divided by
$10,000,000
(total amount we can sell Lincoln Park pursuant to the LPC Purchase Agreement) multiplied by
488,998
(the total number of additional commitment shares). The additional commitment shares will only be issued pursuant to this formula as and when we elect at our discretion to sell stock to Lincoln Park.
During the year ended
December 31, 2017,
we elected to sell Lincoln Park shares of our common stock for which we received
$511,085,
and issued Lincoln Park
1,175,000
shares, and
24,991
“additional commitment shares”. We recorded the stock sale in our equity statement and the additional shares issued as a fee for the transaction was offset against the shares issued. Subsequent to
December 31, 2017,
additional sales were made (see Note
13,
“Subsequent Events”).
BIOLARGO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note
5
. Debt Obligations
The following table summarizes our de
bt obligations outstanding as of
December 31, 2016
and
2017.
|
|
2016
|
|
|
2017
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
Line of credit
|
|
$
|
50,000
|
|
|
$
|
—
|
|
Convertible notes payable
|
|
|
|
|
|
|
|
|
One-year convertible notes, mature July 8, 2017
|
|
$
|
280,000
|
|
|
$
|
—
|
|
One-year convertible notes, mature December 30, 2017
|
|
|
280,000
|
|
|
|
—
|
|
One-year convertible notes, mature July 18, 2018
|
|
|
—
|
|
|
|
280,000
|
|
Convertible notes, mature June 1, 2018*
|
|
|
—
|
|
|
|
4,468,847
|
|
Nine-month convertible note, matures September 18, 2018
|
|
|
—
|
|
|
|
500,000
|
|
Total convertible notes payable
|
|
$
|
560,000
|
|
|
$
|
5,248,847
|
|
|
|
|
|
|
|
|
|
|
Long-term liabilities:
|
|
|
|
|
|
|
|
|
Convertible notes payable, net of current portion
|
|
|
|
|
|
|
|
|
Convertible notes, mature June 1, 2018*
|
|
$
|
4,800,097
|
|
|
$
|
—
|
|
Convertible notes, mature September 17, 2019
|
|
|
283,571
|
|
|
|
283,571
|
|
Convertible notes, mature December 31, 2019
|
|
|
167,000
|
|
|
|
292,000
|
|
Convertible notes, mature July 20, 2019
|
|
|
—
|
|
|
|
440,000
|
|
Convertible notes, mature June 20, 2020
|
|
|
—
|
|
|
|
523,700
|
|
Total convertible notes payable, net of current portion
|
|
$
|
5,250,668
|
|
|
$
|
1,539,271
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
5,860,668
|
|
|
$
|
6,788,118
|
|
* The convertible notes that mature
June 1, 2018,
were considered “long-term” liabilities as of
December 31, 2016,
and “current” liabilities (due within
one
year) as of
December 31, 2017.
As such, those same liabilities are in both the “long-term” and “current” liabilities section in the above table.
For the years ended
December 31, 2016
and
2017
we recorded
$3,
129,364
and
$3,862,173
of interest expense related to the amortization of our discount on our convertible notes payable and interest from our convertible notes and line of credit.
Line of Credit
On
June 6, 2016,
we received
$300,000
pursuant to a line of credit, accruing interest at a rate of
18%
per annum, for which we have pledged our inventory and accounts receivable as collateral. At any time after
December 1, 2017,
the holder of the line of credit
may
call it due by providing
30
days
’ notice of the due date, at which time all principal and outstanding interest is due and payable. Each investor, for
no
additional consideration, received a warrant to purchase our common stock. (See Note
7.
) The warrant allows for the purchase of the number of common shares equal to the investment amount (e.g.,
one
warrant share for each dollar invested).
On
September 17, 2016,
investors holding
$250,000
of the line of credit converted their line of credit into convertible promissory notes and stock purchase warrants on the same terms and notes issued in the
2015
Unit Offering.
On
December 20, 2017,
we paid
$51,907
to an investor holding
$50,000
line of credit and
$1,907
of accrued interest.
As of
December 31, 2017,
there are
no
lines of credit outstanding.
BIOLARGO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
One-Year
Convertible
N
otes, mature
July 8, 2017
On
July 8, 2016,
we received
$250,000
and issued convertible promissory notes, convertible at
$0.45
per share, with a maturity date of
July 8, 2017,
to
two
accredited investors, in the aggregate principal amount of
$280,000.
Interest was charged upon issuance at
3%
per annum. In addition, we issued
the
two
investors stock purchase warrants to purchase an aggregate
400,000
shares of our common stock exercisable at
$0.65
per share, which expire
five
years from the date of grant. (See Note
7.
)
On
January 13, 2017,
at the election of the holders of these notes, the principal amount was converted into
622,222
shares of our common stock.
One-Year Convertible Note
s
, mature
December 30, 2017
On
December 30, 2016,
we received
$250,000
and issued convertible promissory notes, convertible at
$0.57
per share, with a maturity date of
December 30, 2017
, to
two
accredited investors, in the aggregate principal amount of
$280,000.
Interest was charged upon issuance at
3%
per annum. The notes are convertible by the holders at any time. We have the right to convert the notes at any time after
June 30,
2017,
provided that our common stock closes at
two
times the conversion price for
10
consecutive business days. In addition, we issued the
two
investors warrants to purchase an aggregate
400,000
shares of our common stock exercisable at
$0.75
per share, which expire
five
years from the date of grant. (See Note
7.
)
The notes contain a conversion price protection feature such that if the
Company issues a convertible promissory note at a lower conversion price, the holder
may
exchange the note for an investment on the same terms offered to the other investor. On
July 18, 2017,
because we issued notes at a
$0.42
conversion price (see “One-Year Convertible Notes, mature
July 18, 2018,”
below), the holder elected to exchange these notes for notes on similar terms, reducing the conversion price of these notes from
$0.57
to
$0.42.
Concurrently, the noteholders exercised their right to convert the principal into
666,667
shares of our common stock.
One-Year Convertible Notes
, mature
July 18, 2018
On
July 18, 2017,
we received
$250,000
and issued convertible promissory notes, convertible at
$0.42
per share, with a maturity date of
July 18, 2018
, to
two
accredited investors in the aggregate principal amount of
$280,000.
Interest was charged upon issuance at
3%
per annum. The notes are convertible by the holders at any time. We have the right to convert the notes at any time after
January
18,
2018,
provided that our common stock closes at
two
times the conversion price for
10
consecutive business days. In addition, we issued the
two
investors warrants to purchase an aggregate
400,000
shares of our common stock exercisable at
$0.65
per share, which expire
five
years from the date of grant. (See Note
7.
)
The notes contain a conversion price protection feature such that if the
Company issues a convertible promissory note at a lower conversion price, the holder
may
exchange the note for an investment on the same terms offered to the other investor.
Convertible Notes, mature
June 1, 2018
(
2015
Unit Offering)
On
January 15, 2015,
we commenced a private securities offering of “Units”, each Unit consisting of a convertible promissory note and Series A stock purchase warrant (
“2015
Unit Offering”), which was closed on
September 16, 2016.
The price and availability of the Units were set forth in
five
“Pricing Supplements” issued from time-to-time. Each note issued is convertible into the Company
’s common stock, at our discretion, at the Unit price set forth in the particular pricing supplement, and matures
June 1, 2018.
During the year ended
December 31, 2016,
we received
$2,140,000
from investors in the
2015
Unit Offering, and issued unsecured convertible promissory notes with a maturity date of
June
1,
2018,
which accrue interest at the rate of
12%
per annum.
BIOLARGO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Interest due
may
be paid quarterly in cash or shares of common stock
at our discretion; all interest due thus far has been paid in shares of common stock. If paid by the issuance of common stock, interest is paid at a conversion price equal to the average closing price of the Company’s common stock over the
20
trading days prior to the interest payment due date. The principal amount of the note
may
be paid by the issuance of shares of common stock, or cash, upon maturity at the Company’s election. When paid in shares, the number of shares to be issued shall be calculated by dividing the principal amount invested by the Unit price, as it is established at the time of the original investment by the applicable Pricing Supplement. The notes
may
be converted at any time by the investor, at maturity by the Company, or by the Company prior to maturity, so long as all of the following conditions are met: (i) the shares issued as payment are registered with the SEC, (ii) the Company’s common stock closes for
ten
consecutive trading days at or above
three
times the Unit price. On
June 15, 2017,
a registration statement registering the shares issuable upon conversion was deemed effective by the SEC.
Each investor, for
no
additional consideration, received a Series A stock purchase warrant. (See Note
7
.)
As of
December 31, 2017,
the outstanding balance for notes issued in the
2015
Unit Offering, maturing
June 1, 2018
is as follows:
|
Unit/
Conversion
Price
|
|
|
Warrant
Exercise Price
|
|
|
Total
|
|
|
$
|
0.25
|
|
|
$
|
0.40
|
|
|
$
|
1,626,134
|
|
|
$
|
0.35
|
|
|
$
|
0.45
|
|
|
|
1,726,046
|
|
|
$
|
0.55
|
|
|
$
|
0.70
|
|
|
|
1,116,667
|
|
|
|
|
|
|
|
|
|
|
$
|
4,468,847
|
|
During year ended
December 31, 2017,
investors elected to convert an aggregate
$331,250
principal amount of promissory notes issued in our
2015
Unit Offering into
1,009,192
shares of our common stock.
During the year ended
December 31, 2016,
investors elected to convert an aggregate
$589,371
principal amount promissory notes issued in our
2015
Unit Offering into
2,167,420
shares of our common stock.
Convertible Note, mature
s
September 1
8,
2018
(Vista Capital)
On
December 18, 2017,
we
received
$500,000
pursuant to a securities purchase agreement (the “Vista Purchase Agreement”) and a registration rights agreement (the “Vista RRA”) with Vista Capital Investments, LLC (“Vista Capital”), and issued a Note (the “Vista Note”) in the aggregate principal amount of
$500,000
at
5%
annual interest, which is convertible into shares of common stock of the Company at
$0.394
per share, subject to the terms, and certain limitations and conditions, set forth in the Vista Purchase Agreement and Vista Note. The Vista Note matures on
September 18, 2018.
The Company has reserved
1,269,036
shares of common stock for issuance upon conversion of the Vista Note.
Pursuant to the Vista Purchase Agreement, the Company issued
250,000
shares of common stock to Vista Capital as a commitment fee at
$0.39
per share and
$98,500
is recorded as a discount on convertible notes and will amortize to interest expense over the term of the note.
Pursuant to the Vista RRA, the Company agreed to file a registration statement with
the SEC registering all shares of common stock into which the Vista Note is convertible, and the
250,000
shares issued as a commitment fee. The Vista Purchase Agreement requires additional shares be issued for the commitment fee in the event the closing price of our common stock on the date the registration statement is deemed effective is lower than the closing price on
December 18, 2017, (
which was
$0.41
). In such event, additional shares would be issued such that the aggregate shares issued have the same value as the
250,000
shares issued on
December 18, 2017.
The beneficial conversion feature resulted in a
$20,305
relative fair value recorded as a discount. The discount will be amortized monthly to interest expense through
September 18, 2018.
BIOLARGO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Vista Capital represented to the Company, among other things, that it was an “accredited investor” (as such term is defined in Rule
501
(a) of Regulation D under the Securities Act of
1933,
as amended). The Vista Note, Vista Purchase Agreement, and Vista RRA contain customary representations, warranties, agreements and conditions including indemnification rights and obligations of the parties.
The Vista Note contains a price protection provision such that if we issue a security with any term more favorable to the holder of such security that was
not
similarly provided in the Vista Note, then we shall notify Vista Capital of such additional or more favorable term and such term, at its option, shall become a part of the Vista Note.
Convertible Notes, mature
September 17, 2019
On
September 17, 2016,
investors in the line of credit (see “Line of Credit” above), converted an aggregate principal amount of
$250,000
plus accrued interest of
$33,571
promissory notes convertible at
$0.55
per share. Other than the maturity date of
September 17, 2019,
these notes contain the same terms as the notes issued in the
2015
Unit Offering. Our common stock closed at
$0.70
on
September 17, 2016.
In addition to the convertible promissory notes, the investors received a Series A stock purchase warrant to purchase an aggregate
515,583
shares of our common stock at an exercise price of
$0.70
per share (see Note
7
).
Convertible Notes, mature
December 31, 2019
(Winter
2016
Unit Offering)
On
December 27, 2016,
we commenced a private securities offering (titled the “Winter
2016
Unit Offering”) which offered the sale of
$600,000
of “Units,” each Unit consisting of a convertible promissory note and stock purchase warrant. The promissory notes issued to investors were convertible at
$0.57
per share, a discount to the market price of our stock on that date of
$0.86,
mature
December 31, 2019,
and bear interest at the rate of
12%
per annum on the amount invested. Any interest due will be paid quarterly in arrears in cash or shares of common stock. If paid by the issuance of common stock, interest is paid at a conversion price equal to the average closing price of the Company
’s common stock over the
20
trading days prior to the interest payment due date. The principal amount of the note
may
be paid by the issuance of shares of common stock, or cash, upon maturity at the Company’s election.
When paid in shares, the number of shares to be issued shall be calculated by dividing the principal amount invested by the
$0.57
conversion price. Promissory notes
may
be converted at any time by the investor, at maturity by the Company, or by the Company prior to maturity, so long as the following conditions are met: (i) the Shares issued as payment are registered with the SEC; and (ii) the Company
’s common stock closes for
ten
consecutive trading days at or above
three
times the Unit price. In addition to the convertible promissory note, each investor received a warrant allowing for the purchase of the number of shares of BioLargo common stock equal to the investment amount divided by
$0.57
(e.g.,
one
warrant share for each share of common stock which the investor is eligible to receive through conversion of his original convertible note). The exercise price of the warrant is
$0.70
per share of common stock and expire on
December 31, 2021 (
see Note
7
). The Company
may
“call” the warrants, requiring the investor to exercise their warrants within
30
days or forever lose the rights to do so, only if the following conditions have been met: (i) the underlying Shares are registered with the SEC and (ii) the Company’s common stock closes for
10
consecutive trading days at or above
two
times the exercise price. The shares underlying the warrants contain “piggy back” registration rights for any registrations subsequent to the Form S-
1
filed
January 24, 2017.
From inception of the offering through its termination on
January 13, 2017,
we received
$292,000
from
six
investors, issued convertible notes in the aggregate of
$292,000,
and issued warrants to purchase
512,281
shares of our common stock.
BIOLARGO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Convertible Notes, mature
June 20, 2020 (
Summer
2017
Unit Offering)
On
May 24, 2017,
we commenced a private securities offering (titled the “Summer
2017
Unit Offering”) which offered the sale of
$1,500,000
of “Units,” each Unit consisting of a convertible promissory note and stock purchase warrant. Concurrently, we issued Pricing Supplement
No.
1.,
setting the initial unit/conversion price at
$0.42
per share, and the initial warrant exercise price at
$0.65
per share. The promissory notes issued to investors mature
June 20, 2020,
and bear interest at the rate of
12%
per annum on the amount invested. Any interest due will be paid quarterly in arrears in cash or shares of common stock. If paid by the issuance of common stock, interest is paid at a conversion price equal to the average closing price of the Company
’s common stock over the
20
trading days prior to the interest payment due date. The principal amount of the note
may
be paid by the issuance of shares of common stock, or cash, upon maturity at the Company’s election. Promissory notes
may
be converted at any time by the investor, at maturity by the Company, or by the Company prior to maturity, so long as the following conditions are met: (i) the Shares issued as payment are registered with the SEC; and (ii) the Company’s common stock closes for
ten
consecutive trading days at or above
three
times the Unit price.
In addition to the convertible promissory note, each investor received a warrant allowing for the purchase of the number of shares of BioLargo common stock equal to the investment amount divided by the unit/conversion price (e.g.,
one
warrant share for each share of common stock which the investor is eligible to receive through conversion of the note). (See Note
7.
) The warrants expire on
June 20, 2022.
The Company
may
“call” the warrants, requiring the investor to exercise their warrants within
30
days or forever lose the rights to do so, only if the following conditions have been met: (i) the underlying Shares are registered with the SEC and (ii) the Company’s common stock closes for
10
consecutive trading days at or above
two
times the exercise price.
Through
December 31, 2017,
we had received
$523,700
in investments in the Summer
2017
Unit Offering, from
ten
accredited investors.
The offering documents assured the investors that in the event a subsequent pricing supplement offered a lower conversion or exercise price, prior investors would be given those favorable terms. On
December 29, 2017,
we issued a
second
pricing supplement, lowering the conversion price to
$0.394.
As a result of this reduction, we notified each investor of the decrease in conversion price, and increased the number of warrant shares available to each investor. (See Note
7.
)
Two-Year
Convertible Note
, matures
July 20, 2019
On
July 20, 2017,
the
Company accepted
$400,000
and issued a promissory note with a
10%
original issue discount in the principal amount of
$440,000,
due in
two
years, that accrues interest at
12%.
Interest is to be paid quarterly beginning
October 1, 2017,
in either cash, common stock, or an option to purchase common stock, in the holder’s discretion. Subsequent to
December 31, 2017,
the terms of the payment of interest was modified in an amendment to the note (see Note
13
).At maturity, the note automatically converts, at the holder’s option, into either BioLargo common shares at
$0.42
per share,
2,000
shares of Clyra Medical Technologies common stock held by BioLargo, or any combination thereof. The fair value of the beneficial conversion feature resulted in a
$171,429
discount recorded on our balance sheet as a discount on convertible notes payable, net of current portion. The discount will be amortized monthly as interest expense through
July 20, 2019.
Note
6.
Share-Based Compensation
Common Stock
On
May 2, 2017,
pursuant to an employment agreement with the Company
’s president, Dennis Calvert (see Note
12
), we issued Mr. Calvert
1,500,000
shares of common stock, subject to 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. The Company will expense the fair value of the stock if and when it is probable that any of the conditions above are met.
BIOLARGO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During the year ended
December 31,
2016
and
2017,
we issued
2,342,264
and
2,420,821
shares of common stock in lieu of cash for fees for service provided by consultants, for equipment, to settle accrued and unpaid salary to officers and to settle our accrued interest liability, resulting in an aggregate grant date fair value of
$993,078
and
$1,135,623,
which is recorded in selling general and administrative expense and as interest expense
.
Stock Option Expense
During the year ended
December 31,
2016
and
2017,
we recorded an aggregate
$751,113
and
$1,103,090,
respectively, in selling general and administrative expense related to the issuance of stock options. We issued options through our
2007
Equity Incentive Plan and outside of our
2007
Equity Incentive Plan.
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. The Company is in the process of implementing a new stock option plan for
2018.
O
n
June 19, 2017,
the date of our annual stockholders’ meeting, we recorded the issuance of options to purchase an aggregate
40,000
shares of our common stock to the non-employee members of our Board of Directors, pursuant to the terms of the
2007
Equity Plan which calls for an annual automatic issuance. The exercise price of
$0.43
equals the price of our common stock on the grant date. The fair value of these options totaled
$15,600
and was recorded as selling, general and administrative expense.
On
February 10, 2017,
we extended
our engagement agreement with our Chief Financial Officer. The sole consideration for the
one
-year extension was the issuance of an option to purchase
300,000
shares of our common stock, at an exercise price of
$0.69
per share which was equal to the closing price of our common stock on the date of grant. The option expires
February 10, 2027,
and vests over the term of the engagement with
125,000
shares having vested as of
February 10, 2017,
and the remaining shares to vest
25,000
shares monthly beginning
March 1, 2017,
and each month thereafter, so long as his agreement is in full force and effect. The fair value of the option totaled
$207,000
and is recorded in selling, general and administrative expense on our statement of operations. The option has fully vested.
On
June 2
0,
2016,
we recorded the issuance of options to purchase an aggregate
40,000
shares of our common stock to the non-employee members of our Board of Directors, pursuant to the terms of the
2007
Equity Plan which calls for an annual automatic issuance. The exercise price of
$0.45
equals the price of our common stock on the grant date. The fair value of these options totaled
$18,000
and was recorded as selling, general and administrative expense.
On
March 21, 2016,
our Board of Directors extended b
y
five
years the expiration of options to purchase
307,777
shares of our common stock issued to our Board of Directors and vendors in
March 2011.
The options were originally issued in exchange for unpaid obligations and now expire on
March 21, 2021.
The weighted-average fair value of the options resulted in additional
$119,971
of selling, general and administrative expenses.
BIOLARGO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Activity for our stock options under the
2007
Plan for the years ended
December 31, 2016
and
2017
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
Options
|
|
|
Shares
|
|
|
Exercise
|
|
|
Price per
|
|
|
|
Outstanding
|
|
|
Available
|
|
|
p
rice per share
|
|
|
share
|
|
Balances as of December 31, 2015
|
|
|
10,241,086
|
|
|
|
1,758,914
|
|
|
$
|
0.22
|
–
|
1.89
|
|
|
$
|
0.44
|
|
Granted
|
|
|
40,000
|
|
|
|
(40,000
|
)
|
|
|
|
|
0.45
|
|
|
|
0.45
|
|
Exercised
|
|
|
(102,000
|
)
|
|
|
—
|
|
|
|
|
|
0.35
|
|
|
|
0.35
|
|
Expired
|
|
|
(262,500
|
)
|
|
|
262,500
|
|
|
|
|
|
0.40
|
|
|
|
0.40
|
|
Balance, December 31, 2016
|
|
|
9,916,586
|
|
|
|
1,981,414
|
|
|
|
0.22
|
–
|
1.89
|
|
|
|
0.44
|
|
Granted
|
|
|
340,000
|
|
|
|
—
|
|
|
|
0.39
|
–
|
0.69
|
|
|
|
0.65
|
|
Expired
|
|
|
(425,000
|
)
|
|
|
—
|
|
|
|
0.40
|
–
|
0.94
|
|
|
|
0.91
|
|
Not issued, 2007 Plan closed September 2017
|
|
|
—
|
|
|
|
(1,981,414
|
)
|
|
|
|
|
—
|
|
|
|
—
|
|
Balance
, December 31, 2017
|
|
|
9,831,586
|
|
|
|
—
|
|
|
$
|
0.22
|
–
|
1.89
|
|
|
$
|
0.44
|
|
The
following table summarizes the stock options issued under the
2007
Equity Plan outstanding at
December 31, 2017.
|
Options outstanding and exercisable at December 31, 2017
|
|
|
Exercise
price
per
share
|
|
|
Weighted average
remaining years
contractual life
|
|
|
Weighted
average
exercise price
|
|
|
Aggregate
intrinsic value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100,000
|
|
|
$
|
1.10
|
–
|
1.89
|
|
|
|
.5
|
|
|
$
|
1.67
|
|
|
$
|
—
|
|
|
|
892,135
|
|
|
|
0.28
|
–
|
0.99
|
|
|
|
1
|
|
|
|
0.51
|
|
|
|
6,900
|
|
|
|
1,020,000
|
|
|
|
0.25
|
–
|
0.70
|
|
|
|
2
|
|
|
|
0.55
|
|
|
|
3,400
|
|
|
|
3,650,528
|
|
|
|
0.22
|
–
|
0.51
|
|
|
|
3
|
|
|
|
0.37
|
|
|
|
192,206
|
|
|
|
1,656,262
|
|
|
|
0.34
|
–
|
0.40
|
|
|
|
4
|
|
|
|
0.36
|
|
|
|
54,044
|
|
|
|
715,161
|
|
|
|
0.28
|
–
|
0.40
|
|
|
|
5
|
|
|
|
0.36
|
|
|
|
23,455
|
|
|
|
640,000
|
|
|
|
0.30
|
–
|
0.65
|
|
|
|
6
|
|
|
|
0.48
|
|
|
|
27,000
|
|
|
|
477,500
|
|
|
|
0.40
|
–
|
0.60
|
|
|
|
7
|
|
|
|
0.42
|
|
|
|
—
|
|
|
|
340,000
|
|
|
|
0.45
|
–
|
0.57
|
|
|
|
8
|
|
|
|
0.56
|
|
|
|
—
|
|
|
|
340,000
|
|
|
|
0.39
|
–
|
0.69
|
|
|
|
9
|
|
|
|
0.65
|
|
|
|
—
|
|
|
|
9,831,586
|
|
|
$
|
0.22
|
–
|
1.89
|
|
|
|
4
|
|
|
$
|
0.44
|
|
|
$
|
307,005
|
|
Options issued Outside of the
2007
Equity Incentive Plan
During the year ended
December 31, 2017,
we issued options to purchase
580,702
shares of our common stock at exercise prices ranging between
$0.39
–
$0.51
per share to members of our board of directors for fees for services totaling
$262,501.
During the year ended
December 31, 2017,
we issued options to purchase
853,297
shares of our common stock at exercise prices ranging between
$0.39
–
$0.67
per share to vendors and employees in lieu of accrued and unpaid fees and salary totaling
$453,170.
On
December 29, 2017,
we extended our engagement agreement with our Chief Financial Officer. The sole consideration for the
one
-year extension was the issuance of an option to purchase
300,000
shares of our common stock, at an exercise price of
$0.39
per share which was equal to the closing price of our common stock on the date of grant. The option expires
December 19, 2027,
and vests over the term of the engagement with
75,000
shares having vested as of
December 19, 2017
and the remaining shares to vest
25,000
shares monthly through
September 30, 2018,
so long as his agreement is in full force and effect. The fair value of the option totaled
$117,000,
and during the year ended
December 31, 2017,
we recorded
$29,250
of selling, general and administrative expense.
BIOLARGO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On
October 23, 2017,
we issued to our Secretary an option to purchase
100,000
shares of our common stock
at
$0.45
per share, which expires
October 23, 2027,
and vests monthly in
10,000
share increments beginning
November 23, 2017.
The fair value of this option totaled
$45,000,
of which
$9,000
was recorded as selling, general and administrative expense during
2017.
The remaining fair value will be expensed through
August 2018.
On
October 17, 2017,
we issued to an employee of our
BioLargo Maritime Solutions, Inc. an
option to purchase
100,000
shares of our common stock at
$0.47
per share, which expires
October 17, 2027,
and vests monthly in
10,000
share increments beginning
November 23, 2017.
The fair value of these options totaled
$94,000,
of which
$18,800
was recorded as selling, general and administrative expense during
2017.
The remaining fair value will be expensed through
August 2018.
On
September 5, 2017,
we issued options to purchase
2,000,000
shares of our common stock to the employees of our newly created engineering subsidiary (see
Note
11
). The options are non-qualified stock options, exercisable at
$0.45
per share, the closing price of our common stock as of
September
5th,
exercisable for
ten
years from the date of grant and subject to vesting in
five
equal increments on the anniversary of the agreement for
five
years based on certain performance milestones related to the operations of the subsidiary. (See Note
11
for details of the performance milestones.) The options contain other terms standard in option agreements issued by the Company, including provisions for a cashless exercise. The fair value of these options totals
$900,000.
Management chose
not
to expense the fair value of the options at this time because the subsidiary is just beginning operations and therefore reaching the performance milestones by
September 2018
is uncertain.
On
May 2, 2017,
pursuant to his employment agreement (see
Note
12
), we granted to our president, Dennis P. Calvert, an option to purchase
3,731,322
shares of the Company’s common stock. The option is a non-qualified stock option, exercisable at
$0.45
per share, the closing price of our common stock on the grant date, exercisable for
ten
years from the date of grant, and vesting in equal increments on the anniversary of the agreement for
five
years. Any portion of the option which has
not
yet vested shall immediate vest in the event of, and prior to, a change of control, as defined in the employment agreement. The option contains the other terms standard in option agreements issued by the Company, including provisions for a cashless exercise. The fair value of this option totaled
$1,679,095
and will be expensed monthly through
May 2, 2022.
During the year ended
December 31, 2017,
we recorded
$195,894,
of selling, general and administrative expense related to the option.
During the year ended
December 31, 2016,
we issued options to purchase
1,009,718
shares of our common stock at exercise prices ranging between
$0.33
–
$0.83
per share to vendors and to our members of our board of directors, in lieu of
$316,007
in accrued and unpaid fees. The aggregate fair value of these options totaled
$357,312
and is recorded as selling, general and administrative expenses.
The compensation expense of the previously issued options that vested during the year ended
December 31, 2016
and
2017
was
$99,600
and
$250,425,
respectively.
Exercise of Stock Option
On
April 30, 2017,
our president, Dennis P. Calvert, delivered a notice of exercise of
3,866,630
shares pursuant to his stock option agreement dated
April 30, 2007.
The exercise price was
$0.18
per share, and the Company issued to Mr. Calvert
2,501,937
shares, calculated by multiplying the difference between the market price of
$0.51
and the exercise price of
$0.18
with the number of shares exercised, and dividing that amount by the market price.
No
cash consideration was tendered with respect to the exercise. The remaining
3,866,629
shares available for purchase under the option agreement expired unexercised.
Pursuant to a “lock-up agreement” dated
April 30, 2017,
Mr. Calvert agreed to restrict the sales of the shares received until the earlier of (i) the consummation of a sale (in a single transaction or in a series of related transactions) of the Company by means of a sale of (a) a majority of the then outstanding common stock (whether by merger, consolidation, sale or transfer of common stock, reorganization, recapitalization or otherwise) or (b) all or substantially all of its assets; and (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 between the Company and Calvert dated
May 2, 2017
and resulting in Calvert’s termination.
BIOLARGO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Activity of our stock options issued outside of the
2007
Plan for the year ended
December 31,
201
6
and
2017
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
a
verage
|
|
|
|
Options
|
|
|
Exercise
|
|
|
p
rice per
|
|
|
|
o
utstanding
|
|
|
p
rice per share
|
|
|
share
|
|
Balance, December 31, 201
5
|
|
|
19,394,975
|
|
|
$
|
0.18
|
–
|
1.00
|
|
|
$
|
0.40
|
|
Granted
|
|
|
1,009,718
|
|
|
|
0.33
|
–
|
0.83
|
|
|
|
0.48
|
|
Exercised
|
|
|
(255,927
|
)
|
|
|
|
|
0.25
|
|
|
|
0.25
|
|
Balance, December 31, 201
6
|
|
|
20,148,766
|
|
|
|
0.18
|
–
|
1.00
|
|
|
|
0.40
|
|
Granted
|
|
|
7,765,401
|
|
|
|
0.39
|
–
|
0.69
|
|
|
|
0.46
|
|
Exercised
|
|
|
(3,866,630
|
)
|
|
|
|
|
0.18
|
|
|
|
0.18
|
|
Ex
pired
|
|
|
(4,029,129
|
)
|
|
|
|
|
0.18
|
|
|
|
0.18
|
|
Balance, December 31, 201
7
|
|
|
20,018,408
|
|
|
$
|
0.25
|
–
|
1.00
|
|
|
$
|
0.51
|
|
The
following table summarizes the stock options issued outside of the
2007
Equity Incentive Plan outstanding at
December 31, 2017.
|
Number of
shares
outstanding at December 31, 2017
|
|
|
Exercise
price range
|
|
|
Weighted
average
remaining years
contractual life
|
|
|
|
Weighted
average
exercise price
(outstanding)
|
|
|
Number of
shares
exercisable at December
31, 2017
|
|
|
Weighted
average
exercise price
(exercisable)
|
|
|
Aggregate
intrinsic
value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,400,000
|
|
|
$
|
|
|
0.99
|
|
|
|
.04
|
|
|
$
|
0.99
|
|
|
|
2,400,000
|
|
|
$
|
0.99
|
|
|
$
|
—
|
|
|
|
691,975
|
|
|
|
|
|
0.55
|
|
|
|
1
|
|
|
|
0.55
|
|
|
|
691,975
|
|
|
|
0.55
|
|
|
|
—
|
|
|
|
800,000
|
|
|
|
|
|
1.00
|
|
|
|
4
|
|
|
|
1.00
|
|
|
|
800,000
|
|
|
|
1.00
|
|
|
|
—
|
|
|
|
1,666,736
|
|
|
|
0.30
|
–
|
0.40
|
|
|
|
5
|
|
|
|
0.31
|
|
|
|
1,666,736
|
|
|
|
0.31
|
|
|
|
134,819
|
|
|
|
3,122,093
|
|
|
|
0.25
|
–
|
0.65
|
|
|
|
6
|
|
|
|
0.32
|
|
|
|
3,122,093
|
|
|
|
0.32
|
|
|
|
292,583
|
|
|
|
2,120,947
|
|
|
|
0.33
|
–
|
0.47
|
|
|
|
7
|
|
|
|
0.37
|
|
|
|
2,120,947
|
|
|
|
0.37
|
|
|
|
68,517
|
|
|
|
1,388,116
|
|
|
|
0.33
|
–
|
0.65
|
|
|
|
8
|
|
|
|
0.47
|
|
|
|
1,388,116
|
|
|
|
0.47
|
|
|
|
23,811
|
|
|
|
4,615,342
|
|
|
|
0.43
|
–
|
0.83
|
|
|
|
9
|
|
|
|
0.47
|
|
|
|
884,020
|
|
|
|
0.57
|
|
|
|
—
|
|
|
|
3,213,200
|
|
|
|
0.39
|
–
|
0.51
|
|
|
|
10
|
|
|
|
0.44
|
|
|
|
740,200
|
|
|
|
0.44
|
|
|
|
—
|
|
|
|
20,180,908
|
|
|
$
|
0.22
|
–
|
1. 00
|
|
|
|
6.5
|
|
|
$
|
0.51
|
|
|
|
13,882,086
|
|
|
$
|
0.53
|
|
|
$
|
519,731
|
|
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.
BIOLARGO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following methodology and assumptions were used to calculate share
-based compensation for the years ended
December 31:
|
|
2016
|
|
|
2017
|
|
|
|
Non Plan
|
|
|
2007 Plan
|
|
|
Non Plan
|
|
|
2007 Plan
|
|
Risk free interest rate
|
|
1.91
|
–
|
2.49
|
%
|
|
1.36
|
–
|
2.14
|
%
|
|
2.29
|
–
|
2.43
|
%
|
|
2.31
|
–
|
2.40
|
%
|
Expected volatility
|
|
623
|
–
|
738
|
%
|
|
315
|
–
|
738
|
%
|
|
563
|
–
|
601
|
%
|
|
578
|
–
|
601
|
%
|
Expected dividend yield
|
|
|
|
—
|
|
|
|
|
—
|
|
|
|
|
—
|
|
|
|
|
—
|
|
Forfeiture rate
|
|
|
|
—
|
|
|
|
|
—
|
|
|
|
|
—
|
|
|
|
|
—
|
|
Life in years
|
|
|
|
7
|
|
|
3
|
–
|
7
|
|
|
|
|
7
|
|
|
|
|
5
|
|
Expected price volatility is the measure by which our stock price is expected to fluctuate during the expected term of an option. Expected volatility is derived from the historical daily change in the market price of our common stock, as we believe that historical volatility is the best indicator of future volatility.
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.
Note
7
. Warrants
We have certain warrants outstanding to purchase our common stock, at various prices, as described in the following table:
|
|
Number of
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Price Range
|
|
Outstanding as of December 31, 2015
|
|
|
13,779,438
|
|
|
$
|
0.125
|
–
|
1.00
|
|
Prior year extensions
|
|
|
4,634,637
|
|
|
|
|
|
0.30
|
|
Issued
|
|
|
6,822,855
|
|
|
|
0.35
|
–
|
0.75
|
|
Exercised
|
|
|
(2,818,271
|
)
|
|
|
0.25
|
–
|
0.40
|
|
Expired
|
|
|
(2,383,545
|
)
|
|
|
0.55
|
–
|
0.75
|
|
Outstanding as of December 31, 2016
|
|
|
20,035,114
|
|
|
$
|
0.125
|
–
|
1.00
|
|
Issued
|
|
|
2,829,703
|
|
|
|
0.39
|
–
|
0.70
|
|
Exercised
|
|
|
(510,000
|
)
|
|
|
|
|
0.30
|
|
Expired
|
|
|
(250,000
|
)
|
|
|
|
|
0.40
|
|
Outstanding as of December 31, 2017
|
|
|
22,104,817
|
|
|
$
|
0.125
|
–
|
1.00
|
|
Warrants Issued to Summer
2017
Unit Offering Investors
Pursuant to the terms of our Summer
2017
Unit Offering (see Note
5
), we issued warrants to purchase an aggregate
1,246,906
shares of our common stock, at an exercise price of
$0.65
per share. These warrants expire
June 20, 2022.
The relative fair value of these warrants resulted in
$523,700
recorded as a long-term discount on our convertible notes.
The offering documents assured the investors that in the event a subsequent pricing supplement offered a lower conversion or exercise price, prior investors would be given those favorable terms. On
December 29, 2017,
we issued a
second
pricing supplement, lowering the conversion price to
$0.394.
As a result of this reduction, we notified each investor of the decrease in conversion price, and increased the number of warrant shares available to each investor. In the aggregate, the number of warrant shares increased by
82,283,
such that the warrants, in the aggregate, allow for the purchase of
1,329,189
shares.
The relative fair value of these additional warrants resulted in
$32,090
recorded as a long-term discount on our convertible notes.
BIOLARGO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Warrants Issued to Winter
2016
Unit Offering Investors
Pursuant to the terms of our Winter
2016
Unit Offering (see Note
5
), we issued warrants to purchase an aggregate
512,281
shares of our common stock at an exercise price of
$0.70
per share. Of this amount, warrants to purchase
292,983
shares were issued during the
year ended
December 30, 2016,
and
219,298
shares were issued during the year ended
March 31, 2017.
These warrants expire
December 31, 2021.
The relative fair value of these warrants resulted in
$167,000
and
$125,000
in the years ended
December 31, 2016
and
2017,
respectively, recorded as a discount on our convertible notes. This offering is closed and
no
further warrants will be issued.
Warrants Issued Concurrently with One-Year Convertible Notes
On
July 8, 2016,
we issued warrants to purchase an aggregate
400,000
shares of our common stock to
two
investors who received
one
-year convertible notes with a maturity date of
July 8, 2017 (
see Note
5
). These warrants were initially exercisable at
$0.65
per share, and
are scheduled to expire on
July 8, 2021.
The fair value of these warrants resulted in
$160,000
discount on the
one
-year convertible notes. The warrants contain a provision that the exercise price
may
be reduced in the event we sell our common stock or issue warrants to
third
parties at a lower price, other than through our
2015
Unit Offering. On
May 24, 2017,
we commenced the Summer
2017
Unit Offering (see Note
5
), offering promissory notes convertible at
$0.42
per share. Since these securities were sold at less than the exercise price of the
July 8, 2016
warrants, the exercise price of the warrants was decreased from
$0.65
to
$0.42
per share, and the number of shares issuable under the warrant increased by
219,048
shares to a total of
619,048
shares.
On
December 30, 2016,
we issued warrants to purchase an aggregate
400,000
shares of our common stock to
two
investors who received
one
-year convertible notes with a maturity date of
December 30, 2017 (
see Note
5
). These warrants are initially exercisable at
$0.75
per share and expire
December 31, 2021.
The stock price on the date of grant was
$0.83.
The fair value of warrants issued resulted in
$280,000
discount on the
one
-year convertible notes. The warrants contain a provision that the exercise price
may
be reduced in the event we sell our common stock or issue warrants with a lower price, other than through our Winter
2016
Unit Offering, or stock or stock options to persons providing services to our company. On
May 24, 2017,
we commenced the Summer
2017
Unit Offering (see Note
5
), offering promissory notes convertible at
$0.42
per share. Since these securities were sold at less than the exercise price of the
December 30, 2016
warrants, the exercise price of the warrants was decreased from
$0.75
to
$0.42
per share, and the number of shares issuable under the warrant increased by
314,285
shares to a total of
714,285
shares.
On
July 18, 2017,
we issued warrants to purchase an aggregate
400,000
shares of our common stock to
two
investors who received
one
-year convertible notes with a maturity date of
July 18, 2018 (
see Note
5
). These warrants are initially exercisable at
$0.65
per share and expire
July 31, 2022.
The warrants contain a provision that the exercise price
may
be reduced in the event we sell our common stock or issue warrants with a lower price, other than through our Summer
2017
Unit Offering, securities issued for the payment of interest on notes, any convertible note, warrants issued to these
two
investors, or stock or stock options issued for the reduction of accounts payable. The fair value of these warrants resulted in a
$280,000
discount recorded on our balance sheet as a discount on convertible note payable and will be amortized monthly as interest expense through
July 18, 2022.
On
September 26, 2017,
we sold shares of our common stock to Lincoln Park (see Note
4
) at
$0.42
per share, and thus the exercise price of the warrants issued in
July 2017
were decreased from
$0.65
to
$0.45
per share, and the number of shares issuable under the warrants increased by an aggregate
177,777
shares to a total of
577,777
shares. On
October 23, 2017,
we sold shares of our common stock to Lincoln Park (see Note
4
) at
$0.42
per share, and thus the exercise price of the warrants issued in
July 2017,
were decreased from
$0.45
to
$0.42
per share, and the number of shares issuable under the warrants increased by an aggregate
41,270
shares to a total of
619,047
shares. On
December 11, 2017,
we sold shares of our common stock to Lincoln Park (see Note
4
) at
$0.394
per share, and thus the exercise price of the warrants issued in
July 2016,
December 2016,
and
July 2017,
were decreased from
$0.42
to
$0.394
per share, and the number of shares issuable under the warrants increased by an aggregate
128,838
shares to a total of
2,081,216
shares.
These warrants are
no
longer treated as derivative liabilities. Any adjustments in the warrant price and shares due to a down round will be treated as a dividend. (See Note
3
).
BIOLARGO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2015
Unit Offering
Warrants
Pursuant to the terms of our
2015
Unit Offering, during the year ended
December 31, 2016,
we issued warrants to purchase up to an aggregate
5,429,872
shares of our common stock. Of this amount, warrants to purchase an aggregate
2,814,286
shares were issued at an exercise price of
$0.45
per share, and warrant to purchase an aggregate
2,615,586
shares were issued at an exercise price of
$0.70
per share. These warrants were issued to investors in our
2015
Unit Offering (see Note
5
), as commissions to licensed brokers in conjunction therewith, and to other investors who converted their investments into notes on the same terms as the
2015
Unit Offering and Series A warrants. Series A Warrants totaling
4,059,744
expire
June 1, 2020
and
854,545
expire
July 31, 2021.
The relative fair value of these warrants resulted in
$2,115,874
recorded as a discount on our convertible notes on our consolidated balance sheets in the periods presented.
Warrants Issued Concurrently with Line of Credit
During the year ended
December 31, 2016
we issued warrants to purchase an aggregate
300,000
shares of our common stock. These warrants are exercisable at
$0.35
per share and expire in
June 2021.
The relative fair value of warrants issued resulted in
$237,405
discount on the line of credit.
Pursuant to the terms of our line of credit,
five
line of credit holders exchanged their line of credit and accrued interest for notes and warrants on the terms offered in our
2015
Unit Offering totaling
$283,571
(see
Note
5
). With the exchange, these note holders received additional warrants to purchase an aggregate
515,583
of our common stock at an exercise price of
$0.70
which expire
June 1, 2018.
The fair value of the warrants and the intrinsic value of the beneficial conversion feature resulted in an aggregate
$283,571
recorded as a discount on convertible notes payable.
Exercise of Warrants
During the year ended
December 31, 2016
and
2017,
we issued
2,818,271
and
510,000
shares
, respectively, of our common stock from the exercise of outstanding stock purchase warrants and in exchange we received proceeds totaling
$864,009
and
$153,000,
respectively.
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. The determination of expense of warrants issued for services or settlement also uses the option-pricing model. The principal assumptions we used in applying this model were as follows:
|
|
2016
|
|
|
2017
|
|
Risk free interest rate
|
|
.95
|
–
|
1.96
|
%
|
|
1.71
|
–
|
2.10
|
%
|
Expected volatility
|
|
301
|
–
|
315
|
%
|
|
221
|
–
|
297
|
%
|
Expected dividend yield
|
|
|
|
—
|
|
|
|
|
—
|
|
Forfeiture rate
|
|
|
|
—
|
|
|
|
|
—
|
|
Expected life in years
|
|
3
|
–
|
5
|
|
|
3
|
–
|
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
8
. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses included the following:
|
|
December
|
|
|
December
|
|
|
|
|
31, 2016
|
|
|
|
31, 2017
|
|
Accounts payable
|
|
$
|
22,231
|
|
|
$
|
171,872
|
|
Uncertain tax liability
|
|
|
137,500
|
|
|
|
1,485
|
|
Officer bonus
|
|
|
80,000
|
|
|
|
—
|
|
Accrued interest
|
|
|
40,372
|
|
|
|
50,748
|
|
Total accounts payable and accrued expenses
|
|
$
|
280,103
|
|
|
$
|
224,105
|
|
BIOLARGO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The payroll tax liability is our estimate of payroll taxes due on the past services of independent contractors.
Subsequent to
December 31, 2017,
we entered into an agreement with the IRS pursuant to its “Voluntary Classification Settlement Program”, and paid a settlement amount of
$1,485
to the IRS in full satisfaction of this obligation, thereby reducing the liability as of
December 31, 2017
to the settlement amount we paid subsequent to
December 31, 2017.
On
September 27, 2016,
the board approved a
$60,000
bonus for each of our Chief Executive and Chief Science Officers. As of
December 31, 2016,
$80,000
of this bonus remains to be paid. In
January 2017,
$40,000
was paid to each of our Chief Executive and Chief Science Officer.
Issuance of Common Stock in exchange for payment of payables
Payment of Officer Salaries
During
201
7
we issued
148,705
shares of our common stock at
$0.39
per share in lieu of
$57,994
of accrued and unpaid obligations to our officers. During
2016
we did
not
issue stock for service to our officers as their salaries were paid in cash.
Payment of Consultant Fees and Accrued Interest
During
201
7
we issued
2,272,116
shares of our common stock at a range of
$0.39
–
$0.70
per share in lieu of
$1,077,629
of accrued interest and accrued and unpaid obligations to consultants.
During
2016,
we issued
2,342,264
shares of our common stock at a range of
$0.25
-
$0.83
per share in lieu of
$993,078
of accrued interest and accrued and unpaid obligations to consultants.
All of these offerings and sales were made in reliance on the exemption from registration contained in Section
4
(
2
) of the Securities Exchange Act and/or Regulation D promulgated thereunder as
not
involving a public offering of securities.
Note
9
. Provision for Income Taxes
Given our historical losses from operations, income taxes have been limited to the minimum franchise tax assessed by the State of California.
At
December 31, 2017,
we had federal and California tax net operating loss carry-forwards (“NOLs”) of approximately
$52.9
million. Due to changes in our ownership through various common stock issuances during
2002
and
2007,
the utilization of NOLs
may
be subject to annual limitations and discounts under provisions of the Internal Revenue Code. We have
not
conducted a complete analysis to determine the extent of these limitations or any future limitation. Such limitations could result in the permanent loss of a significant portion of the NOLs. Given the impact of the Tax Cuts and Jobs Act signed into law on
December 22, 2017,
the future expected corporate tax rate was reduced to
21%.
Accordingly, the Company remeasured its deferred tax asset for these NOLS. Management
’s best estimate of the NOL deferred tax asset is
$11.1
million for federal, and
$4.6
million for California. Additionally, NOLs expire after
20
years. As such, ours will begin to expire in
2021.
Realization of our deferred tax assets, which relate to operating loss carry-forwards and timing differences, is dependent on future earnings. The timing and amount of future earnings are uncertain and therefore we have established a
100%
valuation allowance.
At
December 31,
2017,
our U.S. Federal and California State income tax returns related to the years
2014
–
2016
remain open to examination by tax authorities. However, given our history of net operating losses, as discussed above, the statute of limitations could remain open to examine years prior to
2007
for the year(s) in which net operating losses were originally incurred if or when we reach profitability and begin to utilize our net operating losses to offset taxable income.
BIOLARGO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note
10
. Noncontrolling Interest
Clyra Medical Technologies
In
May 2012,
we formed a subsidiary for the purpose of marketing and selling medical products containing our technology, Clyra Medical Technologies, Inc. (“Clyra”).
We initially owned
100%
of this subsidiary, and then Clyra granted shares to management, such that we owned approximately
85%
of Clyra’s shares.
On
December 30, 2015,
Clyra sold shares of its Series A Preferred Stock (“Preferred Shares”) to Sanatio Capital, LLC (“Sanatio”) for
$750,000.
As a result of the sale, Sanatio owned
40%
of Clyra
’s issued and outstanding shares, BioLargo owned
54%,
and the remainder was owned by management. Concurrent with the sale of the Preferred Shares, the shareholders entered into a shareholders’ agreement that provides for a
three
-member board of directors, consisting of the company’s president, a person appointed by BioLargo, and a person appointed by Sanatio. BioLargo appointed its president, Dennis P. Calvert, to serve on Clyra’s board. Sanatio appointed its owner, Jack B. Strommen, to serve on the board. In
June 2017,
Mr. Strommen was elected to BioLargo’s board of directors.
As set forth in Clyra
’s Amended and Restated Articles of Incorporation, Preferred Shares accrue an annual dividend of
8%
for a period of
five
years. Although the dividends began to accrue immediately, Clyra 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 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
December 31, 2017
is
$120,000.
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 common stock and Preferred Shares as if the Preferred Shares had converted to Clyra common stock. Holders of Preferred Shares
may
convert the shares to Clyra common stock initially on a
one
-to-
one
basis. The conversion formula is subject to change in the event Clyra sells stock at a lower price than the price paid by Sanatio.
In
April 2017,
BioLargo purchased
500
shares of Clyra common stock from a former member of Clyra
’s management for
$40,000.
Clyra Line of Credit
On
March 31, 2017,
Clyra obtained a
$250,000
line of credit from Sanatio Capital LLC, accruing interest at a rate of
10%
per annum and a
5%
original issue discount. The line of credit was scheduled to mature on
March 31, 2019,
but was subsequently converted to Clyra stock in full payment (see below).
In
August 2017,
Clyra commenced a private securities offering of its common shares at a price of
$160
per share, and accepted
$1,000,000
in subscriptions. It issued
6,250
shares of its common stock to
two
investors. Of that amount, BioLargo invested
$250,000
and was issued
1,562.5
shares. On
August 4, 2017,
Clyra issued
1,690
shares of its common stock
at
$160
per share to Sanatio in exchange for payment of the
$270,400
principal and interest outstanding under the line of credit held by Sanatio (see above). Subsequent to the issuance of shares to investors in the offering, and to Sanatio for the conversion of the line of credit, BioLargo owned
15,297.5
shares of Clyra common stock, which is
46.3%
of the outstanding stock at Clyra. Two members of BioLargo’s board of directors (Dennis P. Calvert and Jack B. Strommen) comprise a majority of the
three
-member Clyra board of directors. Management has determined that Biolargo does control Clyra after reviewing the guidance of ASC Topic
810,
“Consolidation”. While Biolargo does
not
have voting interest control through
50%
ownership of Clyra, it does exercise control under the Variable Interest Model. Biolargo is the primary beneficiary since it has the power to direct Clyra’s activities that most significantly impact Clyra’s performance and it has the obligation to absorb losses or receive benefits (through royalties and licensing) that could be potentially significant to Clyra. Biolargo has consolidated Clyra’s operations through
December 31, 2017.
BIOLARGO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On
September 27, 2017,
Clyra submitted to the FDA an application for premarket notification under Section
510
(k) for a wound care product. It is now in the formal review process by the FDA.
Biolargo Maritime Solutions
The Company has an additional subsidiary, Biolargo Maritime Solutions, whereby if certain factors are met, a noncontrolling equity interest in this subsidiary has been pledged to its management.
Note
11
. 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 (see Note
12
), and entered into employment agreements with
seven
scientists and engineers. These agreements and related operational obligations add approximately
$100,000
to our monthly budget for payroll, taxes, benefits, insurance, and other related obligations. 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
2,000,000
shares of BioLargo, Inc. common stock. The profit interest and option shares are subject to a
five
year vesting schedule tied to the performance of the subsidiary, including gross revenue targets that increase over time, obtaining positive cash flow by
March 31, 2018,
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. The details of these transactions were reported on a Form
8
-K filed with the SEC on
September 8, 2017.
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. It is still too early to make a determination as to whether BLEST will meet some of the performance criteria. As of the end of
2017,
BLEST has
not
met any of the criteria and therefore
no
portion of the Class B Units and stock options have been earned or vested.
Note
12
. Commitments and Contingencies
Calvert Employment Agreement
On
May 2, 2017,
the Company entered into an employment agreement with its President and Chief Executive Officer Dennis P. Calvert (the “Calvert Employment Agreement”), replacing in its entirety the previous employment agreement with Mr. Calvert dated
April 30, 2007.
The Calvert Employment Agreement provides that Mr.
Calvert will continue to serve as our President and Chief Executive Officer and receive base compensation equal to his current rate of pay of
$288,603
annually. In addition to this base compensation, the agreement provides that he is eligible to participate in incentive plans, stock option plans, and similar arrangements as determined by the Company’s Board of Directors, health insurance premium payments for himself and his immediate family, a car allowance of
$800
per month, paid vacation of
four
weeks per year, and bonuses in such amount as the Compensation Committee
may
determine from time to time.
BIOLARGO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Calvert Employment Agreement provides that Mr.
Calvert will be granted an option (the “Option”) to purchase
3,731,322
shares of the Company’s common stock. The Option shall be a non-qualified stock option, exercisable at
$0.45
per share, which represents the market price of the Company’s common stock as of the date of the agreement, exercisable for
ten
years from the date of grant and vesting in equal increments over
five
years. Notwithstanding the foregoing, any portion of the Option which has
not
yet vested shall be immediately vested in the event of, and prior to, a change of control, as defined in the Calvert Employment Agreement. The agreement also provides for a grant of
1,500,000
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. The Option contains the other terms standard in option agreements issued by the Company, including provisions for a cashless exercise.
The Calvert Employment Agreement has a term of
five
years, unless earlier terminated in accordance with its terms. The Calvert Employment Agreement provides that Mr.
Calvert’s employment
may
be terminated by the Company due to his death or disability, for cause, or upon a merger, acquisition, bankruptcy or dissolution of the Company. “Disability” as used in the Calvert Employment Agreement means physical or mental incapacity or illness rendering Mr. Calvert unable to perform his duties on a long-term basis (i) as evidenced by his failure or inability to perform his duties for a total of
120
days in any
360
-day period, or (ii) as determined by an independent and licensed physician whom Company selects, or (iii) as determined without recourse by the Company’s disability insurance carrier. “Cause” means that Mr. Calvert has (i) engaged in willful misconduct in connection with the Company’s business; or (ii) been convicted of, or plead guilty or nolo contendre in connection with, fraud or any crime that constitutes a felony or that involves moral turpitude or theft. If Mr. Calvert’s employment is terminated due to merger or acquisition, then he will be eligible to receive the greater of (i)
one
year’s compensation plus an additional
one
-half year for each year of service since the effective date of the employment agreement or (ii)
one
year’s compensation plus an additional
one
-half year for each year remaining in the term of the agreement. Otherwise, he is only entitled to receive compensation due through the date of termination.
The Calvert Employment Agreement requires Mr.
Calvert to keep certain information confidential,
not
to solicit customers or employees of the Company or interfere with any business relationship of the Company, and to assign all inventions made or created during the term of the Calvert Employment Agreement as “work made for hire”.
Office Leases
We have long-term operating leases for office, industrial and laboratory space in Westminster, California, Oak Ridge, Tennessee, and Alberta, Canada. Payments made under operating leases are charged to the consolidated statement of operations on a straight-line basis over the term of the operating lease agreement. For the years ended
December 31, 2016
and
2017,
total rental expense was
$88,749
and $
183,401.
Future minimum lease payments as of
December 31, 2017
are as follows:
|
|
Total
|
|
2018
|
|
$
|
190,753
|
|
2019
|
|
|
165,348
|
|
2020
|
|
|
88,632
|
|
Total
lease
|
|
$
|
444,733
|
|
Clyra Consulting Agreement
Our partially owned subsidiary Clyra (see Note
10
) entered into a consulting agreement with Beach House Consulting, LLC, through which Jack B. Strommen will be providing consulting services to Clyra related to its sales and marketing activities once it has received FDA Approval (as defined in Note
10
and the associated agreement) on a product, at which point the agreement provides that Mr. Strommen is to receive
$23,438
per month for a period of
four
years. This agreement has
not
started,
and the total cash obligation related to the agreement would be
$1,125,024.
BIOLARGO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note
13
. Subsequent Events.
Management has evaluated subsequent events through the date of the filing of this
Annual Report and management noted the following for disclosure.
Sales of Stock to Lincoln Park
Subsequent to
December 31, 2017,
up to and including
March 1
3,
2017,
we sold to Lincoln Park (see Note
4
)
600,000
shares of our common stock, and received
$155,695.
Associated with these sales, we issued Lincoln Park
7,614
“additional commitment shares.”
FirstFire Global Opportunity Fund Investment
On
January 16, 2018,
we entered into a securities purchase agreement (the “FirstFire Purchase Agreement”) and a registration rights agreement (the “FirstFire RRA”) with FirstFire Global Opportunity Fund, LLC (“FirstFire”), and issued a convertible promissory note (the “FirstFire Note”) in the aggregate principal amount of
$150,000
at
5%
annual interest, which is convertible into shares of common stock of the Company at
$0.394
per share, subject to the terms, and certain limitations and conditions set forth in the FirstFire Purchase Agreement and FirstFire Note. FirstFire
may
convert the FirstFire Note at any time. The Company
may
require the conversion of the FirstFire Note in the event the Company
’s common stock has traded at a price per share of
$0.75
or above for the
ten
trading days immediately preceding the mandatory conversion, and the shares underlying the conversion are subject to an effective registration statement filed with the SEC. The FirstFire Note matures on
October 16, 2018.
Pursuant to the FirstFire Purchase Agreement, the Company issued
75,000
shares of common stock to FirstFire as a commitment fee (the “FirstFire Commitment Shares”).
Under the Note and FirstFire Purchase Agreement, the Company has reserved
394,949
shares of common stock for issuance upon conversion of the Note. Pursuant to the FirstFire RRA, the Company agreed to file a registration statement with the SEC registering all shares of common stock into which the FirstFire Note is convertible, and the FirstFire Commitment Shares. The FirstFire Purchase Agreement allows for an adjustment to the number of FirstFire Commitment Shares in the event the closing price of our common stock, on the earlier of the date the registration statement is deemed effective and
20
trading days following the
six
-month anniversary of the FirstFire Note, is lower than the closing price on
January 16, 2018 (
which was
$0.39
). In such event, additional shares would be issued to FirstFire such that the aggregate FirstFire Commitment Shares issued have the same value as the shares issued on
January 16, 2018.
FirstFire
represented to the Company, among other things, that it was an “accredited investor” (as such term is defined in Rule
501
(a) of Regulation D under the Securities Act of
1933,
as amended). The FirstFire Note, FirstFire Purchase Agreement, and the FirstFire RRA contain customary representations, warranties, agreements and conditions including indemnification rights and obligations of the parties. The FirstFire Note contains a price protection provision such that if we issue a security with any term more favorable to the holder of such security that was
not
similarly provided in the FirstFire Note, then the Company shall notify FirstFire of such additional or more favorable term and such term, at its option, shall become a part of the FirstFire Note.
We expect that proceeds from the FirstFire Note will be used for working capital and general corporate purposes.
Registration of Shares underlying Vista and FirstFire Investments
On
December 18, 2017,
we entered into the Vista Purchase Agreement and Vista RRA (see Note
5,
“Convertible Note, matures
September 18, 2018 (
Vista Capital)”.) On
January 16, 2018,
we entered into the FirstFire Purchase Agreement and FirstFire RRA on similar terms as the Vista Purchase Agreement and Vista RRA.
(See Note
13,
“FirstFire Global Opportunity Fund Investment”.)
BIOLARGO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Pursuant to the requirements set forth in the registration rights agreements, we filed a registration statement with the SEC which was deemed effective as of
February 9, 2018.
On
February 9, 2018,
our common stock last traded at
$0.29
per share. Because the last traded price of our common stock on the date the registration statement was deemed effective was less than the price of our common stock on the dates of the Vista and FirstFire Purchase Agreements, at their option, we are required to issue additional “commitment shares”.
Both companies have exercised that right, and we issued
140,849
and
36,536
additional shares of our common stock to Vista Capital and FirstFire, respectively.
Summer
2017
Offering
On
February 12, 2018,
we issued a
third
pricing supplement for our Summer
2017
Unit Offering (see Note
5
), lowering the
unit price (the conversion price of the notes) to
$0.30,
and the warrant exercise price to
$0.48.
As a result of this reduction in the unit price, pursuant to our commitment in the offering memorandum, we reduced the unit prior of the prior investors in the offering to
$0.30,
and issued amended notes reflecting the lower conversion price, and amended warrants, reflecting new share amounts and the lower exercise price. In the aggregate, the number of shares purchasable by the prior investors increased by
498,761,
from the original amount of
1,246,906,
to
1,745,667.
On
March 8, 2018,
we received a
$50,000
investment from
one
investor, and issued a promissory note convertible at
$0.30
per share, and a warrant to purchase
166,668
shares of common stock at
$0.48
per share.
Two-Year
Convertible Note, matures
July 20, 2019
On
January 25, 2018,
we and the holder of the convertible note due
July 20, 2019,
agreed to modify the interest provisions in the note, such that the
12%
annual simple interest is due at maturity, and payable pursuant to the conversion features of the note.
Additional Warrants to One-Year Note Holders
Subsequent to
December 31, 2017,
we issued stock to Lincoln Park pursuant to the LPC Purchase Agreement (see Note
4
) at
$0.25.
Doing so triggers a reduction in the purchase price of the warrants issued concurrently with
one
-year convertible notes (see Note
7
), and a corresponding increase in the number of shares available to purchase pursuant to those warrants.
F-58