BIOLARGO, INC. 10-Q

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 September 30, 2020, 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; (iii) ONM Environmental, Inc., a California corporation (formerly Odor-No-More); (iv) BioLargo Development Corp., a California corporation; (iv) its majority-owned subsidiary BioLargo Engineering, Science & Technologies, LLC, a Tennessee limited liability company; (v) Canadian subsidiary BioLargo Water, Inc.; and (iv) Clyra Medical Technologies, Inc. (“Clyra”), a partially owned subsidiary. The following discussion and analysis should be read in conjunction with our unaudited consolidated financial statements and the related notes to the consolidated financial statements included elsewhere in this report. Recent Events The COVID-19 pandemic is currently impacting countries, communities, supply chains and markets as well as the global financial markets. Governments have imposed laws requiring social distancing, travel bans and quarantine, and these laws may limit access to our facilities, customers, management, support staff and professional advisors. These factors, in turn, may not only impact our operations, financial condition and demand for our goods and services, but our overall ability to react timely to mitigate the impact of this event. Also, it may hamper our efforts to comply with our filing obligations with the Securities and Exchange Commission. Depending on the severity and longevity of the COVID-19 pandemic, our business, customers, and stockholders may experience a significant negative impact. Third Quarter Accomplishments Record revenue – we generated record revenues in the third quarter (see Results of Operations , below), rebounding from early pandemic shutdowns; New business backlog – our industrial operating divisions each have a backlog of revenue-generating projects that collectively exceed $2 million, providing reliable revenue into 2021 Advanced PFAS (forever chemicals) removal technology – Refined the AEC water technology, developed a modular AEC unit, and have entered into substantial negotiations with a major municipal water agency regarding a pilot project (see Development of AEC to Combat PFAS Crisis , below); New CupriDyne formula – we developed a new CupriDyne formula and are preparing an application to register the product as a sanitizer and hard surface disinfectant with the EPA (see CupriDyne Plus , below). Launched COVID product – our medical subsidiary launched Clyraguard Personal Protective Spray on Amazon (see COVID-19 Response and Related Business Development and Clyra Medical , below), and expanded sales of Clyraguard from first quarter; it is launching a new product soon, with another expected in mid to late 2021; 25 Table of Contents Developed a new technology – our engineers invented a way to extract valuable minerals from certain types of industrial waste, turning a customer’s liability into a billion-dollar revenue opportunity and at the same time creating a long-term revenue opportunity for our engineering team (see New Technology – Mineral Extraction , below); Sales of odor and VOC control solutions to Cannabis operators expanding – CupriDyne Clean odor control product’s use is expanding in the Cannabis industry (see ONM Environmental - Industrial Odor and VOC Solutions , below); Mu nicipal Wastewater pilot under way – we began construction of a commercial-scale AOS water treatment system for delivery to a municipal wastewater treatment plant in Montreal, Canada (see Wastewater Treatment Pilot - Montreal , below); and Improved Balance Sheet - we retired over $3.5 million in debt (by converting to equity), leaving approximately $1.1 million due in August of 2021 or later, and the remaining paid by Clyra subsidiary from sales or as funds are available from financing efforts (see Results of Operations , below); 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. Formula for Success: Technology, Talent and Purpose Technology The company has continually advanced its robust portfolio of technologies since the first acquisition of early iterations of the BioLargo technology in the spring of 2007. Our innovations have primarily been developed through the company’s internal resources, and some through acquisition. These include patents, patents pending and trade secrets that include solutions for: ● PFAS removal ● SARS-CoV-2 solutions ● Infection control ● Wound management ● Regenerative tissue therapy ● Disinfection ● Air quality controls and systems including odor and VOC control ● Water decontamination ● Micro-pollutant destruction and removal ● Legionella detection and water treatment solutions ● Minerals processing Talent We have steadily grown our team to 23 team members, and numerous other part-time consultants, which include highly qualified PhD’s, engineers, MD’s and medical professionals, constructors, field service techs, innovators, sales, marketing, entrepreneurial and executive leadership. Purpose Our mission to make life better centers our company on serving others, with integrity, knowledge, technology, and solutions that provide lasting value. We are unique in our ability to tailor our offerings to serve our customers with proven expertise, proven technology and, if needed, we often have the ability to develop new technical solutions to meet our customer’s needs. 26 Table of Contents Development of AEC to Combat PFAS Crisis Our engineers at BLEST have developed a novel water treatment system, called the AEC (Aqueous Electrostatic Concentrator) , that removes per- and polyfluoroalkyl substances (PFAS) from water at a fraction of the cost of existing carbon-based and reverse osmosis solutions, which are the dominant incumbent solutions. PFAS chemicals can cause cancer, infertility, asthma, and other health problems in human beings, are present in a vast range of manufactured goods, common household products (e.g., cleaning products, cookware), and electronics, and contaminate drinking water in unsafe levels all over the globe. Governments and industry are actively seeking less expensive technologies and processes to eliminate PFAS from groundwater and drinking water, and the U.S. EPA has made finding an economical solution a priority. The AEC has been proven in lab-scale studies to meet or exceed the performance of carbon-filtration and reverse osmosis systems while consuming as little as $0.30 in electrical costs per 1,000 gallons treated. The design of the AEC results in substantially less waste produced than carbon-filtration and reverse osmosis systems, with the AEC’s specialized membranes (onto which the PFAS molecules adhere), creating far less of a disposal liability than incumbent technologies. We believe testing will show that total operating costs of the AEC represent a significant potential cost savings compared to incumbent PFAS solutions like reverse osmosis and carbon sequestration technologies. Thus far in 2020, Orange County, California, has taken more than 40 drinking water wells out of service due to PFAS contamination, and estimate treatment systems using existing technology will cost more than $200 million to build and more than $400 million to operate and maintain. We believe the AEC system could reduce those costs significantly. Recently, our engineers completed the design for a modular AEC unit and are now gathering testing data at the request of a municipal water agency. We intend to field test an AEC unit in conjunction with the AOS project in Montreal (see Wastewater Treatment Pilot – Montreal , below). Additionally, multiple U.S. municipal water agencies have expressed interest in the technology, and indicate they would be available to test a pilot-scale unit. We are hopeful that these pre-commercial trials can begin in early 2021. During this process, our engineers will continue to refine the design of the AEC and ready it for a commercial launch. Those same municipal agencies have told BioLargo management that they have a significant need for economically feasible PFAS treatment solutions, and that existing solutions do not adequately fulfill this need. Broadly speaking, there are three main markets for PFAS water treatment in the U.S., all of which BLEST may address in the coming years. The first is municipal water treatment – that is water which needs treatment for PFAS before it can be distributed to the public or water that must be treated from a wastewater treatment plant. Southern California, Michigan and Wisconsin may be hotbeds for this market, as the states have adopted stringent regulations on PFAS limits in drinking water, and wastewater and significant initiatives have begun to implement systems to address the problem. The second market is treatment of contaminated groundwater and soils associated with military bases and airports. A good example of this in the US is the treatment of groundwater (and soil) affected by PFAS contamination caused by the use of fire-fighting foam, especially on military sites like Air Force bases. These sites are numerous and have significant groundwater and soil contamination problems which regulators are likely to require remediation for in the coming years. The third market is treatment for water intake or outfalls for industrial facilities which either use PFAS compounds in their industrial processes, or whose industrial processes are sensitive to PFAS contamination. BLEST intends to address each of these markets in the coming years, but will begin its first pilots and commercial projects in municipal water treatment and remediation of groundwater, as the need in those markets is most immediate according to prospective customers who have already approached BLEST management about projects. COVID-19 Response and Related Business Development In response to the COVID-19 crisis, and because of our technology portfolio’s specialty focus on iodine, at the outset of the pandemic we sponsored research with one of the country’s leading researchers in the study of pandemic diseases, Dr. Slobodan Paessler. Located at the Galveston National Laboratory at the University of Texas Medical Branch, his laboratory confirmed that our CupriDyne technology, as well as Clyraguard Personal Protection Spray (see the peer-reviewed publication on Clyraguard in F1000 Research at https://f1000research.com/articles/9-674), inactivated the Coronavirus that causes COVID-19: “CupriDyne technology was shown to be effective in inactivating the virus in a time-dependent manner, reducing virus titers by 99% (2 logs) after 30 minutes, and reducing virus titers to below the detection limit after 60 minutes. The novel iodine complex tested herein offers a safe and gentle alternative to conventional disinfectants for use on indoor and outdoor surfaces.” The actual report can be seen at the following link: https://www.biorxiv.org/content/10.1101/2020.05.08.082701v1. The CupriDyne abstract states: “The coronavirus known as SARS-CoV-2, which causes COVID-19 disease, is presently responsible for a global pandemic wherein more than 3.5 million people have been infected and more than 250,000 killed to-date. There is currently no vaccine for COVID-19, leaving governments and public health agencies with little defense against the virus aside from advising or enforcing best practices for virus transmission prevention, which include hand-washing, physical distancing, use of face covers, and use of effective disinfectants. In this study, a novel iodine complex called CupriDyne® [technology] was assessed for its ability to inactivate SARS-CoV-2. CupriDyne was shown to be effective in inactivating the virus in a time-dependent manner, reducing virus titers by 99% (2 logs) after 30 minutes, and reducing virus titers to below the detection limit after 60 minutes. The novel iodine complex tested herein offers a safe and gentle alternative to conventional disinfectants for use on indoor and outdoor surfaces.” 27 Table of Contents Following this initial study, the laboratory of Dr. Paessler conducted a follow-up study whereby a more concentrated CupriDyne formula (See CupriDyne Plus , below) was tested against the COVID-19 virus. In this study, the CupriDyne Plus completely inactivated SARS-CoV-2 (the COVID-19 virus) in 10 minutes – roughly the same performance observed with highly concentrated bleach. As a consequence of these highly promising results, we intend to fully explore any and all alternatives available to develop a new CupriDyne based product to help combat COVID-19 and secure appropriate regulatory approvals (see EPA Registration of CupriDyne Plus , below). While we are actively engaged in responding the COVID-19 crisis, we have not ceased operations of our previous and long-term operating activities or plans and all phases of our development work and commercial activities have continued. However, our normal operations and rate of growth were negatively impacted during the crisis, namely with delays by our customers until such time as our customers operations resume some sense of normalcy. For example, our growth in the waste handling industry reversed course in March as operators, in light of the COVID-19 crisis, were less concerned about managing odor than during normal times. As the pandemic has progressed, and shelter-in-place orders have been lifted, these operating activities are increasing. In the third quarter of 2020, revenues from our odor and VOC control customers began to rebound, and as the fourth quarter began, this business unit had more than $400,000 in contracted projects for this current quarter (more detail on this can be found under Results from Operations). In response to the pandemic, Clyra Medical launched Clyraguard Disinfecting Personal Protection Spray. This product is a safe, effective, FDA-registered Class I General Purpose disinfectant designed to decontaminate non-critical medical devices such as face masks and other personal protective equipment (PPE). The product has been proven effective against a wide range of bacteria, viruses, and fungi, and has been proven effective against SARS-CoV-2, the virus that causes COVID-19 disease. Given the product’s unique value proposition as an FDA-registered safe-on-skin and gentle disinfectant, we hope Clyraguard will experience rapid revenue growth as the word gets out and assuming our distribution channel partners are able to execute. The product is currently going through a staged roll-out plan with a robust manufacturing and supply chain, with distributers in the PPE and healthcare market recently coming online, and online retail channels such as Clyra’s new website and online store (www.clyraguard.com) and Amazon having recently launched. We are in discussions with distributors, resellers and marketing partners and expect to continue building out our selling resources. We also faced and have overcome numerous challenges as we began launching this product, including supply chain delays, a shortage of plastic bottles available to purchase, manufacturing and shipping delays. Because of BioLargo’s efforts to quickly develop innovative solutions to aid in the COVID-19 pandemic, the company was one of three companies recognized by Octane, an Orange County based accelerator, for its COVID-19 response, and specifically its development of Clyraguard Disinfecting Personal Protection Spray. ONM Environmental - Industrial Odor and VOC Solutions ONM Environmental (previously known as Odor-No-More) generates most of its revenues through the sales of odor and VOC control products under the flagship brand CupriDyne Clean. 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 that it offers substantial savings to our customers compared with competing products. While sales of this product have increased over time, the company also began to expand its service offering due principally to the demands and needs of its major waste handling and industrial clients (which ultimately prompted the company to re-brand to “ONM Environmental” to reflect the widened scope of services it offers). ONM now holds General, Electrical, Plumbing and Low Voltage licenses and offers a menu of services to landfills, transfer stations, wastewater treatment facilities as well as facilities in non-waste related industries. These services include 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). It has recently expanded these serves to engineering design, construction and installation. Our customer base for our odor and VOC business was expanding prior to the COVID-19 crisis and we expect it to continue doing so once the world returns back to work. We have been and expect to continue selling product to the largest solid waste handling companies in the country. Opportunities for our products are available internationally. Very recently, some of the capital projects that ONM previously had on hold due to logistical limitations imposed by the COVID-19 pandemic have begun to come back online, with decision-makers from these clients requesting that ONM resume work on these projects. 28 Table of Contents 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 and 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 were realizing systematic adoption by our very large corporate customers and expect to resume the adoption cycle post crisis, 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 wastewater 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. Cannabis Industry In 2019, we granted non-exclusive rights to Mabre Systems to sell our CupriDyne Clean product to the Cannabis industry under a private-label brand. Testing shows that CupriDyne Clean removes eliminates the odors emitted by Cannabis grow and production facilities. We have been installing CupriDyne Clean delivery misting systems for Mabre customers, and they continue to sell their branded CupriDyne Clean to clients in the industry. We continue to receive requests for CupriDyne Clean delivery system installations, and have over 20 facilities regularly buying product from our distributor. Mabre intends to launch a consumer odor product based on CupriDyne Clean in the near future. South Korean Joint Venture On February 12, 2020, we executed a “Joint Venture Framework Agreement” with a leading wastewater treatment solution provider based in South Korea (BKT Co. Ltd., “BKT”), to create a South Korean entity that would manufacture odor and VOC control products based on our CupriDyne Clean products. We received a $350,000 investment from BKT and issued 1,593,087 shares of our common stock, and invested $100,000 into the joint venture for a 40% ownership share. BKT and its U.S. based subsidiary invested $150,000 into the joint venture for the remaining 60% ownership share. Although the joint venture established manufacturing and is marketing the product, the COVID-19 pandemic has significantly impacted the expected growth of the company. Recently, the joint venture (under the name Odin) moved its headquarters to the Korea Water Cluster, which is a new world-renowned water innovation campus located in Daegu, South Korea, a center for industrial innovation in Asia. Full Service Environmental Engineering Our subsidiary BioLargo Engineering, Science & Technologies, LLC (“BLEST”) offers full service environmental engineering to third parties and provides engineering support services to our internal teams to accelerate the commercialization of our technologies. Its website is found at www.BioLargoEngineering.com. BLEST focuses its efforts in three areas: ● Providing engineering services to third-party clients; ● Supporting internal product development and business units’ services to customers (e.g., the AOS) and ● Advancing their own technical innovations such as the AEC, legionella control systems. The subsidiary is located in Oak Ridge (a suburb of Knoxville, Tennessee), and employs seven scientists and engineers who collectively worked together for almost 30 years and experience in diverse engineering fields. The team is led by Randall Moore, who served as Manager of Operations for Consulting and Engineering for the Knoxville office of CB&I Environmental & Infrastructure and was formerly a leader at The Shaw Group, Inc., a Fortune 500 global engineering firm. The other team members are also former employees of CB&I and Shaw. The team is highly experienced across multiple industries and they are considered experts in their respective fields, including chemical engineering, wastewater treatment (including design, operations, data gathering and data evaluation), process safety, energy efficiency, air pollution, design and control, technology evaluation, technology integration, air quality management & testing, engineering management, permitting, industrial hygiene, applied research and development, air testing, environmental permitting, HAZOP review, chemical processing, thermal design, computational fluid dynamics, mechanical engineering, mechanical design, NEPDES permitting, RCRA/TSCA compliance and permitting, project management, storm water design & permitting, computer assisted design (CAD), bench chemistry, continuous emission monitoring system operator, data handling and evaluation and decommissioning and decontamination of radiological and chemical contaminated facilities. 29 Table of Contents BLEST is comprised of industry veterans with experience in executing high-profile environmental engineering projects (like anthrax for the US Postal Service, remediation work post Katrina, the largest dioxin remediation in USA) and served as technical leaders with one of the largest global engineering firms before agreeing to join the BioLargo family of companies as owner operators. They are well-recognized for the value they provide to high-profile clients including the US Air Force, a recent win with one of the global leaders in chemical manufacturing, a leading food producer in the USA and more. As an example, BLEST was awarded a contract to assist in the reconfiguration of the Regenerative Thermal Oxidizer (RTO) systems used at a large chemical manufacturing plant on the East Coast, owned by a global chemical company, that produces phenolic resins, antioxidants and related synthetic organic products. The contract is expected to execute with a series of milestones through mid-2021, with anticipated scope expanding the contract period to at least 24 months and over $500,000 in total revenue. New Technology – Mineral Extraction BLEST developed a proprietary and patent-pending process to extract valuable minerals from certain types of industrial waste. As a consequence of this new process, a client is planning a substantial long-term project expected to generate over $1B in revenues, avoiding expensive remediation costs. As the client’s engineering services provider, and developer of the extraction technology, BLEST is in discussions with the client to secure its role as the project manager and/or lead engineer. We believe there are a number of similarly situated industrial waste sites across the country and around the world that would benefit from our newly developed process, and, as resources permit, we intend to explore these opportunities. 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, until recently, 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 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. Secondly, the AOS has been proven effective against certain soluble organic molecules, pharmaceuticals and a host of micropollutants, which are difficult to treat with other conventional tertiary water treatment technologies like UV. This characteristic of the AOS may offer a significant incentive for prospective customers to choose this technology over established incumbents because of the need in certain contexts to address these hard-to-treat contaminants, in addition to traditional targets of tertiary treatment like microorganisms. 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. Sunworks Farm pilot Our efforts to establish our first commercial pilot for the AOS system, at a poultry and livestock farm in Alberta, Canada, is progressing as planned. We expect to have installed a fully functional treatment train featuring our AOS water system at the client’s farm in the first or second quarter 2021. When complete, the system will be the first of its kind to allow for the complete reuse of this industrial wastewater, allowing the client to expand production and significantly save on water costs. The project budget of approximately $600,000 will be funded in part by government grants and in part by the client. We are finalizing grant funding, and have been working with government regulators. 30 Table of Contents If successful, this project will set a precedent for the AOS and BioLargo’s total water treatment solutions for future customers seeking water reuse, or even “zero liquid discharge” systems, and we believe will lead to follow-up projects with customers who follow Sunworks’ example. Wastewater Treatment Pilot - Montreal BioLargo Water is working on a second AOS demonstration pilot, to be installed at a municipal wastewater treatment facility near Montreal, Quebec, to be run in partnership with acclaimed water experts at the Centre des Technologies de L’Eau (CTE). BLEST engineers are building the AOS unit. The purpose of the project is to assess the AOS (and eventually, an AEC unit to be added on to the treatment train) as effective, cost-efficient, and complementary solutions for disinfecting and eliminating a broad range of recalcitrant contaminants from municipal wastewater in an operating wastewater treatment plant.It is our belief that once these pre-commercial pilots have concluded with the AOS, our ability to entice major water industry players to partner with BioLargo Water to accelerate market adoption of the AOS will be increased dramatically. Clyra Medical Technologies 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. When the COVID-19 crisis began, we immediately responded by supporting the team at Clyra Medical in any way possible to help them create Clyraguard Personal Protection Spray. Testing has confirmed that Clyraguard inactivates the COVID-19 pandemic coronavirus, and these data have been published in a peer-reviewed journal called Faculty 1000 Research (https://f1000research.com/articles/9-674). See details above in “COVID-19 Response and Related Business Development.” Recently Clyra Medical Technologies has welcomed two key team members to its roster. The company recruited Shawn Dougherty, experienced C-level executive responsible for several successful high-profile product launches, to serve as Clyra’s Chief Revenue Officer. Prior to joining Clyra, Shawn co-founded Mophie, the number one selling battery case manufacturer for mobile devices in North America. As COO and founder, she helped Mophie create the first juice pack battery case for the iPhone in North America and built an exclusive partnership with Apple. Clyra also recruited John A. Sirpilla to serve as its Chief Business Development Officer, where he is working with Clyra’s senior executive team on brand expansion and retail channel development, and will work to develop strategic partnerships to help make Clyra products widely available to individuals, businesses, and the healthcare industry. Mr. Sirpilla is the former President of Camping World Accessory Stores, a 140-store nationwide retail chain serving the RV industry and was promoted in 2012 to Chief Business Development Officer for the parent company, Camping World and Good Sam with annual sales of nearly $4 billion. CupriDyne Plus BioLargo’s CupriDyne® technology has been used successfully and safely for years to oxidize airborne contaminants like VOCs and other odor-causing compounds. At the outset of the Covid-19 pandemic, we set out to revisit and modify the CupriDyne technology with the goal of creating a powerful yet comparatively safer, non-toxic, and environmentally friendly disinfectant and/or surface sanitizer. The result of this redevelopment process, which involved over 500 hours by our engineers and scientists, was CupriDyne Plus, a product that delivers a potent concentration of the active ingredient iodine (I-2) as compared to traditional CupriDyne based formulations, meaning it can achieve much faster results.. We are actively working to obtain an EPA registration for CupriDyne Plus for a number of different applications (see EPA Registration , below), and we are optimistic about those efforts. CupriDyne Plus has the potential to offer a safer, more environmentally friendly alternative to bleach and other common antimicrobials for applications like hard surface disinfection, sanitization of non-porous non-food contact surfaces, disinfection of air, textiles, and more. EPA Registration of CupriDyne Plus We intend to pursue registration of CupriDyne Plus as a hard surface disinfectant and/ or sanitizer. Doing so would allow us to expand our label and marketing claims such that it would compete against less gentle and less environmentally sensitive chemicals being used in competing products. Since research demonstrated that CupriDyne Plus kills the SARS-CoV-2 coronavirus that has caused the current global pandemic, we knew there was a need for a safe alternative to cleaning agents such as bleach. Our scientists have spent more than 600 hours testing the product against EPA standards. Based on our extensive work, we are confident it meets the minimum performance requirements required for EPA registration as a disinfectant and/or surface sanitizer. We have met with and presented data to officials at the EPA for the purpose of refining our product and determining additional data requirements, and have retained a firm specializing in EPA registration work to help us through the process. While we are not able to predict the results of any EPA application we submit, or the time it will take to complete the process, we believe the market opportunities are large, with the U.S. market for surface disinfectants coming in at greater than $3.4 billion (https://www.grandviewresearch.com/industry-analysis/surface-disinfectant-market), and that we will ultimately be successful in obtaining registration. 31 Table of Contents Results of Operations We operate our business in distinct business segments: ● ONM Environmental, 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, advancing innovations like the AEC to remove PFAS contaminants from water, and serving outside clients on a fee for service basis; ● Clyra Medical, our partially owned subsidiary which develops and sells medical products based on our technology, including the recently released Clyraguard Personal Protection Spray; and ● BioLargo Water, our Canadian division that has been historically pure research and development, and is now transitioning to focus on commercializing our AOS system and supporting the work to advance CupriDyne technology-based products through an EPA registration; ● Our corporate operations, which support the operating segments with legal, accounting, human resources, and other services. Consolidated revenue for the three and nine months ended September 30, 2020 was $666,000 and $1,522,000, which is a 26% and 15% increase over the same periods in 2019. Sales at our operating divisions decreased upon the initial shutdown of California and most the U.S. in late March due to the COVID-19 pandemic, but have since rebounded. Our product revenue includes sales of our CupriDyne Clean industrial odor control product, Clyraguard Personal Protection Spray, and hand sanitizers. We expect revenues to continue to increase in the foreseeable future, as our operating divisions have significant contracted-for work in the pipeline. Given its brief experience with the product, Clyra’s management is unable to identify any definitive trends in the sales of Clyraguard Personal Protection Spray, which are in large part dependent on the success of third-party sales agents and distributors and thus out of its control. Its recent addition to the Amazon selling platform is being managed by a professional marketing and sales group that is actively testing and refining the product offering, its messaging and related marketing. As a product focused on the COVID-19 pandemic, sales of the product are also in-part dependent on the length of the pandemic and consumer’s wiliness to spend money on personal protective equipment. ONM Environmental (formerly, Odor-No-More) Our wholly owned subsidiary ONM Environmental generated revenues through sales of its flagship product CupriDyne Clean, by providing design, installation, and maintenance services on the systems that deliver CupriDyne Clean at its clients’ facilities, and through other related products. Of its gross sales in the three and nine months ended September 30, 2020, approximately two-thirds were to the waste handling industry. Revenue (ONM) ONM’s revenues for the three and nine months ended September 30, 2020, were $356,000 and $952,000, a decrease of $60,000 and $40,000 from the same periods in 2019. Sales on a quarter-to-quarter basis had been increasing until the COVID-19 pandemic shut down businesses across the country, and have since started to rebound. ONM has multiple contracts scheduled for completion in the fourth quarter that had been delayed due to the pandemic. Cost of Goods Sold (ONM) ONM’s cost of goods sold includes costs of raw materials, contract manufacturing, and portions of depreciation, salaries and expenses related to the manufacturing and installation of its products. As a percentage of revenue, ONM’s costs of goods improved 7% and 5% in the three and nine months ended September 30, 2020 to 36% and 39%. The decrease in cost of goods is due to increase sales of higher-margin products, an increase in product prices, and a slight decrease in the cost of our raw materials resulting from increased purchasing power. Selling, General and Administrative Expense (ONM) ONM’s selling, general and administrative expenses increased by 25% to $996,000 during the nine months ended September 30, 2020. These expenses have increased alongside its efforts to increase revenues by hiring additional sales and support staff. We expect these expenses to increase when compared to 2019 but remain consistent in 2020 unless and until its revenues increase. 32 Table of Contents Net Loss (ONM) For the nine months ended September 30, 2020, ONM generated $952,000 in revenue, a gross margin of $565,000, total costs and expenses of $996,000, and a tax credit of $10,000, resulting in a net loss of $421,000. For the three months ended September 30, 2020, ONM generated $356,000 in revenue, a gross margin of $228,000, had total costs and expenses of $371,000, and a tax credit of $2,000, resulting in a net loss of $142,000. BLEST (engineering division) Revenue (BLEST) Our engineering segment (BLEST) generated $160,000 and $436,000 of revenues from third party clients in the three and nine months ended September 30, 2020, an increase of $22,000 and $126,000 from the same periods in 2019. The increases this year compared with 2019 is due to an increase in the number of client contracts being serviced. BLEST revenues reported on our consolidated statement of operations do not include work performed on internal BioLargo projects, such as its engineering and development of the AOS water filtration system, development of the AEC to combat the PFAS crisis (see Development of AEC to Combat PFAS Crisis , above), and other projects included in research and development. Cost of Goods (Services) Sold (BLEST) BLEST’s cost of services includes employee labor as well as subcontracted labor costs. In the three and nine months ended September 30, 2020, its cost of services were 74% and 78% of its revenues, versus 68% and 74% in the comparable periods in 2019, as a result of an increased use of subcontracted labor. Selling, General and Administrative Expense (BLEST) BLEST’S SG&A expenses include 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 in research and development for its work on BioLargo technologies. BLEST selling, general and administrative expenses during the nine months ended September 30, 2020 totaled $300,000 compared to $331,000 for the nine months ended September 30, 2019. Net Loss (BLEST) For the nine months ended September 30, 2020, BLEST generated $443,000 in revenue, a gross margin of $107,000, and had total costs and expenses of $572,000, resulting in a net loss of $465,000. Reported revenue does not include revenue billed by BLEST to other BioLargo operating divisions, which are not paid in cash, and eliminated in the consolidation of our financial statements. It is important to note that BLEST’s net loss would be eliminated if it were an outside contract-for-hire services company selling services to our water company or our industrial odor and VOC control operating unit. Other Income Our wholly owned Canadian subsidiary has been awarded more than 80 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 revenue in our financial statements. Although we are continuing to apply for government and industry grants, and indications from the various grant agencies is highly encouraging, we cannot be certain of continuing those successes in the future. 33 Table of Contents Selling, General and Administrative Expense – consolidated 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 $108,000 (6%) and $799,000 (18%) in the three and nine months ended September 30, 2020, compared to the three and nine months ended September 30, 2019, due primarily to increases in salaries and payroll of $162,000 and $464,000 and sales and marketing of $44,000 and $88,000 in the three and nine months ended September 30, 2020 versus 2019, offset by a reduction of professional fee and consulting expense during the three months ended September 30, 2020. Much of the increase is due to non-cash expenses related to the issuance of stock options, and the hiring of sales personnel. Our employees, vendors and consultants chose to receive a greater number of stock and stock options in lieu of cash owed and as part of an employee retention program. The largest components of our SG&A expenses included (in thousands): Three months ended: Nine months ended: September 30, 2019 September 30, 2020 September 30, 2019 September 30, 2020 Salaries and payroll related $ 624 $ 786 $ 1,594 $ 2,061 Professional fees 194 125 554 597 Consulting 474 449 1,067 1,134 Office expense 281 260 744 750 Sales and marketing 70 114 162 250 Investor relations 63 35 145 139 Board of director expense 97 77 232 198 The increase in salaries and payroll expenses is related to the implementation of stock option bonus compensation programs for employees. Professional fees have varied over time due to occasional increases and increases in our need for those services. Consulting expenses have increased, as well as sales and marketing and investor relations, as the Company has increased efforts to sell its products and services and increased efforts in the capital markets. Board of director expenses varied from prior periods due to stock options issued in 2019. Research and Development In the three and nine months ended September 30, 2020, we spent approximately $347,000 and $1,031,000 in the research and development of our technologies and products. This was an increase of 5% and a decrease of 8% compared to the same periods in 2019, due to increased needs to develop sales and production objectives and less on further research. Interest expense Our interest expense for the three and nine months ended September 30, 2020 was $318,000 and $1,823,000, a decrease of 75% and 34% compared to the same periods in 2019. The decreases in the 2020 periods are due to non-cash expenses from warrants issued to investors in our OID convertible note offering incurred in 2019. All of the OID investments have converted and the discount fully amortized to interest, therefore we have less debt and less interest. Loss on extinguishment of debt In the three months ended September 30, 2020, we recorded a loss on extinguishment of debt related to the extension of a due date for convertible note payable. In exchange for the due date extension, we reduced the note conversion price from $0.17 to $0.14 and extended the expiration date of warrants held by the note holder by one and two years. The fair value of these concessions resulted in a fair value totaling $228,000, which was recorded as loss on extinguishment. In the nine months ended September 30, 2020, we recorded a loss on extinguishment of debt related to transactions with current vendor and employees where Clyra Medical is unable to pay obligations in cash. In lieu of cash, the vendors and employees accepted options to purchase shares of Clyra stock. The fair value of those options exceeded the debt that was converted by $214,000. In the three months ended September 30, 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 2020. 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 September 30, 2020 was $2,390,000, a loss of $0.01 per share, compared with $3,886,000 and $0.02 per share in the prior year comparable period. Net loss for the nine months ended September 30, 2020 was $7,707,000, a loss of $0.04 per share, compared to a net loss for the nine months ended September 30, 2019 of $8,625,000, a loss of $0.06 per share. The decrease in net loss in the 2020 periods is primarily due to decreased interest expenses. 34 Table of Contents The net loss per business segment is as follows (in thousands): Three months ended Nine months ended September 30, 2019 September 30, 2020 September 30, 2019 September 30, 2020 BioLargo corporate (3,393 ) (1,374 ) (6,985 ) (4,954 ) ONM Environmental (119 ) (142 ) (260 ) (421 ) Clyra Medical (351 ) (528 ) (982 ) (1,493 ) BLEST 27 (298 ) (110 ) (465 ) BioLargo Water (50 ) (48 ) (288 ) (374 ) Net loss (3,886 ) (2,390 ) (8,625 ) (7,707 ) Liquidity and Capital Resources For the nine months ended September 30, 2020, we had a net loss of $7,707,000, used $3,318,000 cash in operations, and at September 30, 2020, we had a working capital deficit of $1,316,000, and current assets of $1,873,000. We do not believe operating profits in the immediate future will be sufficient to fund our current level of operations. We have been, and anticipate that we will continue to be, limited in terms of our capital resources. None of our business segments have ever generated enough revenues to fund their operations, or to contribute to our corporate operations or overhead. Thus, in light of our cash position at year end, in order to continue operations, in calendar year 2020 we have continued to sell our stock in private securities offerings and to Lincoln Park (see Note 3). Thus far this year, we have received approximately $1.7 million from Lincoln Park (an average of approximately $160,000 per month). The proceeds we receive from stock sales to Lincoln Park is a function of stock price and volume – a lower stock price and less trading volume results in less money we can receive from Lincoln Park. Although we have relied on investment funds through our agreement with Lincoln Park this year, there is no assurance that it will continue to provide the funds we need for our operations, and if it does not, we will have to rely on other forms of financing, and there is no assurance that we will be able to do so, or if we do so, it will be on favorable terms. We also regularly pay officers and vendors equity in lieu of cash, and anticipate that we will continue to be able to do so in the future. The foregoing factors raise substantial doubt about our ability to continue as a going concern, unless we are able to continue to raise funds through stock sales to Lincoln Park or other private financings, and in the long term, our ability to attain a reasonable threshold of operating efficiencies and achieve profitable operations by licensing or otherwise commercializing products incorporating our technologies. The consolidated financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern. Critical Accounting Policies Our discussion and analysis of our results of operations and liquidity and capital resources are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates and judgments, including those related to revenue recognition, valuation of offerings of debt with equity or derivative features which include the valuation of the warrant component, any beneficial conversion feature and potential derivative treatment, and share-based payments. We base our estimates on anticipated results and trends and on various other assumptions that we believe are reasonable under the circumstances, including assumptions as to future events. These estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. By their nature, estimates are subject to an inherent degree of uncertainty. Actual results that differ from our estimates could have a significant adverse effect on our operating results and financial position. We believe that the following significant accounting policies and assumptions may involve a higher degree of judgment and complexity than others. The methods, estimates and judgments the Company uses in applying these most critical accounting policies have a significant impact on the results of the Company reports in its financial statements. 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. 35 Table of Contents 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 three subsidiaries, ONM, BLEST and Clyra. ONM and Clyra identify its contract with the customer through a written purchase order, in which the details of the contract are defined including the transaction price and method of shipment. The only performance obligation is to create and ship the product and each product has separate pricing. Revenue is recognized at a point in time when the order for its goods are shipped if its agreement with the customer is FOB manufacturer, and when goods are delivered to its customer if its agreement with the customer is FOB destination. Revenue is recognized with a reduction for sales discounts, as appropriate and negotiated in the customer’s purchase order. ONM also installs misting systems for which it bills on a time and materials basis. It identifies its contract with the customer through a written purchase order in which the details of the time to be billed and materials purchased and an estimated completion date. The performance obligation is the completion of the installation. Revenue is recognized over time as the work is performed. BLEST identifies services to be performed in a written contract, which specifies the performance obligations and the rate at which the services will be billed. Each service is separately negotiated and priced. Revenue is recognized as services are performed and completed. BLEST’s contracts typically call for invoicing for time and materials incurred for that contract. A few contracts have called for milestone or fixed cost payments where BLEST bills an agreed to amount per month for the life of the contract. In these instances, completed work, billed hourly, is recognized as revenue. If the billing amount is greater or lesser than the completed work, a receivable or payable is created. These accounts are adjusted upon additional billings as the work is completed. To date, there have been no discounts or other financing terms for the contracts. 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. Warrants and Conversion Features Warrants issued with our convertible and non-convertible debt instruments are accounted for under the fair value and relative fair value method. The warrant is first analyzed per its terms as to whether it has derivative features or not. If the warrant is determined to be a derivative and not qualify for equity treatment, then it is measured at fair value using the Black Scholes option model, and recorded as a liability on the balance sheet. The warrant is re-measured at its then current fair value at each subsequent reporting date (it is “marked-to-market”). If the warrant is determined to not have derivative features, it is recorded into equity at its fair value using the Black Scholes option model, however, limited to a relative fair value based upon the percentage of its fair value to the total fair value including the fair value of the convertible note. Convertible debt instruments are recorded at fair value, limited to a relative fair value based upon the percentage of its fair value to the total fair value including the fair value of the warrant. Further, the convertible debt instrument is examined for any intrinsic beneficial conversion feature (“BCF”) of which the conversion price is less than the closing common stock price on date of issuance. If the relative fair value method is used to value the convertible debt instrument and there is an intrinsic BCF, a further analysis is undertaken of the BCF using an effective conversion price which assumes the conversion price is the relative fair value divided by the number of shares the convertible debt is converted into by its terms. The BCF value is accounted for as equity. The warrant and BCF relative fair values are also recorded as a discount to the convertible promissory notes. At present, these equity features of the convertible promissory notes have recorded a discount to the convertible notes that is substantially equal to the proceeds received. Share-based Payments It is the Company’s policy to expense share-based payments as of the date of grant or over the term of the vesting period in accordance with Auditing Standards Codification Topic 718 “Share-Based Payment.” Application of this pronouncement requires significant judgment regarding the assumptions used in the selected option pricing model, including stock price volatility and employee exercise behavior. Most of these inputs are either highly dependent on the current economic environment at the date of grant or forward-looking expectations projected over the expected term of the award. 36 Table of Contents Fair Value Measurement Generally accepted accounting principles establishes a hierarchy to prioritize the inputs of valuation techniques used to measure fair value. The hierarchy gives the highest ranking to the fair values determined by using unadjusted quoted prices in active markets for identical assets (Level 1) and the lowest ranking to fair values determined using methodologies and models with unobservable inputs (Level 3). Observable inputs are those that market participants would use in pricing the assets based on market data obtained from sources independent of the Company. Unobservable inputs reflect the Company’s assumptions about inputs market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The Company has determined the appropriate level of the hierarchy and applied it to its financial assets and liabilities. Management believes the carrying amounts of the Company’s financial instruments as of December 31, 2019 and September 30, 2020, 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, convertible notes, and other assets and liabilities. Recent Accounting Pronouncements None.