Quarterly Report (10-q)

Date : 05/15/2019 @ 9:24PM
Source : Edgar (US Regulatory)
Stock : Biolargo, Inc. (QB) (BLGO)
Quote : 0.235  0.0 (0.00%) @ 2:29PM

Quarterly Report (10-q)

 

Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 


 

FORM 10-Q

 

 


 

 

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

    For the quarterly period ended March 31, 2019 .

 

or

 

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

    For the transition period from              to             

 

Commission File Number 000-19709

 


BIOLARGO, INC.

(Exact name of registrant as specified in its charter)  

 


 

     

Delaware

 

65-0159115

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

14921 Chestnut St.

Westminster, CA 92683

(Address of principal executive offices)

 

(888) 400-2863

(Registrant’s telephone number, including area code)

 


 

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

 

Title of each class

Trading symbol(s)

Name of each exchange on which registered

Common stock

BLGO

OTC Markets (OTCQB)

 


 

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

 

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

 

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

 

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

                   

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

 

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

 

The number of shares of the Registrant’s Common Stock outstanding as of May 10, 2019 was 144,953,058 shares.

 

 

 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

 

BIOLARGO, INC. AND SUBSIDIAR IES

CONSOLIDATED BALANCE SHEETS

AS OF DECEMBER 31, 2018 AND MARCH 31, 2019

(in thousands, except for per share data)

 

   

DECEMBER 31,

2018

   

MARCH 3 1 , 2019

(unaudited)

 
                 

Assets

 

Current assets:

               

Cash and cash equivalents

  $ 655     $ 512  

Accounts receivable

    257       210  

Inventories, net of allowance

    26       26  

Prepaid expenses and other current assets

    17       34  

Total current assets

    955       782  
                 

In-process research and development (Note 8)

    1,893       1,893  

Equipment, net of depreciation

    126       110  

Other non-current assets

    35       35  
Right-of-use, operating lease, net of amortization           399  

Deferred offering cost

    176       176  

Total assets

  $ 3,185     $ 3,395  

Liabilities and stockholders’ equity (deficit)

 

Current liabilities:

               

Accounts payable and accrued expenses

  $ 501     $ 631  

Notes payable

    400       490  

Line of credit

    430       430  

Convertible notes payable

    1,365       2,072  

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

    (205 )     (646 )
Lease liability           116  

Customer deposit

          32  

Total current liabilities

    2,491       3,125  
                 

Long-term liabilities:

               

Convertible notes and note payable

    285       235  

Clyra Medical note payable (Note 8)

    1,007       1,007  

Liability to Clyra Medical shareholder (Note 8)

    643       643  

Discount on convertible notes payable, net of amortization

    (118 )     (105 )

Lease liability

          283  
Total long-term liabilities     1,817       2,063  

Total liabilities

    4,308       5,188  
                 

COMMITMENTS, CONTINGENCIES (Note 11)

               
                 

STOCKHOLDERS’ EQUITY (DEFICIT):

               

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

           

Common stock, $.00067 Par Value, 400,000,000 Shares Authorized, 141,466,071 and 144,473,453 Shares Issued, at December 31, 2018 and March 31, 2019, respectively.

    95       97  

Additional paid-in capital

    110,222       112,556  

Accumulated other comprehensive loss

    (90 )     (94 )

Accumulated deficit

    (111,723 )     (114,641 )

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

    (1,496 )     (2,082 )

Non-controlling interest (Note 8)

    373       289  

Total stockholders’ equity (deficit)

    (1,123 )     (1,793 )

Total liabilities and stockholders’ equity (deficit)

  $ 3,185     $ 3,395  

 

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

 

 

 

BIOLARGO, INC. AND SUBSIDIAR IES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

FOR THE THREE MONTHS ENDED MARCH 31, 2018 AND 2019

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

(unaudited)

 

   

MARCH 31,

2018

   

MARCH 31,

2019

 
                 

Revenue

               

Product revenue

  $ 224     $ 301  

Service revenue

    39       63  

Total revenue

    263       364  
                 

Cost of revenue

               

Cost of goods sold

    (134 )     (140 )

Cost of service

    (29 )     (52 )

Total cost of revenue

    (163 )     (192 )

Gross profit

    100       172  
                 
                 

Operating expenses:

               

Selling, general and administrative expenses

    1,170       1,392  

Research and development

    522       426  

Depreciation and amortization

    10       16  

Total operating expenses

    1,702       1,834  
                 

Operating loss

    (1,602 )     (1,662 )
                 

Other income (expense):

               

Grant income

    5       82  

Interest expense

    (832 )     (985 )

Loss on extinguishment of debt

          (184 )

Total other (expense) income

    (827 )     (1,087 )
                 

Net loss

    (2,429 )     (2,749 )
                 

Net loss attributable to noncontrolling interest

    (107 )     (173 )

Net loss attributable to common shareholders

  $ (2,322 )   $ (2,576 )
                 

Net loss per share attributable to common stockholders:

               

Loss per share attributable to shareholders – basic and diluted

  $ (0.02 )   $ (0.02 )

Weighted average number of common shares outstanding:

    104,695,818       142,246,766  
                 

Comprehensive loss attributable to common shareholders

               
                 

Net loss

  $ (2,429 )   $ (2,749 )

Foreign translation adjustment

    8       (4 )

Comprehensive loss

    (2,421 )     (2,753 )
                 

Comprehensive loss attributable to noncontrolling interest

    (107 )     (1,793 )

Comprehensive loss attributable to shareholders

  $ (2,314 )   $ (2,580 )

 

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

 

 

 

BIOLARGO, INC. AND SUBSIDIARIES  

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (DEFICIT)
FOR THE THREE MONTHS ENDED MARCH 31, 2018 AND 201 9

(in thousands, except for share data)

(unaudited)

 

   

Common stock

   

Additional

paid-in

   

Accumulated

   

Accumulated

other

comprehensive

   

 

Non-

controlling

   

Total

stockholders’

 
   

Shares

   

Amount

   

capital

   

deficit

   

Loss

   

interest

   

equity (deficit)

 

Balance, December 31, 2017

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

Issuance of common stock for service

    714,436       1       196                         197  

Issuance of common stock for interest

    617,072             165                         165  

Financing fee in stock

    252,385             85                         85  

Sale of stock for cash

    658,226             168                         168  

Stock option compensation expense

                320                         320  

Warrants and conversion feature issued as discount on convertible notes payable

                282                         282  

Deemed dividend for the change in accounting for derivative liability

                297       (297 )                  

Net loss

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

Foreign currency translation

                            8             8  

Balance, March 31, 2018

    106,406,584     $ 71     $ 98,606     $ (103,825 )   $ (54 )   $ 588     $ (4,614 )

 

 

   

Common stock

   

Additional

paid-in

   

Accumulated

   

Accumulated

other

comprehensive

   

 

Non-

controlling

   

Total

stockholders’

 
   

Shares

   

Amount

   

capital

   

deficit

   

Loss

   

interest

   

equity (deficit)

 

Balance, December 31, 2018

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

Conversion of notes

    1,638,479       1       218                         219  

Issuance of common stock for service

    1,229,541       1       205                         206  

Issuance of common stock for interest

    139,362             25                         25  

Stock option compensation expense

                352                         352  

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

                1,115                         1,115  

Issuance of Clyra Medical common stock

                21                   89       110  

Fair value of warrants for extension of debt

                56                         56  

Deemed dividend for the change in accounting for derivative liability

                342       (342 )                  

Net loss

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

Foreign currency translation

                            (4 )           (4 )

Balance, March 31, 2019

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

 

 

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

 

 

 

BIOLARGO, INC. AND SUBSIDIAR IES

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR
THE THREE MONTHS ENDED MARCH 31, 2018 AND 2019

(in thousands, except for per share data)

(unaudited)

 

   

MARCH 31,

2018

   

MARCH 31,

2019

 

Cash flows from operating activities

               

Net loss

  $ (2,429 )   $ (2,749 )

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

               

Stock option compensation expense

    320       352  

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

    196       206  

Common stock issued for interest

    165       25  

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

    635       851  

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

          54  

Loss on extinguishment of debt

          184  

Deferred offering expense

    4        

Amortization and depreciation expense

    10       16  

Changes in assets and liabilities:

               

Accounts receivable

    (8 )     47  

Inventories

    (3 )      

Accounts payable and accrued expenses

    127       129  

Prepaid expenses and other current assets

    (13 )     (16 )

Customer deposits

          32  

Net cash used in operating activities

    (996 )     (869 )
                 

Cash flows from investing activities

               

Equipment purchases

    (19 )      

Net cash used in investing activities

    (19 )      

Cash flows from financing activities

               

Proceeds from convertible notes payable

    380       750  

Proceeds from the sale of stock in Clyra Medical

          110  

Repayment of note payable

          (300 )

Proceeds from sale of stock to Lincoln Park Capital

    168        

Proceeds from notes payable

          170  

Proceeds from line of credit

    390        

Net cash provided by financing activities

    938       730  

Net effect of foreign currency translation

    8       (4 )

Net change in cash

    (69 )     (143 )

Cash at beginning of year

    990       655  

Cash at end of period

  $ 921     $ 512  

Supplemental disclosures of cash flow information

               

Cash paid during the year for:

               

Interest

  $     $ 32  

Income taxes

  $     $ 3  

Non-cash investing and financing activities

               

Fair value of warrants issued with convertible notes

  $ 282     $ 1,061  

Conversion of convertible notes payable into common stock

  $     $ 220  

Convertible Notes issued with Original Issue Discount

  $     $ 217  

Fair value of stock issued for financing fees

  $ 85     $  

Right of use, operating lease and liability

  $     $ 399  

Deemed dividend

  $ 297     $ 342  

 

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

 

 

BIOLARGO, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

 

Note 1. Business and Organization

 

Description of Business  

 

BioLargo, Inc. delivers innovative and sustainable technology-based products and services, as well as environmental engineering expertise, across a broad range of industries with an overriding mission to “make life better” with a focus on clean water, clean air, and advanced wound care. Our business strategy is straightforward: we invent or acquire technologies that we believe have the potential to be disruptive in large commercial markets; we develop and validate these technologies to advance and promote their commercial success as we leverage our considerable scientific, engineering, and entrepreneurial talent; we then monetize these technical assets through a variety of business structures that may include licensure, joint venture, sale, spin off, or by deploying direct to market strategies.

 

Liquidity / Going concern

 

The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of our business. For the three months ended March 31, 2019, we had a net loss of $2,749,000, used $869,000 cash in operations, and at March 31, 2019, we had a working capital deficit of $2,343,000, and current assets of $782,000. We do not believe gross profits will be sufficient to fund our current level of operations or pay our debt due prior to December 31, 2019, and will have to obtain further investment capital to continue to fund operations and seek to refinance our existing debt. We have been, and anticipate that we will continue to be, limited in terms of our capital resources. During the year ended December 31, 2018, and the three months ended March 31, 2019, we generated revenues of $1,364,000 and $364,000 through two business segments (Odor-No-More and BLEST – see Note 10, “Business Segment Information”). Neither generated enough revenues to fund their operations. Our cash position as of date hereof is insufficient to pay our debt obligations due in the next 12 months (see Note 4), which include (i) $2,072,000 in convertible notes, (ii) $440,000 notes due June 6, 2019, that we may extend to September 2019, and (iii) a line of credit in the amount of $430,000 due September 1, 2019. We must either refinance or renegotiate these obligations. Our cash position is insufficient to maintain our current level of operations and research/development, and thus we will be required to raise additional capital to continue to fund our operations in 2019, as well as our future business plans. We continue to raise money through private securities offerings, and continue to negotiate for more substantial financings from private and institutional investors. During the three months ended March 31, 2019, we received $730,000 cash provided by financing activities, and at March 31, 2019 had cash and cash equivalents of $512,000. No assurance can be made of our success at raising money through private or public offerings.

 

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

 

Organization

 

We are a Delaware corporation formed in 1991. We have five wholly-owned subsidiaries: BioLargo Life Technologies, Inc., organized under the laws of the State of California in 2006; Odor-No-More, Inc., organized under the laws of the State of California in 2009; BioLargo Water, Inc., organized under the laws of Canada in 2014; BioLargo Development Corp., organized under the laws of the State of California in 2016; and BioLargo Engineering Science and Technologies, LLC, organized under the laws of the State of Tennessee in 2017 (“BLEST”). Additionally, we own 42.0% of Clyra Medical Technologies, Inc. (“Clyra Medical”), organized under the laws of the State of California in 2012, and consolidate their financial statements (see Notes 2 and 8).

 

The unaudited consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and pursuant to Rule 8-03 of Regulation S-X under the Securities Act of 1933, as amended. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for annual financial statements.  In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been included. For some of our activities, we are still operating in the early stages of the sales and distribution process, and therefore our operating results for the three months ended March 31, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019, or for any other period. These unaudited consolidated financial statements and notes should be read in conjunction with the Company’s audited consolidated financial statements and accompanying notes included in the Annual Report on Form 10-K for the year ended December 31, 2018 filed with the Securities and Exchange Commission (the “SEC”) on March 29, 2019, as amended.

 

 

BIOLARGO, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

 

Note 2. Summary of Significant Accounting Policies

 

In the opinion of management, the accompanying balance sheet and related statements of operations, cash flows, and stockholders’ deficit include all adjustments, consisting only of normal recurring items, necessary for their fair presentation in conformity with accounting principles generally accepted in the United States of America.

 

Principles of Consolidation

 

The consolidated financial statements include the accounts of the Company, its wholly owned subsidiaries, and Clyra Medical. Management believes Clyra Medical’s financial statements are appropriately consolidated with that of the Company after reviewing the guidance of ASC Topic  810,  “Consolidation”, and concluding that BioLargo controls Clyra Medical. While BioLargo does not have voting interest control through a majority stock ownership of Clyra Medical (it owns 42% of the outstanding voting stock), it does exercise control under the “Variable Interest Model”: there is substantial board overlap, BioLargo is the primary beneficiary since it has the power to direct Clyra Medical’s activities that most significantly impact Clyra Medical’s performance, and it has the obligation to absorb losses or receive benefits (through royalties and licensing) that could be potentially significant to Clyra Medical. BioLargo has consolidated Clyra Medical’s operations for all periods presented. 

 

All intercompany accounts and transactions have been eliminated (see Note 8). 

 

Foreign Currency

 

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

 

Cash and Cash Equivalents

 

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

 

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

 

   

December 31,

2018

   

March 31,

2019

 

BioLargo, Inc. and wholly owned subsidiaries

  $ 193     $ 183  

Clyra Medical Technologies, Inc.

    462       329  

Total

  $ 655     $ 512  

 

Accounts Receivable

 

Trade accounts receivable are recorded net of allowances for doubtful accounts. Estimates for allowances for doubtful accounts are determined based on payment history and individual customer circumstances. The allowance for doubtful accounts as of December 31, 2018 and March 31, 2019 was zero.

 

 

BIOLARGO, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Credit Concentration

 

We have a limited number of customers that account for significant portions of our revenue. During the three months ended March 31, 2018 and 2019, we had three customers that each accounted for more than 10% of consolidated revenues in the respective periods, as follows:

 

   

March 31,
201 8

   

March 31,

201 9

 

Customer A

    39 %     43 %

Customer B

    18 %     10 %

Customer C

    <10 %     26 %

Customer D

    18 %     <10 %

 

 

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

 

   

December 31,

201 8

   

March 31,

201 9

 

Customer X

    12 %     25 %

Customer Y

    31 %  

 

<10 %

Customer Z

    <10 %     11 %

 

Inventory

 

Inventories are stated at the lower of cost or net realizable value using the average cost method. The allowance for obsolete inventory as of December 31, 2018 and March 31, 2019 was $3,000. As of December 31, 2018 and March 31, 2019, inventories consisted of (in thousands):

 

   

December 31,

201 8

   

March 31,

201 9

 

Raw material

  $ 14     $ 14  

Finished goods

    12       12  

Total

  $ 26     $ 26  

 

Other Assets

 

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

 

Impairment

 

Long-lived and definite lived intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If the sum of the expected future undiscounted cash flows from the use of the asset and its eventual disposition is less than the carrying amount of the asset, then an impairment loss is recognized. The impairment loss is measured based on the fair value of the asset. Any resulting impairment is recorded as a reduction in the carrying value of the related asset in excess of fair value and a charge to operating results. As of December 31, 2018 and March 31, 2019, management determined that there was no impairment of its long-lived assets.

 

Earnings (Loss) Per Share

 

We report basic and diluted earnings (loss) per share (“EPS”) for common and common share equivalents. Basic EPS is computed by dividing reported earnings by the weighted average shares outstanding. Diluted EPS is computed by adding to the weighted average shares the dilutive effect if stock options and warrants were exercised into common stock. For the three months ended March 31, 2018 and 2019, the denominator in the diluted EPS computation is the same as the denominator for basic EPS due to the anti-dilutive effect of the warrants and stock options on the Company’s net loss.

 

 

BIOLARGO, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and revenues and expenses during the period reported. Actual results could differ from those estimates. Estimates are used when accounting for stock-based transactions, debt transactions, derivative liabilities, allowance for bad debt, asset depreciation and amortization, among others.

 

The methods, estimates and judgments we use in applying these most critical accounting policies have a significant impact on the results of our financial statements.

 

Share-Based Compensation Expense

 

We recognize compensation expense for stock option awards on a straight-line basis for employees over the applicable service period of the award, which is the vesting period. We recognize compensation expense for stock option awards for non-employees at the fair value on the grant date. Generally, the options issued to non-employees have been earned upon issuance. For the instances that options are issued to non-employees with a vesting schedule, the fair value is recorded on each vesting date. Share-based compensation expense is based on the grant date fair value estimated using the Black-Scholes Option Pricing Model.

 

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

 

The following methodology and assumptions were used to calculate share-based compensation for the three months ended March 31, 2018 and 2019:

 

   

2018

   

2019

 
   

Non Plan

   

2018 Plan

   

Non Plan

   

20 18 Plan

 

Risk free interest rate

    2.43

%

    n/a       2.65

%

    2.65

%

Expected volatility

    252

%

    n/a       152

%

    152

%

Expected dividend yield

          n/a              

Forfeiture rate

          n/a              

Life in years

    7       n/a       7       7  

 

Expected price volatility is the measure by which our stock price is expected to fluctuate during the expected term of an option. Expected volatility is derived from the historical daily change in the market price of our common stock, as we believe that historical volatility is the best indicator of future volatility.

 

The risk-free interest rate used in the Black-Scholes calculation is based on the prevailing U.S. Treasury yield as determined by the U.S. Federal Reserve. We have never paid any cash dividends on our common stock and do not anticipate paying cash dividends on our common stock in the foreseeable future.

 

Historically, we have not had significant forfeitures of unvested stock options granted to employees and Directors. A significant number of our stock option grants are fully vested at issuance or have short vesting provisions. Therefore, we have estimated the forfeiture rate of our outstanding stock options as zero.

 

 

BIOLARGO, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Warrants

 

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

 

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

 

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

 

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

 

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

 

Non-Cash Transactions

 

We have established a policy relative to the methodology to determine the value assigned to each intangible we acquire, and/or services or products received for non-cash consideration of our common stock. The value is based on the market price of our common stock issued as consideration, at the date of the agreement of each transaction or when the service is rendered or product is received.

 

Revenue Recognition

 

We adopted ASU 2014-09, “Revenue from Contracts with Customers”, Topic 606, on January 1, 2018. The guidance focuses on the core principle for revenue recognition.

 

The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps:

 

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

 

Step 2: Identify the performance obligations in the contract.

 

Step 3: Determine the transaction price.

 

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

 

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

 

We have revenue from two subsidiaries, Odor-No-More and BLEST. Odor-No-More identifies its contract with the customer through a written purchase order, in which the details of the contract are defined including the transaction price and method of shipment. The only performance obligation is to create and ship the product and each product has separate pricing. Odor-No-More recognizes revenue at a point in time when the order for its goods are shipped if its agreement with the customer is FOB Odor-No-More’s warehouse facility, and when goods are delivered to its customer if its agreement with the customer is FOB destination. Revenue is recognized with a reduction for sales discounts, as appropriate and negotiated in the customer’s purchase order.

 

 

BIOLARGO, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

BLEST identifies services to be performed in a written contract, which specifies the performance obligations and the rate at which the services will be billed. Each service is separately negotiated and priced. Revenue is recognized as services are performed and completed. BLEST’s contracts typically call for invoicing for time and materials incurred for that contract. To date, there have been no discounts or other financing terms for the contracts.

 

In the future, we may generate revenues from royalties or license fees from our intellectual property. In the event we do so, we anticipate a licensee would pay a license fee in one or more installments and ongoing royalties based on their sales of products incorporating or using our licensed intellectual property. Upon entering into a licensing agreement, we will determine the appropriate method of recognizing the royalty and license fees.

 

Government Grants

 

We have been awarded multiple research grants from governmental and quasi-governmental institutions. The grants received are considered “other income” and are included in our Consolidated Statements of Operations. We received our first grant in 2015 and have been awarded over 60 grants totaling over $3.6 million. Some of the funds from these grants are given directly to third parties (such as the University of Alberta or a third-party research scientist) to support research on our technology. The grants have terms generally ranging between six and eighteen months and support a majority, but not all, of the related research budget costs. This cooperative research allows us to utilize (i) a depth of resources and talent to accomplish highly skilled work, (ii) financial aid to support research and development costs, (iii) independent and credible validation of our technical claims.

 

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

 

Income Taxes

 

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

 

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

 

Fair Value of Financial Instruments

 

Management believes the carrying amounts of the Company’s financial instruments (excluding debt and equity instruments) as of December 31, 2018 and March 31, 2019 approximate their respective fair values because of the short-term nature of these instruments. Such instruments consist of cash, accounts receivable, prepaid assets, accounts payable, lines of credit, and other assets and liabilities.

 

Tax Credits

 

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

 

 

BIOLARGO, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Recent Accounting Pronouncements

 

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

 

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

 

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

 

 

Note 3. Lincoln Park Financing

 

On August 25, 2017, we entered into a stock purchase agreement (“LPC Purchase Agreement”) with Lincoln Park Capital Fund, LLC (“Lincoln Park”), pursuant to which Lincoln Park agreed to purchase from us at our request up to an aggregate of $10 million of our common stock (subject to certain limitations) from time to time over a period of three years. The LPC Purchase Agreement allows us, from time to time and at our sole discretion, to direct Lincoln Park to purchase shares of our common stock, subject to limitations in both volume and dollar amount. The purchase price of the shares that may be sold to Lincoln Park under the Purchase Agreement is the lower of (i) the lowest sale price on the date of purchase, or (ii) the average of the three lowest closing prices in the prior 12 business days. There are no restrictions on future financings, rights of first refusal, participation rights, penalties or liquidated damages in the LPC Purchase Agreement or LPC RRA other than a prohibition on entering into a “Variable Rate Transaction,” as defined in the Purchase Agreement. Lincoln Park may not assign or transfer its rights and obligations under the Purchase Agreement.

 

We did not sell any shares to Lincoln Park during the three months ended March 31, 2019. During the three months ended March 31, 2018, we elected to sell to Lincoln Park 650,000 shares of our common stock for which we received $168,220. Additionally, we issued Lincoln Park 8,226 “additional commitment” shares.

 

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

 

 

BIOLARGO, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

 

Note 4. Debt Obligations

 

The following table summarizes our debt obligations outstanding as of December 31, 2018 and as of March 31, 2019 (in thousands).

 

   

December 31,

201 8

   

March 31,
201 9

 

C urrent liabilities:

               

Notes payable, mature June 6, 2019

  $ 400     $ 440  

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

          50  

Line of credit, matures September 1, 2019 or later (on 30-day demand)

    430       430  

Convertible notes payable:

               

Convertible notes, mature December 31, 2019 ( 1 )

    75       75  

Convertible note, matured January 11, 2019

    300        

Convertible note, matures July 15, 2019

    550       420  

Convertible note, matures July 20, 2019 ( 1 )

    440       440  

Convertible note, matures October 7, 2019

          370  

Convertible note, matures November 5, 2019 and December 7, 2019

          554  

Convertible nine-month notes, due October, November 2019

          213  

Total convertible notes payable

  $ 1,365     $ 2,072  

Total current liabilities

  $ 2,195     $ 2,992  
                 

L ong-term liabilities :

               

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

    1,007       1,007  

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

    25       25  

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

    100       100  

Convertible notes, mature June 15, 2021 (1)

    110       110  

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

    50        

Total long-term liabilities

  $ 1,292     $ 1,242  
                 

Total

  $ 3,487     $ 4,234  

 

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

 

For the three months ended March 31, 2018 and 2019 we recorded $832,000 and $985,000 of interest expense related to the amortization of discounts on convertible notes payable and coupon interest from our convertible notes and line of credit.

 

The following discussion includes debt instruments to which amendments were made or included other activity that management deemed appropriate to disclose. Each of the debt instruments contained in the above table are disclosed more fully in the financial statements contained in the Company’s Annual Report filed March 29, 2019, as amended.

 

Notes payable, mature June 6, 2019

 

On September 19, 2018, we received $400,000 and issued promissory notes originally due January 5, 2019 and incurring interest at an annual rate of 12%, and stock purchase warrants (see Note 6), to two investors (the first held by Vernal Bay Investments, LLC (“Vernal”) in the original principal amount of $280,000, and the second held by Chappy Bean, LLC (“Chappy Bean”) in the original principal amount of $120,000). By letter dated January 3, 2019, we notified the holders of the two notes in the aggregate principal amount of $400,000 of our election to extend the maturity date of the notes by 60 days, to March 6, 2019. As provided in the notes, our election to extend increased the principal amount of each note by 10%, such that the aggregate principal balance of the two notes increased to $440,000 as of January 5, 2019.

 

On March 5, 2019, we executed amendments to these two notes that (i) extended the maturity dates to June 6, 2019, and (ii) provide that we may further extend the maturity dates to September 6, 2019 by giving written notice of such extension and increasing the principal due on the notes at that time by 10%. As consideration of the extension of the maturity dates reflected in the March 5, 2019 amendments, we (i) increased the annual percentage rate of interest from 12% to 18%, effective as of March 7, 2019, and (ii) lowered the exercise price, and increased the number of shares available, on warrants that had been previously issued to the two investors (at the time of their original investment).

 

 

BIOLARGO, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Convertible note payable, matures January 11, 2019 (Triton)

 

On October 16, 2018, we entered into a Securities Purchase Agreement (“Triton Purchase Agreement”) with Triton Fund, LP (“Triton”) for a $225,000 bridge loan, and issued a promissory note in the principal amount of $300,000 (the “Triton Note”). The Triton Note incurred interest at an annual rate of 5%, and was scheduled to mature January 11, 2019. The $75,000 original issue discount was recorded as a discount on our convertible note and was amortized to interest expense in the three-month ended March 31, 2019.

 

On January 8, 2019, we paid the Triton Note in full.

 

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

 

On January 7, 2019, we and Vista Capital agreed to amend the convertible promissory note originally issued December 14, 2017 (“Vista 2017 Note”) and extend its maturity date to April 15, 2019. The principal amount of the note was increased to $605,100. The note will continue to earn interest at the rate of five percent per annum. The amendment re-defined the conversion price to equal 80% of the lowest closing bid price of the Company’s common stock during the 25 consecutive trading days immediately preceding the conversion date. The amendment also reduced the prepayment penalty from 20% to 15%, such that a prepayment requires the payment of an additional 15% of the then outstanding balance, and reduced the penalty for a default from 30% to 25% of the outstanding balance.   The intrinsic value of the beneficial conversion feature resulted in a fair value totaling $487,000, all of which was recorded as interest expense during the three months ended March 31, 2019.

 

On March 28, 2019, we and Vista agreed to further extend the maturity date of the Vista 2017 Note, to July 15, 2019. In consideration for the extension, we agreed to increase the principal balance of the note by 10 percent, to $420,000. The increase in principal totaling $38,000 was recorded as a loss on debt extinguishment during on our statement of operations for the three months ended March 31, 2019.

 

During the three months ended March 31, 2019, Vista Capital elected to convert $225,000 of the outstanding principal and interest of the Vista 2017 Note and we issued 1,679,248 shares of our common stock. Of that amount, 1,638,479 shares were issued as payment of principal, and 40,769 shares as payment of interest. As of March 31, 2019, the outstanding balance on the Vista Note totaled $420,000.

 

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

 

On January 7, 2019, Vista Capital invested an additional $300,000 and we issued a convertible promissory note (the “Vista 2019 Note”) in the principal amount of $330,000, maturing nine months from the date of issuance (October 7, 2019). The Vista 2019 Note earned a one-time interest charge of 12%, recorded as a discount on convertible notes and will be amortized over the term of the note. The Vista 2019 Note allows Vista Capital to convert the note to our common stock at any time at a price equal to 65% of the lowest closing bid price of the Company’s common stock during the 25 consecutive trading days immediately preceding the conversion date. The Vista 2019 Note contains standard provisions of default, and precludes the issuance of shares to the extent that Vista Capital would beneficially own more than 4.99% of our common stock. We may pre-pay the Vista 2019 Note within 90 days of the issuance date by giving 10 business day notice of the intent to pre-pay, and then tendering 120% of the outstanding balance of the note. Vista Capital has the option to convert the note to common stock during the 10-day period. The Vista 2019 Note also includes a term that allows Vista Capital to adopt any term of a future financing more favorable than what is provided in the note. For example, these provisions could include a more favorable interest rate, conversion price, or original issue discount. The Vista 2019 Note also requires that we include the shares underlying conversion of the note on the next registration statement we file with the SEC (but not the registration statement filed November 6, 2018). The intrinsic value of the beneficial conversion feature resulted in a fair value totaling $300,000, and is recorded as a discount on convertible notes on our balance sheet. This discount will be amortized over the term of the note as interest expense, all of which will be recorded in 2019.

 

With respect to the above transactions with Vista Capital, Lincoln Park Capital Fund, LLC agreed to waive the provisions of the Purchase Agreement dated August 25, 2017, prohibiting variable rate transactions. As consideration for this waiver, we issued to Lincoln Park a warrant to purchase 250,000 shares of our common stock at $0.25 per share, expiring five years from the date of grant. In the event the shares underlying the warrant are not registered, the warrant allows the holder to do a “cashless” exercise. (See Note 6).

 

 

BIOLARGO, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

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

 

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

 

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

 

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

 

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

 

With respect to the above transaction with Tangiers, Lincoln Park consented to waive the provisions of the Purchase Agreement dated August 25, 2017 prohibiting variable rate transactions. As consideration for the consent, we agreed to issue Lincoln Park a stock purchase warrant allowing for the purchase of 50,000 shares of our common stock at $0.25 per share, expiring five years from the date of grant. In the event the shares underlying the warrant are not registered, the warrant allows the holder to do a “cashless” exercise. (See Note 6).

 

Nine-month Notes payable

 

During the three months ended March 31, 2019, we issued convertible promissory notes (each, an “OID Note”) in the aggregate principal amount of $212,500, with a 25% original issue discount. These notes are convertible into shares of the Company’s common stock at a conversion price of $0.25 per share, and mature nine months from the date of issuance. On January 14, 2019, we received $50,000 and issued an OID Note in the principal amount of $62,500. On January 22, 2019, we received $20,000 and issued an OID Note in the principal amount of $25,000. On February 4, 2019, we received $100,000 and issued an OID Note in the principal amount of $125,000. The original issuance discount totaled $42,500, recorded as a discount on convertible notes payable on our balance sheet. The discount will be amortized and recorded to interest expense over the term of the notes.

 

Each OID Note is convertible by the investor at any time at $0.25 per share. This initial conversion price shall be adjusted downward in the event the Company subsequently issues a convertible promissory note at a lower conversion rate (with this lower conversion rate becoming the adjusted conversion rate under the OID Note), or conducts an equity offering at a per-share price less than $0.25. The Note earns interest at five percent (5%) per annum, due at maturity. The Company may prepay an OID Note only upon 10 days’ notice to the investor, during which time the investor may exercise his/her right to convert the note to stock.

 

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

 

In addition to the note, each OID investor will receive a warrant to purchase common stock for $0.25 per share, expiring 5 years from the date of issuance (the “Warrant”). The number of shares purchasable under the warrant is equal to the 75% of the principal balance of the note divided by $0.25 (thus, a $100,000 investment would yield a note with principal balance of $125,000, and a warrant allowing for the purchase of up to 375,000 shares). The warrant will allow for cashless exercise so long as the shares underlying the warrant are not registered. The Company does not have the obligation to register the shares underlying the warrant (or the OID Notes). (See Note 6).

 

 

BIOLARGO, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

 

Note 5. Share-Based Compensation

 

Issuance of Common Stock in exchange for payment of payables

 

Payment of Officer Salaries

 

On March 29, 2019, we issued 579,996 shares of our common stock at $0.16 per share in lieu of $93,000 of accrued and unpaid salary to our officers.

 

On March 31, 2018, we issued 323,030 shares of our common stock at $0.26 per share in lieu of $84,000 of accrued and unpaid obligations to our officers.

 

Payment of Consultant Fees and Accrued Interest

 

During the three months ended March 31, 2019, we issued 788,907 shares of our common stock at a range of $0.16 – $0.23 per share in lieu of $138,000 of accrued interest and accrued and unpaid obligations to consultants.

 

During the three months ended March 31, 2018, we issued 1,008,478 shares of our common stock at a range of $0.25 – $0.41 per share in lieu of $277,000 of accrued interest and accrued and unpaid obligations to consultants.

 

Stock Option Expense

 

During the three months ended March 31, 2018 and 2019, we recorded an aggregate $320,000 and $352,000, respectively, in selling general and administrative expense related to the issuance and vesting of stock options. We issued options through our 2018 Equity Incentive Plan, our (now expired) 2007 Equity Incentive Plan, and outside of these plans.

 

2018 Equity Incentive Plan

 

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

 

Activity for our stock options under the 2018 Plan from December 31, 2018, through the year ended March 31, 2019, is as follows: (The 2018 Plan inception was June 2018, therefore there is no activity through March 31, 2018).

 

                       

Weighted

         
                       

Average

   

Aggregate

 
   

Options

     

Exercise

   

Price per

   

intrinsic

 

As of March 31, 2019 :

 

Outstanding

     

Price per share

   

share

   

Value (1)

 

Balance, December 31, 2018

    1,318,517       $0.22 0.43     $ 0.30          

Granted

    890,280       0.16 0.22       0.19          

Expired

                             

Balance, March 31, 2019

    2,208,797       $0.16 0.43     $ 0.25     $  

(1) – Aggregate intrinsic value based on closing common stock price of $0.16 at March 31, 2019.

 

 

BIOLARGO, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

The options to purchase 890,280 shares granted during the three months ended March 31, 2019 are comprised of options issued to employees, consultants, officers, and directors: (i) we issued options to purchase 300,000 shares of our common stock at an exercise price on the respective grant date of $0.22 per share to our CFO as described below. We also issued options to purchase 168,404 shares of our common stock to employees in lieu of salary at an exercise price on the respective date ranging between $0.16 - $0.25 per share. The fair value of these options totaled $36,000 and is recorded as selling, general and administrative expense. We issued options to purchase 421,876 shares of our common stock at an exercise price on the respective grant date of $0.16 per share to members of our board of directors for services performed, in lieu of cash. The fair value of these options totaled $68,000 and is recorded as selling, general and administrative expenses.

 

Chief Financial Officer Contract Extension

 

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

 

For the Extended Term, Mr. Dargan was issued an option (“Option”) to purchase 300,000 shares of the Company’s common stock, at a strike price equal to the closing price of the Company’s common stock on January 16, 2019 of $0.22, to expire January 16, 2029, and to vest over the term of the engagement with 75,000 shares having vested as of March 31, 2019, and the remaining shares to vest 25,000 shares monthly beginning January 31, 2019, and each month thereafter, so long as the Engagement Agreement is in full force and effect. The Option was issued pursuant to the Company’s 2018 Equity Incentive Plan. The fair value of the option totaled $67,000, of which $17,000 was recorded as selling, general and administrative expense during the three months ended March 31, 2019.

 

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

 

2007 Equity Incentive Plan

 

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

 

Activity for our stock options under the 2007 Plan for the three months ended March 31, 2018 and 2019 is as follows:

 

                       

Weighted

         
                       

Average

   

Aggregate

 
   

Options

   

Exercise

   

Price per

   

intrinsic

 

As of March 31, 2018 :

 

Outstanding

   

p rice per share

   

share

   

Value (1)

 

Balance, December 31, 2017

    9,831,586       $0.23 1.89     $ 0.44          

Expired

    (50,000 )       1.89         0.91          

Balance, March 31, 2018

    9,781,586       $0.23 1.65     $ 0.43     $  
                                     
As of March 31, 2019 :                                    

Balance, December 31, 2018

    9,691,586       $0.23 0.94     $ 0.43          

Expired

    (30,000 )     0.38 0.70       0.50          

Balance, March 31, 2019

    9,661,586       $0.23 1.65     $ 0.43     $  

(1) – Aggregate intrinsic value based on closing common stock price of $0.16 at March 31, 2019.

 

 

BIOLARGO, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Non-Plan Options issued

 

During the three months ended March 31, 2019, we issued options to purchase 731,250 shares of our common stock at exercise prices ranging between $0.16 – $0.25 per share to vendors for fees for service. The fair value of the options issued totaled $139,000, is recorded in our selling, general and administrative expense.

 

During the three months ended March 31, 2018, we issued options to purchase 619,435 shares of our common stock at exercise prices ranging between $0.26 – $0.28 per share to members of our board of directors and vendors for fees for services totaling $158,000.

 

Activity of our non-plan stock options issued for the three months ended March 31, 2018 and 2019 is as follows:

 

                       

Weighted

         
   

Non-plan

               

a verage

   

Aggregate

 
   

Options

   

Exercise

   

p rice per

   

intrinsic

 

As of March 31, 2018 :

 

o utstanding

   

p rice per share

   

share

   

value (1)

 

Balance, December 31, 2017

    20,018,408       $0.25 1.00     $ 0.51          

Granted

    619,435       0.26 0.28       0.26          

Expired

    (2,400,000

)

      0.99         0.99          

Balance, March 31, 2018

    18,237,843       $0.25 1.00     $ 0.45     $  
                                     
As of March 31, 2019 :                                    

Balance, December 31, 2018

    19,319,496       $0.23 1.00     $ 0.43          

Granted

    731,250       0.16 0.25       0.19          

Balance, March 31, 2019

    20,050,746       $0.25 1.00     $ 0.42     $  

(1) – Aggregate intrinsic value based on closing common stock price of $0.16 at March 31, 2019.

 

 

 

Note 6. Warrants

 

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

 

                       

Weighted

         
                       

a verage

   

Aggregate

 
   

Warrants

   

Exercise

   

p rice per

   

intrinsic

 

As of March 31, 2018 :

 

o utstanding

   

p rice per share

   

share

   

value (1)

 

Balance, December 31, 2017

    22,104,817       $0.125 1.00     $ 0.45          

Issued

    2,611,513       0.25 0.48       0.35          

Balance, March 31, 2018

    24,716,330       $0.125 1.00     $ 0.44     $  
                                     
As of March 31, 2019 :                                    

Balance, December 31, 2018

    26,872,430       $0.25 1.00     $ 0.42          

Issued

    3,861,041       $0.16 0.25     $ 0.24          

Balance, March 31, 2019

    30,733,471       $0.20 1.00     $ 0.40     $  

 

 

BIOLARGO, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Warrants issued as part of debt extension

 

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

 

Warrants issued as consent for variable rate debt

 

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

 

Warrants Issued concurrently with the Nine-month note payable

 

Pursuant to the terms of the OID Offering, in addition to the Note, the investor will receive a warrant to purchase common stock for $0.25 per share, expiring 5 years from the date of issuance (the “Warrant”). The number of shares purchasable under the warrant is equal to the 75% of the principal balance of the note divided by $0.25 (thus, a $100,000 investment would yield a note with principal balance of $125,000, and a warrant allowing for the purchase of up to 375,000 shares). We issued warrants to purchase 637,500 shares of our common stock. The warrant will allow for cashless exercise so long as the shares underlying the warrant are not registered. The Company does not have the obligation to register the shares underlying the warrant. The fair value of these warrants totaled $89,000 and was recorded as a discount on note payable on our consolidated balance sheet and will amortize to interest expense in 2019 over the term of the notes. (See Note 4).

 

Warrants Issued to One-Year Noteholders

 

In conjunction with three separate investments of one-year convertible notes, we issued three sets of warrants to purchase an aggregate 400,000 shares to two investors. These warrants were issued July 8, 2016 (400,000 shares at $0.65 exercise price) and December 30, 2016 (400,000 shares at $0.75 exercise price).   

 

Each of these warrants contained provisions that required a reduction to the exercise price and increase to the number of warrant shares in the event that we sold our common stock at a lower price than the exercise price (subject to some exceptions). During the three months ended March 31, 2019, we adjusted downward the warrant exercise price three times to $0.12, resulting in an increase of 2,426,666 warrants available for exercise. The increase in warrants resulted in a fair value totaling $342,000, recorded as a deemed dividend in our statement of stockholders’ equity. 

 

Fair Value – Interest Expense

 

To determine interest expense related to our outstanding warrants issued in conjunction with debt offerings, the fair value of each award grant is estimated on the date of grant using the Black-Scholes option pricing model and the relative fair values are amortized over the life of the warrant. For the determination of expense of warrants issued for services, extinguishment of debt and settlement management also uses the option-pricing model. The principal assumptions we used in applying this model were as follows:

 

   

March 31,

2018

   

March 31,

2019

 

Risk free interest rate

      2.54%  

 

    2.18 2.62%

 

Expected volatility

      252%  

 

    86 110%

 

Expected dividend yield

                   

Forfeiture rate

                   

Expected life in years

    5 10       2 5  

 

 

BIOLARGO, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

The risk-free interest rate is based on U.S. Treasury yields in effect at the time of grant. Expected volatilities are based on historical volatility of our common stock. The expected life in years is based on the contract term of the warrant.

 

 

Note 7. Accounts Payable and Accrued Expenses

 

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

 

   

December 31,

2018

   

March 31,

2019

 

Accounts payable and accrued expense

  $ 302     $ 370  

Accrued interest

    122       151  

Accrued payroll

    77       110  

Total accounts payable and accrued expenses

  $ 501     $ 631  

 

 

 

Note 8. Noncontrolling Interest – Clyra Medical

 

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

 

Acquisition of In-process Research and Development

 

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

 

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

 

Scion Solutions – Note Payable and Clyra Liability

 

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

 

Non-Controlling Interest

 

As of March 31, 2019, Clyra had raised $1,110,000 at a price of $200 per share.  During the three months ended March 31, 2019, Clyra raised $110,000 and issued 550 shares of Clyra. At March 31, 2019, the balance due on the Clyra-Scion Note equaled $1,007,000. The shares of BioLargo common stock held by Clyra for the benefit of Scion (the redemption shares) are recorded on our balance sheet as a liability to “Clyra Medical Shareholder”.

 

 

BIOLARGO, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

As of March 31, 2019, Clyra Medical had the following common and preferred shares outstanding:

 

Shareholder

 

Shares

   

Percent

 

BioLargo, Inc.

    28,053       42.0 %

Sanatio Capital (1)

    11,520       17.4 %

Scion Solutions (2)

    15,500       23.4 %

Other

    11,772       17.2 %

Total

    66,845          

 

Notes:

 

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

 

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

 

 

Sanatio Capital purchased Series A Preferred shares in 2015. Sanatio Capital is owned by Jack B. Strommen, who subsequently joined BioLargo’s board of directors. Preferred Shares accrue an annual dividend of 8% for a period of five years. Although the dividends began to accrue immediately, Clyra Medical has no obligation to declare a dividend until a product of the company has received a premarket approval by the United States Federal Drug Administration (“FDA”), or for which a premarket notification pursuant to form 510(k) has been submitted and for which the FDA has given written clearance to market the product in the United States (either, “FDA Approval”). After FDA Approval, annually on December 20, and unless prohibited by California law governing distributions to shareholders, Clyra Medical is required to declare and pay any accruing dividends to holders of Preferred Shares then accrued but unpaid. As the declaration and payment of such dividends is contingent on an uncertain future event, no liability has been recorded for the dividends. The accumulated and undeclared dividend balance as of March 31, 2019 is $200,000.

 

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

 

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

 

 

Note 9. BioLargo Engineering, Science and Technologies, LLC

 

In September 2017, we commenced a full-service environmental engineering firm and formed a Tennessee entity named BioLargo Engineering, Science & Technologies, LLC (“BLEST”). In conjunction with the start of this subsidiary, we entered into a three-year office lease in the Knoxville, Tennessee area, and entered into employment agreements with seven scientists and engineers. (See Note 10 “Business Segment Information”.) The company was capitalized with two classes of membership units: Class A, 100% owned by BioLargo, and Class B, held by management of BLEST, and which initially have no “profit interest,” as that term is defined in Tennessee law. However, over the succeeding five years, the Class B members can earn up to a 30% profit interest. They also have been granted options to purchase up to an aggregate 2 million shares of BioLargo, Inc. common stock. The profit interest and option shares are subject to a five year vesting schedule tied to the performance of the subsidiary, including gross revenue targets that increase over time, obtaining positive cash flow by March 31, 2018 (which was not met), collecting 90% of its account receivables, obtaining a profit of 10% in its first year (and increasing in subsequent years), making progress in the scale-up and commercialization of our AOS system, and using BioLargo research scientists (such as our Canadian team) for billable work on client projects. These criteria are to be evaluated annually by BLEST’s compensation committee (which includes BioLargo’s president, CFO, and BLEST’s president), beginning September 2018. 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.

 

 The Compensation Committee met on September 26, 2018 and reviewed the operating performance of the engineering subsidiary and determined that the performance metrics were not met and as a result, did not award any Class B units or stock options. The Committee decided to roll forward one additional year to the time allowed for the performance metrics to be met and for the Class B units and stock options to be awarded.

 

 

BIOLARGO, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

 

Note 10. Business Segment Information

 

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

 

 

1.

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

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

3.

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

 

4.

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

 

Historically, none of our operating business units operated at a profit and therefore each required additional cash to meet its monthly expenses. The additional sources of the cash to fund the shortfall from operations of Odor-No-More, BLEST and BioLargo Water have been provided by BioLargo’s sales of debt or equity, research grants, and tax credits. Clyra Medical has been funded by third party investors who invest directly in Clyra Medical in exchange for equity ownership in that entity. For example, during the year ended December 31, 2018, we provided Odor-No-More with approximately $417,000 in cash to supplement its operations. As this subsidiary’s sales have increased (from approximately $500,000 in calendar year 2017 to over $1 million in calendar year 2018), and its gross margins have improved, it has generated more cash for its operations and relied less on corporate to supplement its cash to pay its bills.

 

The segment information for the three months ended March 31, 2018 and 2019, is as follows (in thousands):

 

As of March 31, 2019

 

BioLargo

   

ONM

   

Clyra

   

BLEST

   

Water

   

Elimination

   

Total

 

Revenue

  $     $ 301     $     $ 183     $     $ (120 )   $ 364  

Intersegment revenue

                      (120 )                  

Operating loss

    (948 )     (90 )     (287 )     (110 )     (227 )           (1,662 )

Grant income

                            82             82  

Interest expense

    (632 )           (12 )                       (985 )

Depreciation

          (4 )           (12 )                 (16 )

Research and development

    (172 )           (49 )     (122 )     (209 )     126       (426 )

Loss on extinguishment

    (184 )                                   (184 )

Net loss

    (2,105 )     (90 )     (299 )     (110 )     (145 )           (2,749 )

 

 

As of March 31, 2018

 

BioLargo

   

ONM

   

Clyra

   

BLEST

   

Water

   

Elimination

   

Total

 

Revenue

  $     $ 224     $     $ 189     $     $ (120 )   $ 364  

Intersegment revenue

                      (150 )                  

Operating loss

    (1,093 )     (109 )     (199 )     (45 )     (156 )           (1,602 )

Grant income

                            5             5  

Interest expense

    (830 )                 (2 )                 (832 )

Depreciation

          (4 )           (6 )                 (10 )

Research and development

    (343 )           (87 )     (100 )     (142 )     150       (522 )

Net loss

    (1,924 )     (109 )     (199 )     (46 )     (151 )           (2,429 )

 

 

As of March 31, 2019

 

BioLargo

   

ONM

   

Clyra

   

BLEST

   

Water

   

Elimination

   

Total

 

Tangible assets

  $ 673     $ 182     $ 277     $ 329     $ 48     $ (6 )   $ 1,503  

Intangible assets

    1,893                                     1,893  

 

 

As of December 31, 2018

 

BioLargo

   

ONM

   

Clyra

   

BLEST

   

Water

   

Elimination

   

Total

 

Tangible assets

  $ 353     $ 220     $ 462     $ 230     $ 33     $ (6 )   $ 1,292  

Intangible assets

    1,893                                     1,893  

 

 

BIOLARGO, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

 

Note 11. 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 $289,000 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, paid vacation of four weeks per year, and bonuses in such amount as the Compensation Committee may determine from time to time.

 

Pursuant to the Calvert Employment Agreement, we granted Mr. Calvert a non-qualified stock option (the “Option”) to purchase 3,731,322 shares of our common stock, exercisable at $0.45 per share, which represented 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 (see Note 6). The Option provides that 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 Calvert Employment 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 million in cash, or the recognition of $3 million 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 and Comprehensive Loss on a straight-line basis over the term of the operating lease agreement. For the three months ended March 31, 2018 and 2019, total rental expense was $49,000 and $51,000, respectively. On January 1, 2019, we adopted ASC 842 which resulted in a right-of-use asset and lease liability, the adoption resulted in an immaterial cumulative effect of an accounting change that was not recorded. Our right-of-use asset and lease liability operating leases included our office space BioLargo/ONM and BLEST. Our BioLargo/ONM lease has a 4-year extension and we included this extension in the net present value of our lease payments, which used the incremental borrowing cost to BioLargo of 18%. Water operations lease is considered short-term and not included.

 

The leases have no additional payment terms such as common area maintenance payments, tax sharing payments or other allocable expenses. Likewise, the leases do not contain other terms and conditions of use, such as variable lease payments, residual value guaranties or other restrictive financial terms.

 

 

BIOLARGO, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Clyra Medical Consulting Agreement

 

Our partially owned subsidiary Clyra Medical (see Note 8) entered into a consulting agreement with Beach House Consulting, LLC, through which Jack B. Strommen will be providing consulting services to Clyra Medical related to its sales and marketing activities once it has received FDA Approval (as defined in Note 8 and the associated agreement) on a product, at which point the agreement provides that Mr. Strommen is to receive $23,000 per month for a period of four years. This agreement has not started, and the total cash obligation related to the agreement would be $1.1 million.

 

 

Note 12. Subsequent Events.

 

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

 

Bellridge Capital Investment

 

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

 

The Bellridge Note is convertible at the option of Bellridge at a conversion price equal to 70% of the lowest closing bid price of the Company’s common stock during the 25 trading days prior to the conversion date. We may prepay the Bellridge Note at any time. If we do so up to 90 days after the effective date, the amount due is equal to 125% of the unpaid principal amount of the note along with any accrued interest, and thereafter, the amount due is 130% of the unpaid principal amount of the note along with any accrued interest. Upon the occurrence of an event of default, as such term is defined under the Bellridge Note, additional interest will accrue from the date of the event of default at a rate equal to the lesser of 24% per annum or the highest rate permitted by law.

 

Crossover Capital Investment

 

On May 14, 2019, we received $95,000 and issued a Convertible Note to Crossover Capital Fund I, LP (“Crossover Capital”) in the principal amount of $110,000 (the “Crossover Capital Note”), representing a 10% original issue discount, and a deduction of $5,000 for legal fees and due diligence. The note is due nine months from the date of issuance. We and Crossover Capital concurrently entered into a Securities Purchase Agreement. The Crossover Capital Note is convertible at the option of the holder at a conversion price equal to 70% of the lowest closing bid price of the Company’s common stock during the 25 trading days prior to the conversion date. We may prepay the Crossover Capital Note up to 180 days after issuance, by paying a prepayment penalty that increases from 5% within the first 30 days, to 30% during the last 30. Upon the occurrence of an event of default, as such term is defined under the note, additional interest will accrue from the date of the event of default at a rate equal to the lesser of 24% per annum or the highest rate permitted by law.

 

 

 

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

 

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

 

Unless otherwise expressly stated herein, all statements, including forward-looking statements, set forth in this Form 10-Q are as of March 31, 2019, unless expressly stated otherwise, and we undertake no duty to update this information.

 

As used in this report, “we” and “Company” refers to (i) BioLargo, Inc., a Delaware corporation; (ii) its wholly-owned subsidiaries BioLargo Life Technologies, Inc., a California corporation, Odor-No-More, Inc., a California corporation, BioLargo Development Corp., a California corporation, BioLargo Engineering, Science & Technologies, LLC, a Tennessee limited liability company, and Canadian subsidiary BioLargo Water, Inc.; and (iii) Clyra Medical Technologies, Inc. (“Clyra”), a partially owned subsidiary.

 

The following discussion and analysis should be read in conjunction with our unaudited consolidated financial statements and the related notes to the consolidated financial statements included elsewhere in this report.

 

Our Business- A Sustainable Products, Technology and Solutions Provider

 

BioLargo, Inc. is an innovative technology developer and environmental engineering company driven by a mission to make life better  by delivering robust, sustainable solutions for a broad range of industries and applications, with a focus on clean water, clean air, and advanced wound care. We develop and commercialize disruptive technologies by providing the capital, support, and expertise to expedite them from “cradle” to “maturity”. Our business strategy is straightforward: we invent or acquire technologies that we believe have the potential to be disruptive in large commercial markets; we incubate and develop these technologies to advance them and promote their commercial success as we leverage our considerable scientific, engineering, and entrepreneurial talent; we then monetize these technical assets through a variety of business structures that may include licensure, joint venture, sale, spin off, or by deploying direct to market strategies. We seek to unlock the value of our portfolio of underlying technologies to both advance our purposeful mission while we create value for our stockholders.

 

Our first significant commercial success is currently unfolding in our subsidiary, Odor-No-More, Inc., which is focused on odor and volatile organic compound (“VOC”) control products sold under the brands CupriDyne Clean and Nature’s Best Science. We are gearing up for rapid growth as our products are experiencing more widespread market adoption in the waste handling industry through national purchasing agreements with four of the largest industry members. To this end, we have recently begun to offer a menu of services to our clients including engineering design, construction, and installation of misting systems and related equipment used to deliver our liquid chemistry products, as well as ongoing maintenance services for installed systems. We have also begun expanding with early adopters into new vertical segments such as wastewater treatment, the cannabis industry and various industrial facilities like steel manufacturing and livestock processing operations. We recently executed a five-year white-label distribution agreement with Cannabusters, Inc. a company organized and owned by Mabre Corporation to feature our odor and VOC control technology to the cannabis industry in combination with their air handling and air quality systems. We believe this to be an important opportunity for BioLargo’s odor and VOC control products, as the cannabis and hemp industries are predicted to grow significantly in the US in the coming years and are known to contend with significant odor and VOC challenges (read more under Emerging High-Growth Opportunity in Cannabis / Hemp Industry ).

 

Our second commercial operation, BioLargo Engineering, Science & Technologies, LLC (“BLEST”), provides professional engineering and consulting services to third party clients on a fee-for-service basis, and also serves as our in-house engineering team to advance our proprietary technologies and complement service offerings of our other business segments.

 

 

In addition to our two operating subsidiaries, we have technologies and products in the development pipeline progressing towards commercialization, including our water treatment system for decontamination and disinfection (our “Advanced Oxidation System”, or “AOS” – see Pilot Projects discussion below), and our medical products focused on healing chronic wounds, including our recently acquired stem cell therapy called the SkinDisc TM , which is focused on regenerative tissue management and is licensed to our subsidiary Clyra Medical Technologies, Inc. (“Clyra Medical”).

 

We believe our current success with our industrial odor and VOC control products serves to validate our overall business strategy which is focused on technology-based products and services capable of disrupting the status quo in their applicable industry market segment. We believe that the future of our medical and clean water technologies has similar and also very large market opportunities ahead as they are introduced commercially.

 

Odor-No-More Industrial Odor and VOC Solutions

 

Our CupriDyne Clean industrial products reduce and eliminate tough odors and VOC’s in various industrial settings, delivered through misting systems, sprayers, water trucks and similar water delivery systems. We believe the product is the number one performing odor-control product in the market, and offers substantial savings to our customers compared with competing products.

 

Waste Handling

 

Our customer base for our odor and VOC business is expanding. We are now selling product to four of the largest solid waste handling companies in the country, and also have secured multiple flagship clients in the wastewater treatment industry, which we expect to become a priority market. We are also expanding with early adopters into new industrial markets, including steel manufacturing, paper production, construction, building and facilities management, livestock production, the cannabis industry. Opportunities for our products are available internationally. To that end, we participated in the China InnoStars Semi Finals competition in China in early November, gaining exposure for both our company and our products to stakeholders in China’s air quality and odor control market as well as potential strategic investors. We have in the past and plan to continue marketing these products through industry associations like the “Technology Approval Group” program offered by Isle Utilities that serves the wastewater treatment industry. We also have a number of potential partners actively engaged in commercial trials around the globe and we are actively in discussion with a number of groups to leverage our commercial focus through distribution partnerships.

 

Many of our customers have adopted CupriDyne Clean as a replacement for a non-performing competitive products, some of which have been in use by customers for as many as 30 years. Upon using CupriDyne Clean, the majority of customers have expressed a very high degree of satisfaction with its performance compared to prior solutions. Because of this, we are realizing systematic adoption by our very large corporate customers and expect to serve these customers for years to come. Our experience has helped refine our value proposition and assemble a comprehensive menu of products and services. Our success in this market has validated the market opportunity for our products and services and encourages us to continue investing in infrastructure and sales and marketing to increase revenues. We estimate there are approximately 2,000 active landfills 1 , 8,000 transfer stations 2 , and 15,000 waste water treatment agencies 3 in the United States. While all may not have ongoing odor problems or neighbor complaints, we believe many of the facilities have need for a disruptive odor solution like CupriDyne Clean.

 

The total addressable market for the waste handling and wastewater treatment industries is greater than $1.3 billion.  While we are still assessing the size of the cannabis, agriculture and steel manufacturing industries, we believe they could readily double the market opportunities for our product CupriDyne Clean.

 

 


1 “Municipal Solid Waste Landfills - Economic Impact Analysis for the Proposed New Subpart to the New Source Performance Standards” (2014), by U.S. Environmental Protection Agency Office of Air and Radiation and Office of Air Quality Planning and Standards.

2 The top 5 Waste Management companies in the US, as of 2011, operated 624 transfer stations, and 565 landfills. “Municipal Solid Waste Landfills - Economic Impact Analysis for the Proposed New Subpart to the New Source Performance Standards” (2014), by U.S. Environmental Protection Agency Office of Air and Radiation and Office of Air Quality Planning and Standards. This is a ratio of 1:4 (landfill to transfer stations). The estimated number of transfer stations is this ratio multiplied by the approximate 1,900 total landfills, and rounded.

3 1 “Failure to Act, The Economic Impact of Current Investment Trends in Water and Wastewater Treatment Infrastructure” (2011), by American Society of Civil Engineers and Economic Development Research Group. Figure includes treatment facilities owned and operated by municipalities, as well as those owned and/or operated by private entities contracting with municipalities.

 

 

Turn-key Full-service Solutions

 

At the request of our clients, we have begun offering a menu of services to landfills, transfer stations, and wastewater treatment facilities. These services include ongoing maintenance and on-site support services to assist our clients in the design and continued use of the various systems that deliver our liquid products in the field (such as misting systems). We have recently expanded these serves to engineering design, construction and installation. Our engineering team at BLEST has been instrumental in supporting these operations. During late 2018 we were awarded and completed more than 15 projects and we currently have more than 10 “design build” bids out to clients for CupriDyne Clean delivery systems.

 

Regional Adoption

 

Sales of our CupriDyne Clean products and related services were initially made at the local level, on a per-location/facility basis. We would demonstrate our product to the manager of operations at a transfer station or landfill, and he or she ultimately would decide whether to use our products. If owned by a national company, in some instances before the operations manager could buy our products, we were required to obtain official “vendor” status with the company and sign a “national purchasing agreement” (“NPA”). Doing so required a tremendous amount of effort and time. These agreements typically include the addition of our line of products which will be offered through an online purchasing portal to the members around the nation. The process of integrating the data is often delayed by months from the start date of our agreements given their very technical nature. As an example, we just completed work to finish this portion of the startup process with our fourth national agreement account. These processes establish an easy and familiar selling and purchasing process for the ongoing and long-term relationships we seek to develop. We now have NPAs with four of the largest solid waste handling companies in the United States. Some of these accounts are now introducing us to regional managers around the country who have the ability to direct the facilities in their region to use our product. Because of our continued success with our existing clients, our national accounts are expanding their support for, and expanding resources to encourage increased awareness and broad adoption of our products and services. It is also important to note that we are often replacing companies that have served these customers for 20 to 30 years giving support for our claim of ‘disruption’ to an industry.

 

We believe that “regional adoption” is a scalable approach for the larger solid waste handling companies that, with sufficient resources, we can implement nationwide. Our current national accounts represent the opportunity to serve more than 3,000 local operations around North America. Because of our success serving the transfer stations, material transfer facilities, and landfills, these very large companies are also evaluating the use of CupriDyne Clean in various transportation segments as well.

 

New Product Expansion with Existing Customers

 

In line with our mandate as an innovator and full services solution provider, Odor-No-More was recently asked by one of its national customers to expand the use of its CupriDyne based products to include a wash out and odor control product for transportation devices, compactors and containers. While this work is still early, our first trials demonstrate that the new product saves our customers money and labor costs. Although sales for this new product have just begun, we believe the opportunity for this product is significant.

 

Emerging High-Growth Opportunity in Cannabis / Hemp Industry

 

Odor-No-More recently entered into a 5-year “white-label” distribution agreement with Cannabusters, Inc., a sister company to Mabre Air Systems, to sell its CupriDyne Clean odor and VOC control products to Cannabis and Hemp grow and production facilities, which represent a target market that management’s research indicates is in sore need of new odor control products and services. Cannabusters has decades of experience with air quality management through their sister company Mabre Air Systems, a leader in air quality control systems in Italy. Cannabusters has committed to a comprehensive marketing program that includes more than 25 trade show events over the next two years to quickly introduce the Cannabusters product to the cannabis and hemp industries. BioLargo's subsidiary Odor-No-More has committed to manufacture and supply its products containing the patented CupriDyne Clean formula to be distributed under the "Cannabusters TM " brand.

 

The cannabis industry is facing increased scrutiny by regulators to better control of hazardous air pollutants called terpenes that are a natural part of production and processing. These gases can also cause malodors that demand attention and can be problematic as these companies seek to maintain good community relations and avoid legal entanglements or lawsuits over nuisance odors. Odor abatement operating procedures are part and parcel to the permitting processes for companies involved in the industry and have typically included traditional carbon filters. With the growth and concentration of cannabis related operators, the industry has come to recognize that the volume of terpenes and air flow in a typical operation are often more than the traditional carbon filter-based systems can manage effectively. Odor complaints persist. We have been able to successfully demonstrate that our products are effective as eliminating these VOC’s and related odors, just as we have done in the waste handling industry. As a result, we have had a number of experts in the cannabis industry tell us that our products could become part of the ‘best practices’ operating procedures for this industry and are working toward that goal.

 

 

The global legal cannabis market is expected to grow to  $146.4B in 2025  at an astounding 34.6% annual growth rate. Some call cannabis the 21st century’s gold rush. With an estimated 15,000 companies operating in our California alone, we believe the opportunity for our product is significant. A number of recent examples have surfaced with leading companies in this industry that highlight the nuisance odor issue and their inability to adequately manage the volume of terpenes escaping the operations. To that end, we are organizing a series of strategic relationships within the Cannabis industry to capture the opportunity quickly. We are working to finalize agreements with equipment manufacturers, regulatory consultants, key opinion leaders, and marketing partners.  Our value proposition is unmatched for odor and VOC control and this is another great example how our platform continues to expand in high value markets. 

 

Wastewater Treatment

 

We have begun selling products and services to wastewater treatment facilities in our local markets. Our clients are prominent municipal agencies and have indicated a desire to expand the use of our products and services to additional locations in their service areas. As a result of our success in the field, a client featured our product as an example of ‘Best Practices’ for the waste water treatment industry at a national water quality conference hosted by the Water Environment Federation. We anticipate overall longer selling cycles given the technical sophistication of the customers in this market, and believe that channel partnerships with leading companies that already sell and service this highly technical market will be required for our ultimate success. We are encouraged and are evaluating various strategies to maximize our marketing and selling proposition into this mature and well-established market. We are actively engaged in discussions with potential distribution partners and leading engineering firms with well established relationships to the clients in order to service this very large market.

 

Infrastructure and Capital Needs for Odor-No-More

 

We recognize the scope of the opportunity for CupriDyne Clean and related services, and understand the task of building the personnel and infrastructure to become a disruptive company in the waste handling industry. In the United States, we currently operate out of two locations – Southern California and Tennessee. As of now, our manufacturing facilities are located in California. However, we expect to expand our manufacturing and staffing in our Tennessee operation as we achieve critical mass in that region. We are also contemplating the opportunity to establish a manufacturing facility in Canada to serve the Canadian odor and VOC control market. In the meantime, as a result of the rapid adoption we are experiencing in our local Southern California market, we want to focus on adding staff and infrastructure to meet the obvious need for our products and services. Since January 1, 2018, we have added five people in both sales and support roles. We believe that we need to invest in qualified sales and support personnel to properly focus our energies on capturing the client opportunities already under contract with our national accounts and expand revenues accordingly.

 

We believe that a significant number of personnel will be required to fully service the solid waste handling and wastewater treatment industries. We plan to expand as adequate capital to fund these needs becomes available. 

 

Full Service Environmental Engineering

 

In September 2017, we formed a subsidiary (BioLargo Engineering, Science & Technologies, LLC, or “BLEST”), for the purpose of offering full service environmental engineering to third parties, and to provide engineering support services to our internal teams to accelerate the commercialization of our AOS technologies. Its website is found at www.BioLargoEngineering.com.

 

BLEST focuses its efforts in three areas:

 

 

Providing engineering services to third party client;

 

 

Supporting the AOS development efforts by working with our Canadian subsidiary, BioLargo Water; and

 

 

Supporting our team at Odor-No-More to provide engineering and design of the CupriDyne Clean delivery systems.

 

The subsidiary, opened its office in Oak Ridge (a suburb of Knoxville, Tennessee), and entered into employment agreements with seven scientists and engineers who collectively have over two hundred years of experience in diverse engineering fields. The team is led by Randall Moore, who served as Manager of Operations for Consulting and Engineering for the Knoxville office of CB&I Environmental & Infrastructure and was formerly a leader at The Shaw Group, Inc., a Fortune 500 global engineering firm. The other team members are also former employees of CB&I and Shaw. The team is highly experienced across multiple industries and they are considered experts in their respective fields, including chemical engineering, wastewater treatment (including design, operations, data gathering and data evaluation), process safety, energy efficiency, air pollution, design and control, technology evaluation, technology integration, air quality management & testing, engineering management, permitting, industrial hygiene, applied research and development, air testing, environmental permitting, HAZOP review, chemical processing, thermal design, computational fluid dynamics, mechanical engineering, mechanical design, NEPDES permitting, RCRA/TSCA compliance and permitting,  project management, storm water design & permitting, computer assisted design (CAD), bench chemistry, continuous emission monitoring system operator, data handling and evaluation and decommissioning and decontamination of radiological and chemical contaminated facilities.

 

 

Business Development at BLEST

 

BLEST has had success in several noteworthy areas in the past months. The company is increasing its customer base and executing more and larger projects than in its first year. Additionally, BLEST has made strides toward creating lucrative new opportunities through development of new processes, which BioLargo intend to seek new IP for where possible.

 

Notably, BLEST recently begun work to develop a new process by which to manage and mitigate Legionella contamination in the water distribution systems of large buildings including hospitals, office buildings, condos, and more. BioLargo recently filed a patent for this new process, which is referenced below in the Intellectual Property section. BLEST intends to leverage this patented process to offer Legionella mitigation services to customers.

 

BLEST was recently awarded an SBIR Phase I Competitive Grant by the Environmental Protection Agency in the amount of $100,000 to investigate solutions for the removal of per- and polyfluoroalkyl substances (PFAS) from water. PFAS have been linked to cancer, fertility problems, asthma, and more, and are present in a vast range of manufactured goods including food, common household products (e.g., cleaning products, cookware), and electronics. PFAS also pose widespread and serious water safety problems around the world, with governments and industry actively seeking new technologies and processes to eliminate PFAS from groundwater and drinking water.

 

BLEST has recently been notified that as a result of its recent audit work on assisting a leading healthcare products company in transitioning to the 2015 revision of the ISO 14001 standard for environmental management systems (EMS) it is being awarded another small project from the client. The new time and materials project involved preparing a detailed GAP analysis, and subsequently updating the client’s EMS procedures to reflect the significant changes to the new EMS standard which places new emphasis on upper management involvement, the life cycle of products and services, emergency preparedness and response, and sustainability. There is also a new focus on evaluating risks and opportunities and integrating this assessment into the EMS program. 

 

BLEST recently began a time and materials contract of work approaching $100,000 to plan and test to demonstrate that emissions from an energetic materials incinerator at a large U.S. military installation on the East coast are meeting EPA regulatory standards. An “energetic materials incinerator” allows the military to safely dispose propellants, explosives, and munitions that have aged beyond their shelf life. This facility must meet numerous emission standards including regulations that limit emissions of chemical compounds called “dioxins” and “furans”, which are tightly regulated chemicals in nearly every developed country. BLEST, having submitted the draft report for the dioxin test, has been awarded a contract for 2019 to prepare a test plan for the 2020 trial burn of the incineration system at the site. This effort combined with a contract to conduct an environmental audit and conduct training of site personnel will exceed $30,000 for calendar 2019. The anticipated contract for the 2020 test, to be awarded January/February of 2020 will exceed $300,000.

 

BLEST has now performed seven separate projects for HAVCO Wood Products, totaling over $35,000 with two additional projects scheduled for the second quarter of 2019. We anticipate extending the current Professional Services Agreement into an overall environmental services annual contact with specific annual tasks that will convert this repeat client into a perpetual source of revenue.

 

 

The formation of BLEST was predicated on the concept that 60% of the revenue would be provided by external clients and the remaining 40% would be provided by internal clients (i.e. BioLargo Water or Odor-No-More). By reaching this goal, BLEST will provide direct positive cash flow to the BioLargo, Inc. while fulfilling its mission to provide professional engineering services to the internal client base. For calendar 2018, the ratio was approximately 40% of revenue provided by external clients and 60% provided by internal sources. The ratio for 2018 was driven by significant need from the internal client base and circumstances related to the first full year of operation for BLEST. BLEST anticipates the original target ratios to be met or exceeded in calendar 2019. This is based on an increasing number of perpetual contracts including Citizens Gas Utility District, HAVCO, Powell Valley Utilities, and APTIM/Picatinny Arsenal. These perpetual contracts, which are renewed annually, will provide a steady base load of outside client revenue that is reasonably predictable and secure.

 

In addition to continued organic growth in the external client base, BLEST has developed several business development initiatives including water pollution control services and equipment specifically designed for the microbrewery sector. They have developed a bundle of services and technology-based products to offer a total solution for legionella prevention in public buildings. They are evaluating similar approaches for the cannabis industry as well. These markets are expanding in areas across the United States and represent significant opportunities for BLEST.

 

BLEST management believes the company can expect growth in several additional areas. For one, BLEST is under contract to design, build, and install wastewater treatment equipment and “treatment trains” for clients in collaboration with BioLargo’s water technology subsidiary BioLargo Water. Not only does this represent important synergy between two BioLargo business units, but it offers BLEST the opportunity to become a total water treatment solutions provider for customers in the widely under-served small industrial wastewater treatment sector. Another area of predicted growth is the conduct of environmental engineering and permitting work for large industrial facilities such as fuel conversion plants, an area in which BLEST has experienced an increasing number of contracts in the past quarter.

 

BioLargo Water and the Advanced Oxidation System - AOS

 

BioLargo Water is our wholly owned subsidiary located on campus at the University of Alberta, Canada, that has been primarily engaged in the research and development of our Advanced Oxidation System (AOS).  The AOS is our patented water treatment device that generates a series of highly oxidative species of iodine and other molecules that, because of its proprietary configuration and inner constituents, allow it to eliminate pathogenic organisms and organic contaminants as water passes through the device and it performs with extreme efficacy while consuming very little electricity. Its key application is extremely efficient decontamination and the disinfection of various waste waters. The AOS recently began its first pre-commercial pilot project, wherein an AOS and treatment train has been installed on-site at Sunworks Farm, a poultry farm in Alberta. This pilot project is discussed in more detail in the Pre-commercial Pilot Projects section below.

 

The key value proposition of the AOS is its ability to eliminate a wide variety of contaminants with high performance while consuming extremely low levels of input electricity and extremely low levels of chemistry inputs – a trait made possible by the complex set of highly oxidative iodine compounds generated within the AOS reactor. Our proof-of-concept studies and case studies have generated results that project the AOS will be more cost- and energy-efficient than commonly used advanced water treatment technologies such as UV, electro-chlorination, and ozonation. This value proposition sets the AOS technology above other water treatment options, as we believe the AOS may allow safe and reliable water treatment for significantly lower cost compared to its competitors and may even enable advanced water treatment in applications where it otherwise would have been prohibitively costly.

 

The AOS has the potential to allow reliable and cost-effective water treatment in numerous industries and applications where high-level disinfection or elimination of hard-to-treat organic contaminants is required. We believe the total serviceable market for our AOS is $10.75 billion for the poultry processing, food & beverage, and storm water segments with a target beachhead market for poultry processing in North America at an estimated $240 million.

 

Our AOS was the result of breakthroughs in both advanced iodine electrochemistry and advances in materials engineering, and its invention led to BioLargo’s co-founding of a multi-year industrial research chair whose goal was to solve the contaminated water issues associated with the Canadian Oil Sands at the University of Alberta Department of Engineering in conjunction with the top five oil companies in Canada, the regional water district, and various environmental agencies of the Canadian government. Based on recovering oil prices and our ongoing work in Canada, we recently reinitiated discussions with a number of stakeholders in the oil sands industry to support the completion of AOS development for oil and gas water treatment and to discuss the initiation of pre-commercial and commercial pilots for our AOS to help treat and remediate oil sands process-affected water (“OSPW”) found in tailings ponds in the Canadian oil sands, an application that currently has no good economically viable solution. We continue to apply for significant grant funding to re-initiate our work to help treat OSPW and other oil and gas wastewaters using the AOS. We believe that this opportunity requires substantial grant support to be viable for our company and, therefore we will continue to focus on energies on other markets until such time as resources are available.

 

 

Our AOS is an award-winning invention that is supported by science and engineering financial support and highly competitive grants (66 and counting) from various federal and provincial funding agencies in Canada such as NSERC, NRC- IRAP, and Alberta Innovates and in the United States by the Metropolitan Water District of Southern California and National Water Research Institute.

 

Our immediate goals for the development and commercialization of the AOS are: 1) to secure direct investment into the BioLargo Water subsidiary to empower its staff to complete its development cycle, 2) complete the ongoing pre-commercial field pilot studies which are necessary to generate the techno-economic data required to secure commercial trials, entice future customers, and commence traversal of necessary regulatory pathways, 3) conduct the first commercial trials with the AOS, and 4) secure first sale of the AOS. It is our belief that once pre-commercial pilots have concluded with the AOS, our ability to entice major water industry players to partner with BioLargo Water to accelerate market adoption of the AOS will be increased dramatically.

 

Recent AOS Milestones

 

The most important advances in AOS development in recent months have been 1) recent validation of the AOS as an effective tool to eliminate hard-to-treat “micropollutants” from wastewater; 2) design and engineering advances and changes to the AOS in preparation for piloting and scale-up for industrial flow-rates and conditions; and 3) the planning and design of pre-commercial field pilot projects.

 

One recent and important AOS milestone was the demonstration that it eliminated or reduced the toxicity of certain high-concern pharmaceutical byproducts (micropollutants) common in some municipal wastewater (“MWW”) streams. Currently, there are no economically viable solutions to remove these compounds from MWW, and incumbent technologies fall short. We believe that the value proposition for our AOS for use as a tool for the municipal water treatment industry to efficiently remove micropollutants could increase our total serviceable market to 5% or more of the total industry which is recognized at + $700 billion globally or approximately $35 billion.

 

Several advances and improvements to the AOS have also been made in recent months with the purpose of preparing the technology for pre-commercial piloting, commercial piloting, and subsequent mass production, as well as to prepare it for scale-up to allow industrial flow rates. These advancements have largely been proprietary physical improvements to the AOS, including the transitioning of the AOS to using inner substrates more amenable to mass-production and greater flow rates and pressures. Management believes it will continue to advance the scale-up to higher volume throughputs of water flow and enhances the AOS ability to be more compact and longer lasting in the field.  This work is not complete, but management believes it does represent a significant step forward to achieving high throughput quality results. Importantly, we have also designed and begun assembling our own proprietary water treatment train that will be used in pilots for the AOS and that will pave the way for complete wastewater treatment in industrial settings.

 

Pre-commercial Pilot Projects for AOS

 

We are now underway on multiple pre-commercial field pilot projects. The first project involves treating poultry wastewater on-site at a poultry producer’s facility in Alberta Canada, with support from the Poultry Growers Association, where the AOS is being assessed for its ability to eliminate bacteria and other contaminants from the wastewater effectively and cost-efficiently and to establish operating costs (OPEX) and capital costs (CAPEX) in a field setting. Importantly, in this pilot, BioLargo Water built and installed a complete “treatment train” with equipment to address all aspects of the client’s water treatment needs, including organic contaminants, suspended solids, and biological organisms. Therefore, this pilot also represents BioLargo’s first assessment as a “total solutions provider”, which could open the door for a wider array of future water treatment market opportunities. Recently, the BioLargo Water team finishing installing the full AOS treatment train on-site at Sunworks Farm, the location for the pilot. Work is now underway to begin treating the facility’s wastewater.

 

In the second pilot, the AOS will be used on-site at a Californian brewery as a polishing (final) step in an Aquacycl treatment train to eliminate bacteria and enable wastewater discharge in compliance with Californian regulatory standards. Aquacycl is an emerging waste-water treatment technology company based in the San Diego area that was introduced to our company by The Maritime Alliance, a trade organization in San Diego committed to fostering maritime business and technology innovation. We are a member organization, and our president has recently joined its board of directors. This pilot will help establish the efficacy of the AOS in a field setting, the OPEX and CAPEX of the system, and the AOS’ ability to “plug and play” in the context of diverse supporting equipment and logistics.

 

 

In addition to the poultry and brewery pilots, we are negotiating to begin a pilot to treat captured storm water for recycling and reuse that will be backed by a Canadian government grant and will include a leading city planning consultant in Southern California, a leading engineering firm dedicated to the water industry, and a prominent city based in Southern California. Storm water capture and reuse is an emerging market backed by the State of California pursuant to Measure W which sets aside an estimated $300 million a year from a tax to be used for public agencies to invest in related storm water capture and treatment infrastructure. Also, we were recently invited to participate in a pre-commercial pilot treating municipal wastewater in order to remove micropollutants which is organized by one of the leading engineering firms in the water industry in conjunction with prominent water treatment agency in the Pacific Northwest. Finally, we and a Chinese partner were awarded a grant co-funded by the governments of Canada and China to install an AOS pilot unit on-site at a petrochemical plant in Tianjin City, China, where the AOS would be used to eliminate hard-to-treat organic contaminants to new standards set by the Chinese government. However, we have not yet been able to verify the funding to be provided by the Chinese government to our collaborating partner, and thus are not yet fully committed to this project as it may require capital contributions that we are unwilling to commit to provide without additional funding.

 

All of these pilot projects represent an important step for our AOS technology, as well as for our company. We are confident in our disruptive water treatment technology and have proven its treatment capabilities in the lab ad nauseum. However, pilot projects for the AOS, as with any technology, are crucial to prove its reliability to industry stakeholders as well the capital cost and operating costs of our technology at-scale. These data will be critical to pave the way for future market adoption. As a reminder, we have many other pilots in evaluation to support this same cause.

 

We believe that our current designs for the AOS are cost-effective, commercially viable and should be ready for their first commercial launch in late 2019 or early 2020. We secured a patent on the AOS in 2018, and another in March 2019. We intend to continue refining and improving the AOS continually to accomplish a series of goals: expanded patent coverage, extended useful life, lower capital costs, lower energy costs, optimized performance, precise configurations for specific industry challenges, portability, and identifying its performance limits. Our current and most pressing goal for the AOS, as evidenced by the pilot projects described above, is to demonstrate its efficacy in field settings, which is a crucial and necessary step for the commercialization of any water treatment system.

 

Advanced Wound Care - Clyra Medical

 

We initially formed Clyra Medical to commercialize our technology in the medical products industry, which we believe can be disruptive to many competing product lines. Our initial product designs focus in the “advanced wound care” field, which includes traumatic injury, diabetic ulcers, and chronic hard-to-heal wounds. We also have designs for products focused on preventing or controlling infections. In late 2018, we also acquired our second technology, a stem cell therapy technology, SkinDisc, that is both complementary to our antimicrobial product designs and it also presents a high value proposition to offer stand-alone products to the advanced wound care industry to assist in regenerating tissue. With the addition of highly skilled team members with extensive experience and proven track record of success in the medical industry and, the addition of the SkinDisc, we have expanded our plans to focus and build out a complete line of products to deliver state of the art solutions to assist in healing wounds. Therefore, we are also presently evaluating a number of additional licensing opportunities to add complementary technologies and products to our medical products portfolio with the goal of offering a complete menu of proprietary and patent protected products to better serve the advanced wound care patient population with state-of-the-art medical products. We are presently seeking pre-market clearance for our first advanced wound care product (application in process), from the U.S. Food & Drug Administration (“FDA”) under Section 510(k) of the Food, Drug, and Cosmetic Act.

 

We believe the total addressable market for Clyra Medical’s existing product designs in the advanced wound care market, dental, orthopedics and regenerative tissue markets will exceed $2.5 billion by 2022.

 

Our first and original advanced wound care product combines the broad-spectrum antimicrobial capabilities of iodine in a platform complex that promotes and facilitates wound healing. Our products are highly differentiated from existing antimicrobials in multiple ways - by the gentle nature in which they perform, extremely low dosing of active ingredients, reduced product costs, extended antimicrobial activity, and biofilm efficacy. In addition, iodine has no known acquired microbial resistance, unlike many competing products. We believe the future markets for some of our product designs may also include infection control and wound therapy in orthopedics, dental and veterinary markets. We also intend to pursue and study the use of our technology as a complimentary and synergistic platform for use with regenerative tissue therapy.

 

We have three patent applications pending for medical products, and are preparing additional applications. While these patent applications are pending, we intend to continue expanding patent coverage as we refine and expand our medical products.

 

We are in the process of obtaining regulatory approval (pre-market clearance) from the FDA for our first advanced wound care product. These efforts are ongoing as of the date of this report. Although the process has taken considerable time and money, and we have faced a number of delays as a result of the FDA’s requirements of us, we remain highly encouraged by our current interactions with the FDA staff and our current position. The process has confirmed that our product design falls in the scope of the 510(k) process and the pathway to clearance has now been better defined by senior staff at FDA. Having had a second in-person meeting with the FDA just prior to filing this report, in order to obtain further clarifications on the data needed, we are preparing to commence a 30-day animal study to confirm that the Clyra product has no adverse effects on wound healing. Our preliminary study (using the same animal and testing protocol required by FDA) confirmed no adverse effects, and thus we are confident that the data generated by this formal study will meet the FDA’s requirements. This animal study is the last material item asked of us by FDA staff, and we believe we can submit this new data and have a response back from the FDA within 90 to 120 days. While we remain confident that we will ultimately receive premarket clearance for this product, and we continue to invest substantial recourses in anticipation of our ultimate success, we are continually reminded by legal counsel that we can make no assurance or prediction as to success of these efforts, or whether additional information will be requested after this animal study, and must wait patiently for the process with the FDA to conclude. Notwithstanding these disclosures, having spent a significant amount of time and money, including two trips to Washington D.C., we are confident we will see a successful conclusion.

 

 

We believe this product’s future role in the advanced wound care industry will be disruptive to many incumbent competing products like silver, hypochlorous acid and even other iodine-based products and therefore our extraordinary investment of time and money will have significant opportunity to generate a considerable return on investment as the products find their way through the FDA process for clearance and then to market adoption. Simply stated, we believe it is worth it and that we will succeed.

 

Our second technology and its related products center around the SkinDisc technology which we acquired in late 2018 from Scion Solutions, LLC (“Scion”). Scion is led by Spencer Brown, a medical device industry veteran with more than 35 years’ experience in sales, account management, and distribution in the medical device industry. The SkinDisc product was developed by Dr. Brock Liden, a renowned medical podiatrist and expert in wound care and diabetic limb salvage. The SkinDisc is a therapy product that uses a patient’s own bone marrow and plasma in a unique mixture to generate a cell-rich bio gel for use with chronic wounds. It has been tested in over 250 patient cases with no adverse effects, and has successfully aided in the salvage of limbs that otherwise would have been amputated. The regenerative tissue therapy technique has been shown to assist in successful wound closure in time frames as short at 4 to 7 weeks with one or two applications and is patent pending.

 

Clyra Medical also continues to actively work on the development of new products.

 

Clyra is currently successfully recruiting Key Opinion Leaders from the medial field to join Clyra’s Medical Advisory Board and is actively evaluating a number of technologies and products to add to its product portfolio in anticipation of its near-term plans to launch its commercial sales efforts.

 

We are committed to see these advanced wound care products go to market and we believe they will make a positive impact for a greater good around the world and generate meaningful financial results for our stockholders.

 

Scion Solutions Acquisition – SkinDisc TM

 

On September 26, 2018, we and Clyra Medical agreed to a transaction whereby we would acquire the intangible assets of Scion Solutions, LLC (“Scion”), and in particular its stem cell-based technology, the SkinDisc, and the know-how of key team members to support further research as well as the sale and distribution of Clyra Medical’s products based on our BioLargo technologies.

 

The parties entered into a Stock Purchase Agreement and Plan of Reorganization (“Purchase Agreement”) whereby Clyra Medical acquired (and then sold to BioLargo) the Scion intangible assets, including the SkinDisc. The consideration provided to Scion is subject to an escrow agreement and earn out provisions and includes: (i) 21,000 shares of the Clyra Medical common stock; (ii) 10,000 shares of Clyra Medical common stock redeemable for BioLargo common shares (detailed below); and (iii) a promissory note in the principal amount of $1,250,000 to be paid through new capital investments and revenue, as detailed below. The Clyra Medical common stock was initially held in escrow subject to the new entity raising $1,000,000 “base capital” to fund its business operations, which was raised effective December 17, 2018 (see below). One-half of the common stock was released to scion, and the second half remains subject to the following performance metrics, each vesting one-fifth of the remaining shares of common stock: (a) notification of FDA premarket clearance of certain orthopedics products, or recognition by Clyra Medical of $100,000 gross revenue; (b) the recognition by Clyra Medical of $100,000 in aggregate gross revenue; (c) the granting of all or any part of the patent application for the SkinDisc product, or recognition by Clyra Medical of $500,000 in gross revenue; (d) recognition by Clyra Medical of $1,000,000 in aggregate gross revenue; and (e) recognition by Clyra Medical of $2,000,000 in gross revenue. In addition, Clyra and Scion entered into the $1,250,000 promissory note called for by the Purchase Agreement. The promissory note accrues interest at the rate of 5%. Principal and interest due under the note are to be paid periodically at a rate of 25% of investment proceeds received. If the note is not paid off within 18 months after the date of issuance, it is automatically extended for additional 12-month periods until the note is repaid in full. Payments after the initial 18-month maturity date are required to be made as investment proceeds are received, at a rate of 25% of such proceeds, and 5% of Clyra Medical’s gross revenues.

 

Immediately following Clyra Medical’s purchase of Scion’s assets, Clyra Medical sold to BioLargo the assets, along with 12,755 Clyra Medical common shares. In exchange, BioLargo issued Clyra Medical 7,142,858 shares of BioLargo common stock. Concurrently, BioLargo licensed back to Clyra Medical the Scion assets. Scion may exchange its 10,000 Clyra Medical common shares for the 7,142,858 shares of BioLargo common stock issued to Clyra Medical, subject to the escrow and earn-out provisions described above. As of December 31, 2018, per the Closing Agreement, one-half of these shares have been earned and thus may be redeemed, and one-half remain subject to the earn-out provisions.

 

On December 17, 2018, we entered into a closing agreement (“Closing Agreement”) reflecting the satisfaction of the obligation to raise $1,000,000 “base capital” established under the Purchase Agreement. With the satisfaction of the obligation to raise $1,000,000 in base capital, Clyra Medical agreed to release to Scion one-half of the shares of Clyra common stock exchanged for the Scion assets. The remaining Clyra Medical common shares remain subject to the Escrow Agreement dated September 26, 2018, subject to the metrics identified above. We were initially introduced to the SkinDisc product and Scion Solutions through Dr. Liden and Tanya Rhodes’s consulting work with Clyra Medical (both Dr. Liden and Ms. Rhodes have ownership interest in Scion). Prior to the execution of the above-described agreements, BioLargo did not have any material relationship with Scion’s founder Spencer Brown.

 

 

Results of Operations

 

We operate our business in distinct business segments:

 

 

Odor-No-More, which manufactures and sells our odor and VOC control products and services, including our flagship product, CupriDyne Clean;

 

 

BLEST, our professional engineering services division supporting our internal business units and serving outside clients on a fee for service basis;

 

 

BioLargo Water, our Canadian division that has been historically pure research and development, and is now transitioning to focus on commercializing our AOS system;

 

 

Clyra Medical, our partially owned subsidiary focused on the Advanced Wound Care industry; and

 

 

Our corporate operations, which support the operating segments with legal, accounting, human resources, and other services.

 

We invest cash into each of these segments on a regular basis, as none of the segments yet generates enough cash to fund their operations. However, both Odor-No-More and BLEST are trending towards cash-flow positive, and we expect each of those two segments to begin to generate positive cash for BioLargo in 2019.

 

Revenue for the three months ended March 31, 2019 was $364,000, which is a $101,000 increase over the same period in 2018 and a $133,000 decrease over the three months ended December 31, 2018. We generated revenue from two of our operating divisions – Odor-No-More and BLEST. Our business segments obtain cash to support operations in different ways. Odor-No-More and BLEST generate revenues from third parties, and receive funding as needed from their parent corporation, BioLargo. Our Canadian team, BioLargo Water, receives funds from government research grants (reported on our financial statements as “Other income – Grant income”), and receives funding as needed from BioLargo. Clyra Medical, however, relies on direct investment from third parties for 100% of its operating costs and is not supported with capital from BioLargo’s corporate budget or fundraising.

 

Odor-No-More

 

Our wholly owned subsidiary Odor-No-More generates revenues through sales of our flagship product CupriDyne Clean, by providing design, installation, and maintenance services on the systems that deliver CupriDyne Clean at its clients’ facilities, and through sales of odor absorption products to the U.S. Government.

 

Revenue (Odor-No-More)

 

Odor-No-More’s revenues for the three months ended March 31, 2019, increased $76,000 or 34% from the same period in 2018, and decreased $36,000 or 11% from the prior three months ended December 31, 2018. The fluctuation in our revenues is due to timing of orders out of our control, weather at customer facilities (such as rain and snow), and delays in shipping our pouch products due to delays from our contract manufacturer. For example, we had approximately $68,000 of orders in process as of March 31, 2019, which are not recorded to revenue until the products are properly delivered to our customers. Approximately 79% of revenue is from sales of CupriDyne Clean products, and the remaining mostly from sales to the U.S. military.

 

Sales of our CupriDyne Clean products increased 54% in the three months ended March 31, 2019, as compared to same period in 2018, due to the acquisition of more clients and client locations, and the sale and delivery of more products. Of our CupriDyne Clean sales, approximately one-half were made pursuant to “national purchasing agreements” (“NPA”) with the four largest waste handling companies in the United States. We expect our sales to NPA clients to continue to increase in 2019 as we expect to continue to add new service locations for those customers.

 

Sales to the U.S. military are primarily our Specimen Transport Solidifier pouches, and are made to the U.S. Defense Logistics Agency through our distributor Downeast Logistics. These sales decreased by 38% in the three months ended March 31, 2019 as compared with 2018. The vast majority of these sales are made through a bid process in response to a request for bids to which any qualified government vendor can respond, and our decreased revenue in 2019 is due to a reduced number of opportunities from the government for our products. We cannot know in advance the frequency or size of such requests from the US Government, or whether our bids will be successful, and as such we are uncertain as to our future revenues through this system.

 

 

Cost of Goods Sold (Odor-No-More)

 

Odor-No-More’s cost of goods sold includes costs of raw materials, contract manufacturing, and portions of salaries and expenses related to the manufacturing of our products. As a percentage of gross sales, Odor-No-More’s costs of goods was 47% in the three months ended March 31, 2019 versus 60% in the same period in 2018. In mid-2018, because of higher volumes, Odor-No-More was able to decrease its costs by purchasing raw materials directly from manufacturers at more favorable prices, resulting in the year-to-year cost of goods decrease.

 

Selling, General and Administrative Expense (Odor-No-More)

 

Odor-No-More’s Selling, General and Administrative (“SG&A”) expenses include both cash and non-cash expense related to its operations. Odor-No-More’s SG&A expenses increased to $247,000 in the three months ended March 31, 2019, as compared with $135,000 in 2018, an increase of 27%. These expenses have increased alongside Odor-No-More’s efforts to increase revenues by hiring additional sales and support staff. We expect its SG&A expenses to increase in 2019 as it continues to add sales and support personnel as its number of customers and revenues increase.

 

Net Loss (Odor-No-More)

 

Odor-No-More generated $301,000 in revenue, a gross margin of $160,000, and had total costs and expenses of $251,000, resulting in a net loss of $94,000. Odor-No-More is trending toward profitability. Its gross margin from product sales continues to increase, and its loss from operations is trending downward. We believe these trends will continue. The loss from operations is trending downward for two reasons. First, Odor-No-More was able to reduce its product costs as a result of its increased volume (purchasing power). Second, increased sales resulted in increased gross margin contributing to the company’s operational costs.

 

We expect that Odor-No-More’s sales will continue to increase, and thus its gross margin will continue to increase. By the end of 2019, assuming the company is properly capitalized with a marketing budget and additional salespeople, we expect that Odor-No-More will no longer require a cash subsidy to operate, but will be contributing cash to our corporate operations.

 

BLEST (engineering division)

 

Revenue (BLEST)

 

Our engineering segment (BLEST) generated $63,000 of revenues from third party clients in the three months ended March 31, 2019, versus $39,000 in revenue in comparable period in 2018.  The increase is due to an increase in the number of client contracts being serviced.  BLEST revenues do not include work performed on internal BioLargo projects, such as its further engineering and development of the AOS water filtration system, which if billed to third party clients exceeded $120,000 in the first quarter. Our engineers are performing a critical role in the AOS pilot projects, some of which are supported by third-party research grants and has been instrumental in developing and supporting a professional engineered design service for misting systems being sold by our Odor-No-More operating unit.

 

Cost of Goods (Services) Sold (BLEST)

 

BLEST’s cost of services includes employee labor as well as subcontracted labor costs. In the three months ended March 31, 2019, its cost of services were 83% of its revenues, versus 74% in the three months ended March 31, 2018. We expect the cost of services to remain stable in 2019. Costs were higher as we utilized sub-contractors with lower margins.

 

Selling, General and Administrative Expense (BLEST)

 

BLEST’S SG&A expenses include both cash and non-cash expense related to its operations, although because it primarily delivers services to its clients, most of its labor costs are included in its cost of services (for third party clients), and research and development for its work on BioLargo technologies. BLEST selling, general and administrative expenses during the three months ended March 31, 2019 totaled $106,000 compared to $98,000 for the three months ended March 31, 2018.

 

Net Loss (BLEST)

 

BLEST generated $63,000 in revenue, a gross margin of $11,000, and had total costs and expenses of $240,000, resulting in a net loss of $108,000 because intracompany services are eliminated in consolidation.

 

While we are unable to record revenues generated from intracompany services by the engineering group to other operating divisions, it is important to note that the net loss would be eliminated if BLEST were an outside contract for hire services company selling services to our water company or our industrial odor and VOC control operating unit.

 

Because the subsidiary had a net loss, we invested cash during the year to allow it to maintain operations. BLEST’s need for a cash subsidy to support its operations decreased considerably towards the end of calendar year 2018. We expect this trend to continue, and expect that in 2019 its sales will continue to increase, and thus its gross profit will continue to increase. By the end of 2019, we expect that it will no longer require a cash subsidy to operate, but will be contributing cash to our corporate operations.

 

 

Other Income

 

Our wholly owned Canadian subsidiary has been awarded more than 65 research grants over the years from various Canadian public and private agencies, including the Canadian National Research Institute – Industrial Research Assistance Program (NRC-IRAP), the National Science and Engineering Research Council of Canada (NSERC), and the Metropolitan Water District of Southern California’s Innovative Conservation Program “ICP”. The research grants received are considered reimbursement grants related to costs we incur and therefore are included as Other Income. We continued to win grants and it is important to note that amounts paid directly to third parties are not included as income in our financial statements. Our grant income increased significantly in the three months ended March 31, 2019, compared with the prior year period. This increase is due to timing and the number of grants awarded in prior periods.

 

Although we are continuing to apply for government and industry grants, and indications from the various grant agencies is highly encouraging, we cannot be certain of continuing those successes in the future.

 

Selling, General and Administrative Expense – company wide

 

Our SG&A expenses include both cash expenses (for example, salaries to employees) and non-cash expenses (for example, stock option compensation expense). Our SG&A expenses increased by 20% ($235,000) in the three months ended March 31, 2019 compared to the three months ended March 31, 2018. Our non-cash expenses (through the issuance of stock and stock options) increased $42,000 for the three months ended March 31, 2019 compared to the three months ended March 31, 2018. Our employees, vendors and consultants chose to receive a greater number of stock and stock options in lieu of cash owed. The largest components of our SG&A expenses included (in thousands):

 

   

March 31, 2018

   

March 31, 2019

 

Salaries and payroll related

  $ 451     $ 494  

Professional fees

    192       196  

Consulting

    162       291  

Office expense

    210       240  

Board of director expense

    68       68  

Sales and marketing

    54       58  

Investor relations

    33       45  

 

Consulting expense increased as we’ve engaged more consultants to identify business opportunities for our various ventures. The company increased its investor relations expense to continue to develop and spread the word about the BioLargo opportunity.

 

Research and Development

 

In the three months ended March 31, 2019, we spent approximately $426,000 in the research and development of our technologies and products. This was a decrease of 20% ($98,000) compared to the three months ended March 31, 2018.

 

As we transition our Canadian operations from pure research and development towards a focus on commercializing the AOS system, we expect their contribution to our total research and development expenses to decrease in 2019. We expect this to be offset by increased research and development at Clyra Medical, which we fully expect to be funded from its own resources or direct third-party investment.

 

 

Interest expense 

 

Our interest expense for the three months ended March 31, 2019 was $985,000, an increase of $153,000 compared with the three months ended March 31, 2018, of which $32,000 was paid in cash, and the remaining $953,000 is non-cash expense. Our interest expense increased due to the issuance and extensions of convertible notes and associated warrants. We record the relative fair value of the warrants and the intrinsic value of the beneficial conversion feature sold with the convertible notes payable which typically results in a full discount on the proceeds from the convertible notes. This discount is being amortized as interest expense over the term of the convertible notes. We expect our interest expense to decrease in 2019 because the total amount we amortize (the line item on our balance sheet “Discount on convertible notes payable and line of credit, net of amortization”) has decreased. However, any decrease would be offset if we issue new debt instruments in 2019 that are combined with warrants, or if we issue new warrants as consideration to extend maturity dates on existing debt instruments. 

 

Loss on extinguishment of debt

 

In the three months ended On March 31, 2019, we recorded a loss on extinguishment of debt related to transactions with prior investors to extend the maturity dates of promissory notes. As consideration, we increased principal amounts, modified conversion terms, and/or issued stock purchase warrants. We had no such activities in the comparable period in 2018. We extended the maturity dates of the promissory notes due to a lack of sufficient cash to satisfy the obligations at maturity. Unless our cash position changes substantially, we anticipate we will continue to do so as additional notes come due.

 

Net Loss

 

Net loss for the three months ended March 31, 2019 was $2,749,000 a loss of $0.02 per share, compared to a net loss for the three months ended March 31, 2018 of $2,429,000 a loss of $0.02 per share. Our net loss this year was somewhat offset by an increase in revenue; nevertheless, the net loss increased mainly due to the increased payroll and related office expenses, and the increase in financing costs and non-cash interest expense to obtain capital.