BIOLARGO, INC. 10-K

ITEM 9A. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures We conducted an evaluation, under the supervision and with the participation of management, including our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this Annual Report. Our procedures have been designed to ensure that the information relating to our company, including our consolidated subsidiaries, required to be disclosed in our SEC reports is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow for timely decisions regarding required disclosure. However, our Company is continuing to grow and evolve. The volume of our product sales continues to grow, increasing strain on our accounting systems. And, our operations do not yet generate enough cash to fund operations, and thus we rely on financing activities to maintain our level of operations and fund our anticipated growth. In combination, these activities put stress on our overall controls and procedures. Based on this evaluation, our chief executive officer and chief financial officer concluded that as of the evaluation date our disclosure controls and procedures were not effective, due to the material weakness identified below. It should be noted that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote. 33 Table of Contents Management ’ s Report on Internal Control over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Our internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements. Under the supervision and with the participation of our management, including our chief executive officer and the chief financial officer, we have established internal control procedures in accordance with the guidelines established in the 2013 Framework —Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Management evaluated the effectiveness of our internal controls, and concluded that due to our limited financial and personal resources, and the fact that we operate our business in three distinct locations in the U.S. and Canada, we continue to have a material weakness in our internal controls with respect to the closing our financial statements. Until the company has the financial resources to implement more robust automated systems, or to hire additional dedicated accounting personal, we expect this material weakness to continue. In reaching this conclusion, management considered that despite this weakness, and others identified in past years, the company has not identified material misstatements in prior financial statements, and believes that the material weakness identified is not likely to lead to a material misstatement in the financial statements contained within this report. Recognizing the dynamic nature and growth of the Company’s business, including the addition of an engineering division in late 2017, growth of the core operations, and the increase in the number of employees, management has recognized the strain on the overall internal control environment. As a result, management has concluded that its internal controls over financial reporting are not effective. Management identified a material weakness with respect to deficiencies in its financial closing and reporting procedures. Management believes this is due to a lack of resources. Management intends to add accounting personnel and operating staff and more sophisticated systems in order to improve its reporting procedures and internal controls, subject to available capital. A material weakness is a significant deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected. While management has recognized the material weakness, nothing additionally has changed in internal controls over financial reporting in the fourth quarter or the fiscal year ended December 31, 2020. This Annual Report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s independent registered public accounting firm pursuant to rules of the SEC that permit the Company to provide only management’s report in this Annual Report. Our management, including our chief executive officer and chief financial officer, does not expect that our disclosure controls or our internal control over financial reporting, or any system we design or implement in the future, will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. ITEM 9B. OTHER INFORMATION None. 34 Table of Contents PART III Certain information required by Part III is incorporated by reference from our Proxy Statement to be filed with the SEC in connection with the solicitation of proxies for our 2021 Annual Meeting of Stockholders, currently scheduled to be held on June 15, 2021 (the “Proxy Statement”). ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE The information required by this section is incorporated by reference from the section entitled “Proposal One—Election of Directors” in the Proxy Statement. Item 405 of Regulation S-K calls for disclosure of any known late filing or failure by an insider to file a report required by Section 16 of the Exchange Act. This disclosure is incorporated by reference to the section entitled “Section 16(a) Beneficial Ownership Reporting Compliance” in the Proxy Statement. The information required by this Item with respect to our executive officers is contained in Item 1 of Part I of this Annual Report under the heading “Business—Executive Officers”. ITEM 11. EXECUTIVE COMPENSATION The information required by this section is incorporated by reference from the information in the section entitled “Executive Compensation” in the Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The information required by this section is incorporated by reference from the information in the section entitled “Security Ownership of Certain Beneficial Owners and Management” in the Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE The information required by this section is incorporated by reference from the information in the section entitled “Certain Relationships and Related Transactions” in the Proxy Statement. ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES The information required by this section is incorporated by reference from the information in the section entitled “Ratification of Appointment of Independent Auditor” in the Proxy Statement. 35 Table of Contents PART IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. The following documents are filed as a part of this report: 1. Financial Statements . The consolidated financial statements required to be filed in this report are listed on the Index to Financial Statements immediately preceding the financial statements. 2. Financial Statement Schedules . Separate financial statement schedules have been omitted either because they are not applicable or because the required information is included in the consolidated financial statements or the notes thereto. 3. Exhibits. See the Exhibit Index for a list of the exhibits being filed or furnished with or incorporated by reference into this report. 36 Table of Contents Exhibit Index Incorporated by Reference Herein Exhibit Number Exhibit Description Form File Date 3.1 Bylaws of BioLargo, Inc., as amended and restated Form 10-KSB 5/23/2003 3.2 Amended and Restated Certificate of Incorporation for BioLargo, Inc. filed March 16, 2007 Form 10-KSB 5/4/2007 3.3 Certificate of Amendment to Certificate of Incorporation, filed May 25, 2018 Pos Am 6/22/2018 3.4 Amended and Restated Articles of Incorporation of Clyra Medical Technologies, Inc. Form 8-K 1/6/2016 4.1 BioLargo, Inc. 2007 Equity Incentive Plan Form 10-QSB 11/19/2007 4.2 Amendment No. 1 to BioLargo 2007 Equity Incentive Plan Def 14C (Exhibit A) 5/2/2011 4.3 2018 Equity Incentive Plan Form S-8 6/22/2018 4.4 Stock Option Award Agreement under 2018 Equity Incentive Plan Form S-8 6/22/2018 4.5 Notice of Stock Option Grant under 2018 Equity Incentive Plan Form S-8 6/22/2018 4.6 Restricted Stock Unit Award Agreement under 2018 Equity Incentive Plan Form S-8 6/22/2018 4.7 Notice of Restricted Stock Unit Award under 2018 Equity Incentive Plan Form S-8 6/22/2018 4.8 Form of Stock Options issued in exchange for reduction in accounts payable. Form 10-K 3/31/2015 4.9 September 2018 Amendment to Promissory Note dated December 14, 2017 issued to Vista Capital Investments, LLC. Form 8-K 9/18/2018 4.10 Stock Purchase Warrant issued to Vista Capital Investments dated September 12, 2018. Form 8-K 9/18/2018 4.11 January 2019 Amendment to Promissory Note dated December 14, 2017, by and between BioLargo, Inc. and Vista Capital Investments, LLC. Form 8-K 1/11/2019 37 Table of Contents 4.12 Convertible Promissory Note issued to Vista Capital Investments LLC dated January 7, 2019 Form 8-K 1/11/2019 4.13 Form of Note issued in Summer 2017 Offering Form 10-Q 8/14/2017 4.14 Two-year Note in face amount of $440,000 issued July 2017 Form 10-Q 8/14/2017 4.15 Purchase Agreement, dated as of August 25, 2017 by and between BioLargo, Inc. and Lincoln Park Capital Fund, LLC Form 8-K 8/31/2017 4.16 Promissory note issued by Clyra Medical to Scion Solutions dated September 26, 2018 Form 8-K 10/2/2018 4.17 Promissory Note issued to Vernal Bay Investments, LLC on September 19, 2018 Form 8-K 9/24/2018 4.18 Stock Purchase Warrant issued to Vernal Bay Investments, LLC on September 19, 2018 Form 8-K 9/24/2018 4.19 Promissory Note issued to Chappy Bean, LLC on September 19, 2018 Form 8-K 9/24/2018 4.20 Stock Purchase Warrant issued to Chappy Bean, LLC on September 19, 2018 Form 8-K 9/24/2018 4.21 Warrant issued with Line of credit that matures September 1, 2019 Form 10-Q 5/14/2018 4.22 Amendment dated March 5, 2019 to Promissory Note issued to Vernal Bay Investments, LLC on September 19, 2018 Form 8-K 3/8/2019 4.23 Amendment dated March 5, 2019 to Promissory Note issued to Chappy Bean, LLC on September 19, 2018 Form 8-K 3/8/2019 4.24 $50,000 convertible note, matures March 8, 2020 Form 10-Q 5/14/2018 4.25 Amendment dated August 12, 2019 to Promissory Note issued to Vernal Bay Investments, LLC on September 19, 2018 Form 10-Q 8/14/2019 4.26 Amended and restated note issued to Vernal August 12, 2019 Form 10-Q 8/14/2019 4.27 Form of convertible notes that mature April 20, 2021 (Spring 2018 Offering) Form 10-Q 5/14/2018 4.28 Warrant issued to Vernal August 12, 2019 Form 10-Q 8/14/2019 4.29 Revolving Line of Credit Agreement dated June 30, 2020, between Clyra Medical and Vernal Bay Form 8-K 7/7/2020 4.30 Form of warrant issued with convertible notes that mature April 20, 2021 (Spring 2018 Offering) Form 10-Q 5/14/2018 4.31 Security Agreement dated June 30, 2020, between Clyra Medical and Vernal Bay Form 8-K 7/7/2020 4.32 Revolving Line of Credit Note issued by Clyra Medical to Vernal Bay on June 30, 2020 Form 8-K 7/7/2020 4.33 Stock Purchase Agreement and Plan of Reorganziation dated September 26, 2018, with Scion Solutions, LLC Form 8-K 10/2/2018 4.34 Stock Purchase Warrant Issued to Lincoln Park Capital on January 31, 2019 Form 8-K 2/11/2019 38 Table of Contents 4.35 10% Convertible Promissory Note issued to Bellridge Capital, LP dated April 18, 2019 Form 8-K 4/23/2019 4.36 Convertible Promissory Note issued to Crossover Capital dated May 10, 2019 Form 10-Q 5/15/2019 4.37 Securities Purchase Agreement by and between BioLargo, Inc., and EMA Financial, LP dated June 4, 2019 Form 8-K 6/7/2019 4.38 10% Convertible Promissory Note issued to EMA Financial, LP dated June 4, 2019 Form 8-K 6/7/2019 4.39 Amendment #1 to the Convertible Note issued on June 4, 2019 to EMA Capital, LP Form 8-K 6/7/2019 4.40 OID twelve-month promissory note Form 8-K 8/2/2019 4.41 Stock purchase warrant issued to OID twelve-month investors Form 8-K 8/2/2019 4.42 $600,000 Promissory note dated August 9, 2019 Form 10-Q 8/14/2019 4.43 Warrant to purchase 1.2 million shares issued August 9, 2019 Form 10-Q 8/14/2019 4.44 Amendment to $440,000 convertible notes that matures July 20, 2019 Form 10-Q 5/14/2018 4.45 Warrant issued March 2018, expiring March 2023 S-1 8/29/2019 4.46 Form of warrant issued January 2019 to Lincoln Park, expiring January 2024 S-1 8/29/2019 4.47 Registration Rights Agreement, dated as of March 30, 2020, by and between BioLargo, Inc. and Lincoln Park Capital Fund, LLC 8-K 3/31/2020 4.48 Warrant issued in 2020 Unit Offering Form 10-Q 8/14/2020 4.49* Amendment to $50,000 Convertible Note dated March 8, 2018 4.50* Warrant issued to $50,000 Convertible Noteholder on March 1, 2020 10.1 License Agreement to Clyra Medical Technologies, Inc., dated December 17, 2012 Form 8-K 1/6/2016 10.2 December 30, 2015 amendment to License Agreement with Clyra Medical Technologies, Inc. Form 8-K 1/6/2016 10.3 Escrow Agreement dated September 26, 2018 regarding Clyra/Scion transaction Form 8-K 10/2/2018 10.4 Closing Agreement dated December 17, 2018 between Clyra Medical and Scion Solutions Form 8-K 12/19/2018 10.5 Amendment dated June 30, 2020 to License Agreement with Clyra Medical Technologies, Inc. Form 8-K 7/7/2020 10.6 Amendment dated June 30, 2020 to Consulting Agreement dated December 30, 2015 between Clyra Medical and Beach House Consulting LLC Form 8-K 7/7/2020 10.7 Consulting Agreement dated December 30, 2015 with Beach House Consulting LLC Form 8-K 1/6/2016 10.8 Commercial Office Lease Agreement for 14921 Chestnut St., Westminster, CA 92683 Form 8-K 8/24/2016 10.9† Employment Agreement with Dennis P. Calvert dated May 2, 2017. Form 8-K 5/4/2017 39 Table of Contents 10.10† Lock-Up Agreement with Dennis P. Calvert dated April 30, 2017 Form 8-K 5/4/2017 10.11† Lock-Up Agreement with Dennis P. Calvert dated May 2, 2017. Form 8-K 5/4/2017 10.12 Commercial Office Lease Agreement for Oak Ridge Tennessee Form 8-K 9/8/2017 10.13 Form of Employment Agreement for Engineering Subsidiary Form 8-K 9/8/2017 10.14 Form of Option issued to founding employees of Engineering subsidiary (BLEST) Form 8-K 9/8/2017 10.15† January 16, 2019 Engagement Extension Agreement by and between BioLargo, Inc. and Charles K. Dargan Form 8-K 1/18/2019 10.16 Securities Purchase Agreement by and between BioLargo, Inc., and Bellridge Capital, LP dated April 18, 2019 Form 8-K 4/23/2019 10.17 Securities Purchase Agreement by and between BioLargo, Inc., and Crossover Capital dated May 10, 2019 Form 10-Q 5/15/2019 10.18† Provenzano Employment Agreement dated May 28, 2019 Form 8-K 6/24/2019 10.19† Lock-Up Agreement dated May 28, 2019 Form 8-K 6/24/2029 10.20† Lock-Up Agreement dated May 28, 2019 Form 8-K 2/27/2020 10.21 Purchase Agreement, dated as of March 30, 2020 by and between BioLargo, Inc. and Lincoln Park Capital Fund, LLC. Form 8-K 3/31/2020 10.22† 2021 Engagement Extension Agreement with CFO Form 8-K 3/19/2021 14.1 Code of Ethics Form 10-KSB 11/16/2004 21.1* List of Subsidiaries of the Registrant 23.1* Consent of Haskell & White LLP 24.1 Power of Attorney (see signature page) 31.1* Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 and Rules 13(a)-14 and 15(d)-14 under the Securities Exchange Act of 1934 31.2* Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 and Rules 13(a)-14 and 15(d)-14 under the Securities Exchange Act of 1934 32.1* Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350. 101.INS** XBRL Instance 101.SCH** XBRL Taxonomy Extension Schema 101.CAL** XBRL Taxonomy Extension Calculation 101.DEF** XBRL Taxonomy Extension Definition 101.LAB** XBRL Taxonomy Extension Labels 101.PRE** XBRL Taxonomy Extension Presentation * Filed herewith ** Furnished herewith † Management contract or compensatory plan, contract or arrangement 40 Table of Contents SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. BIOLARGO, INC. Date: March 30, 2021 By: /s/ Dennis P. Calvert Dennis P. Calvert President and Chief Executive Officer POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints, jointly and severally, Dennis P. Calvert and Joseph L. Provenzano, and each of them, as his or her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities and on the date indicated: Name Title Date /s/ Dennis P. Calvert Chairman of the Board, Chief March 30, 2021 Dennis P. Calvert Executive Officer and President /s/ Charles K. Dargan II Chief Financial Officer March 30, 2021 Charles K. Dargan II (principal financial officer and principal accounting officer) /s/ Kenneth R. Code Chief Science Officer and Director March 30, 2021 Kenneth R. Code /s/ Joseph L. Provenzano Executive Vice President, Corporate March 30, 2021 Joseph L. Provenzano Secretary and Director /s/ Jack B. Strommen Director March 30, 2021 Jack B. Strommen /s/ Dennis E. Marshall Director March 30, 2021 Dennis E. Marshall /s/ Kent C. Roberts II Director March 30, 2021 Kent C. Roberts II /s/John S. Runyan Director March 30, 2021 John S. Runyan 41 Table of Contents INDEX TO FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm F-2 Consolidated Balance Sheets as of December 31, 2020 and December 31, 2019 F-6 Consolidated Statements of Operations and Comprehensive Loss for the years ended December 31, 2020 and 2019 F-7 Consolidated Statements of Stockholders ’ Equity (Deficit) for the years ended December 31, 2020 and 2019 F-8 Consolidated Statements of Cash Flows for the years ended December 31, 2020 and 2019 F-9 Notes to Consolidated Financial Statements F-10 – F-38 F-1 Table of Contents Report of Independent Registered Public Accounting Firm To the Board of Directors and Stockholders BioLargo, Inc. and Subsidiaries Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of BioLargo, Inc. and Subsidiaries (the “Company”) as of December 31, 2020 and 2019, and the related consolidated statements of operations, stockholders’ equity (deficit), and cash flows for each of the two years in the period ended December 31, 2020, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2020 and 2019, and the consolidated results of its operations and its cash flows for each of the two years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America. Going Concern The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has experienced recurring losses, negative cash flows from operations, has limited capital resources, a net stockholders’ deficit, and significant debt obligations coming due in the near term. These matters raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. F-2 Table of Contents Report of Independent Registered Public Accounting Firm (continued) Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. Fair Value of Stock Options — Refer to Notes 5 and 10 to the Consolidated Financial Statements Critical Audit Matter Description The Company issues options from both BioLargo, Inc. as well as its partially-owned subsidiary, Clyra Medical. Management uses the Black-Scholes option-pricing model to estimate the fair value of its stock options. The Black-Scholes option-pricing model involves the use of significant estimates, including the following: ■ Risk-free interest rate; ■ Expected share price volatility; ■ Expected dividend yield; and ■ Expected life of the award. In addition, management discounts the estimated fair value of the Clyra Medical stock options because the partially-owned subsidiary is a private company with no secondary market for its common stock. Given the significant estimates involved in estimating the fair value of stock options, the related audit effort in evaluating management’s estimates in determining the fair value of stock options was extensive and required a high degree of auditor judgment. How the Critical Audit Matter was Addressed in the Audit We obtained an understanding over the Company’s process to estimate the fair value of stock options, including how the Company develops each of the estimates required to utilize the Black-Scholes option-pricing model. We applied the following audit procedures related to testing the Company’s estimates utilized in the Black-Scholes option-pricing model: ■ We compared the Company’s risk-free interest rate used to the comparable United States Treasury yield for a term comparable to the stock options’ expected term. F-3 Table of Contents ■ We recalculated the Company’s historical share price volatility for a term comparable to the stock options’ expected term. For Clyra Medical, we recalculated a comparable public company’s historical share price volatility for a term comparable to the stock options’ expected term. ■ We performed a look-back at the Company’s previously issued dividends, noting there were none. We inquired with management of the Company who informed us that no future dividends were currently anticipated. ■ We agreed the expected term of stock options granted to employees and non-employees to the original contractual term of the option as management deems it likely they will remain outstanding for the entire original term. We further noted that this was consistent with historical options granted. In addition, we reviewed management’s analysis over the discount used on the estimated fair value of the Clyra Medical stock options. Management concluded that both the illiquidity and lack of marketability warranted a discount to the estimated fair value calculated using the Black-Scholes option-pricing model. We noted that Clyra Medical is a private company and therefore its stock is not actively traded. We also reviewed the stock sales history of Clyra Medical noting the infrequent stock sales supports management’s assertions of both illiquidity and lack of marketability. We further researched published articles on valuation discounts and noted that the liquidity and lack of marketability discount used by management was within a reasonable range. Accounting for Complex Debt Transactions — Refer to Notes 4 and 6 to the Consolidated Financial Statements Critical Audit Matter Description During the year ended December 31, 2020, the Company refinanced a convertible note to extend the maturity date by one year. The terms of the refinance included: (1) 25% of the principal and accrued interest converted to common stock, (2) a reduction to the conversion price to both the converted and remaining principal, and (3) extension of maturity dates of the warrants outstanding related to the convertible note. Management had to determine whether to account for the refinance as a debt modification or a debt extinguishment. Management determines if the modified terms of the refinance are considered substantially different, defined as the present value of the remaining cash flows after modification differ by at least 10% of those prior to the modification. Management used the Black-Scholes option-pricing model to estimate the increase in fair value of the warrants modified with the refinanced convertible note, 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 Black-Scholes option-pricing model involves the use of significant estimates, including the following: ■ Risk-free interest rate; ■ Expected share price volatility; ■ Expected dividend yield; and ■ Contractual life of the award. Management also evaluated the refinanced convertible note for any intrinsic beneficial conversion feature, in which the revised convertible price of the note is less that the closing common stock price on the date of refinance. If the relative fair value method is used to value the convertible note and there is an intrinsic beneficial conversion feature, a further analysis is undertaken of the beneficial conversion feature using an effective conversion price which assumes the conversion price is the relative fair value divided by the number of shares the convertible note is converted into by its terms. F-4 Table of Contents Given the significant estimates involved in estimating the total debt discount resulting from the relative fair value of the warrants and intrinsic beneficial conversion feature, as well as determining whether the debt refinance was a debt modification or debt extinguishment, the related audit effort in evaluating both management’s estimates in determining the total debt discount and determination of whether the refinance was a debt modification or debt extinguishment was extensive and required a high degree of auditor judgment. How the Critical Audit Matter was Addressed in the Audit We obtained an understanding over the Company’s process to determine whether a debt refinance is a debt modification or debt extinguishment. We reviewed the relevant guidance and management’s calculation of the present value of the cash flows prior to and after the debt modification. We also obtained an understanding over the Company’s process to estimate the debt discount resulting from the increase in the relative fair value of the modified warrants and the increase in the relative fair value of the intrinsic conversion feature from the reduction in conversion price, including how the Company develops each of the estimates required to utilize the Black-Scholes option-pricing model. We applied the following audit procedures related to testing the Company’s estimates utilized in the Black-Scholes option-pricing model: ■ We compared the Company’s risk-free interest rate used to the comparable United States Treasury yield for a term comparable to the warrants’ remaining contractual term. ■ We recalculated the Company’s historical share price volatility for a term comparable to warrants’ remaining contractual term. ■ We performed a look-back at the Company’s previously issued dividends, noting there were none. We inquired with management of the Company who informed us that no future dividends were currently anticipated. ■ We agreed the remaining contractual term of the warrants to the revised contractual term of the refinanced convertible note. We also reviewed management’s relative fair value calculation used to determine the total debt discount and agreed all inputs as follows: ■ We agreed the fair value of the note to the refinanced convertible note agreement. ■ We agreed the fair value of the warrants to the fair value calculated using the Black-Scholes option-pricing model. ■ We agreed to stock price at the refinance date to the trading price. ■ We agreed the exercise price to the revised conversion price to the refinanced convertible note agreement. Finally, we recalculated the change in the present value of the remaining cash flows after debt modification to determine if the correct accounting treatment was used by management. /s/ HASKELL & WHITE LLP Irvine, California March 30, 2021 F-5 Table of Contents BIOLARGO, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands, except for per share data) DECEMBER 31, 2020 2019 Assets Current assets: Cash and cash equivalents $ 716 $ 655 Accounts receivable, net of allowance 484 355 Inventories, net of allowance 277 16 Prepaid expenses and other current assets 28 39 Total current assets 1,505 1,065 In-process research and development (Note 9) 2,150 1,893 Equipment, net of depreciation 60 95 Other non-current assets 35 35 Investment in South Korean joint venture 63 — Right of use, operating lease, net of amortization 341 411 Deferred offering cost — 122 Clyra Medical prepaid marketing (Note 10) 788 — Total assets $ 4,942 $ 3,621 Liabilities and stockholders ’ equity (deficit) Current liabilities: Accounts payable and accrued expenses $ 513 $ 394 Debt obligations (Note 4) 1,206 4,057 Discount on debt, net of amortization (104 ) (1,472 ) Deferred revenue 48 35 Lease liability, current 114 125 Clyra Medical accounts payable and accrued expenses 536 208 Clyra Medical debt obligations (See Note 10) 1,231 1,007 Total current liabilities 3,544 4,354 Long-term liabilities: Debt obligations (Note 4) 507 700 Discount on convertible notes payable, net of amortization — (182 ) Lease liability 226 286 Common stock held for redemption (Note 9) 900 643 Total liabilities 5,177 5,801 COMMITMENTS AND CONTINGENCIES (Note 13) STOCKHOLDERS’ EQUITY (DEFICIT): Preferred Series A, $0.00067 Par Value, 50,000,000 Shares Authorized, -0- Shares Issued and Outstanding, at December 31, 2019 and December 31, 2020 — — Common stock, $0.00067 Par Value, 400,000,000 Shares Authorized, 166,256,024 and 225,885,682 Shares Issued, at December 31, 2019 and December 31, 2020 151 111 Additional paid-in capital 135,849 121,327 Accumulated other comprehensive loss (101 ) (99 ) Accumulated deficit (132,041 ) (123,492 ) Total BioLargo Inc. and subsidiaries stockholders’ equity (deficit) 3,858 (2,153 ) Non-controlling interest (Note 10) (4,093 ) (27 ) Total stockholders’ equity (deficit) (235 ) (2,180 ) Total liabilities and stockholders’ equity (deficit) $ 4,942 $ 3,621 See accompanying notes to consolidated financial statements and report of Independent Registered Public Accounting Firm. F-6 Table of Contents BIOLARGO, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (in thousands, except for per share data) Year ended December 31, 2020 2019 Revenue Product revenue $ 1,825 $ 1,460 Service revenue 607 401 Total revenue 2,432 1,861 Cost of revenue Cost of goods sold (743 ) (627 ) Cost of service (461 ) (318 ) Total cost of revenue (1,204 ) (945 ) Gross profit 1,228 916 Operating expenses: Selling, general and administrative expenses 7,473 6,140 Research and development 1,338 1,472 Total operating expenses 8,811 7,612 Operating loss (7,583 ) (6,696 ) Other income (expense): Grant income 137 218 Tax credit income 111 63 Interest expense (1,923 ) (3,996 ) Loss on extinguishment of debt (442 ) (1,029 ) Total other (expense) income (2,117 ) (4,744 ) Net loss (9,700 ) (11,440 ) Net loss attributable to noncontrolling interest (1,268 ) (750 ) Net loss attributable to common stockholders $ (8,432 ) $ (10,690 ) Net loss per share attributable to common stockholders: Loss per share attributable to stockholders – basic and diluted $ (0.05 ) $ (0.08 ) Weighted average number of common shares outstanding: 195,993,575 152,086,221 Comprehensive loss attributable to common stockholders Net loss $ (9,700 ) $ (11,440 ) Foreign currency translation adjustment (2 ) (9 ) Comprehensive loss (9,702 ) (11,449 ) Comprehensive loss attributable to noncontrolling interest (1,268 ) (750 ) Comprehensive loss attributable to stockholders $ (8,434 ) $ (10,699 ) See accompanying notes to consolidated financial statements and report of Independent Registered Public Accounting Firm. F-7 Table of Contents BIOLARGO, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS ’ EQUITY (DEFICIT) (in thousands, except for share data) 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 12,105,699 8 1,727 — — — 1,735 Warrant exercise 7,544,456 5 555 — — — 560 Issuance of common stock for service 3,318,490 2 708 — — — 710 Issuance of common stock for interest 915,164 1 199 — — — 200 Financing fee in common stock cancelled (150,000 ) — (42 ) — — — (42 ) Stock issuance to officer 500,000 — — — — — — Sale of stock for cash 556,144 — 125 — — — 125 Stock option compensation expense — — 1,522 — — — 1,522 Warrants and conversion feature issued as discount on convertible notes payable and line of credit — — 3,931 — — — 3,931 Issuance of Clyra common stock for cash — — 186 — — 350 536 Debt extinguishment expense — — 619 — — — 619 Warrant reprice — — 56 — — — 56 Exchange Clyra ownership for BioLargo debt — — 440 — — — 440 Preferred Series A Clyra dividend, converted to Clyra common shares — — 270 (270 ) — — — Deemed dividend — — 809 (809 ) — — — Net loss — — — (10,690 ) — (750 ) (11,440 ) Foreign currency translation — — — — (9 ) — (9 ) Balance, December 31, 2019 166,256,024 $ 111 $ 121,327 $ (123,492 ) $ (99 ) $ (27 ) $ (2,180 ) Conversion of notes 33,157,961 22 3,504 — — — 3,526 Issuance of common stock for service 4,458,731 3 663 — — — 666 Issuance of common stock for interest 1,728,331 1 183 — — — 184 Sale of stock for cash 17,356,064 12 2,771 — — — 2,783 Stock issued as a commitment fee 2,928,571 2 (124 ) — — — (122 ) Stock option compensation expense — — 1,821 — — — 1,821 Loss on extinguishment — — 442 — — — 442 Noncontrolling interest allocation — — 3,157 — — (3,157 ) — Clyra stock options issued for service — — 638 — — — 638 Clyra stock issued for consulting agreement — — 788 — — — 788 Clyra stock issued as line of credit commitment fee — — 70 — — — 70 Issuance of Clyra common stock for cash — — 492 — — 359 851 Deemed dividend — — 117 (117 ) — — — Net loss — — — (8,432 ) — (1,268 ) (9,700 ) Foreign currency translation — — — — (2 ) — (2 ) Balance, December 31, 2020 225,885,682 $ 151 $ 135,849 $ (132,041 ) $ (101 ) $ (4,093 ) $ (235 ) See accompanying notes to consolidated financial statements and report of Independent Registered Public Accounting Firm. F-8 Table of Contents BIOLARGO, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands, except for per share data) DECEMBER 31, 2020 DECEMBER 31, 2019 Cash flows from operating activities Net loss $ (9,700 ) $ (11,400 ) Adjustments to reconcile net loss to net cash used in operating activities: Stock option compensation expense 2,459 1,522 Common stock issued in lieu of salary to officers and fees for services from vendors 666 710 Common stock issued for interest 184 200 Interest expense related to amortization of the discount on convertible notes payable and line of credit and deferred financing costs 1,618 3,376 Loss on extinguishment of debt 442 1,029 Loss on investment in South Korean joint venture 37 — Deferred offering expense — 53 Financing fee paid in stock (cancellation) — (42 ) Warrant reprice — 56 Amortization and depreciation expense 58 65 Bad debt expense 13 24 Changes in assets and liabilities: Accounts receivable (142 ) (121 ) Inventories (261 ) (9 ) Accounts payable and accrued expenses 122 (65 ) Clyra accounts payable and accrued expenses 327 188 Deferred revenue 14 35 Prepaid expenses and other assets 9 (21 ) Net cash used in operating activities (4,154 ) (4,422 ) Cash flows from investing activities Equipment purchases (23 ) (35 ) Investment in South Korean joint venture (100 ) — Net cash used in investing activities (123 ) (35 ) Cash flows from financing activities Proceeds from sale of common stock 2,783 125 Proceeds from convertible notes payable — 1,632 Proceeds from OID offering — 2,703 Proceeds from notes payable — 400 Proceeds from SBA loans 507 — Proceeds from warrant exercise — 560 Repayment of note payable (25 ) (915 ) Proceeds received by Clyra from inventory line of credit 260 430 Repayment by Clyra on inventory line of credit (36 ) (175 ) Proceeds from sale of stock in Clyra Medical 851 536 Net cash provided by financing activities 4,340 4,466 Net effect of foreign currency translation (2 ) (9 ) Net change in cash 61 — Cash at beginning of year 655 655 Cash at end of year $ 716 $ 655 Supplemental disclosures of cash flow information Cash paid during the year for: Interest $ 118 $ 195 Income taxes $ 2 $ 3 Non-cash investing and financing activities Fair value of warrants issued with convertible notes and letter of credit $ — $ 3,931 Conversion of convertible notes payable into common stock $ 3,526 $ 1,735 Convertible notes issued with original Issue Discount $ — $ 1,008 Deemed dividend $ 117 $ 809 Fair value of right of use and operating lease $ — $ 411 Deferred offering costs recorded as additional paid in capital $ (122 ) $ — Fair value of shares issued for In Process research and development $ 257 $ — Exchange of note payable for Clyra Shares $ — $ 440 Exchange of consulting services for Clyra common shares $ 788 $ — Fair value of Clyra shares issued as commitment fee $ 70 $ — Allocation of stock option expense within noncontrolling interest $ 3,157 $ — Clyra preferred shares dividend exchange for Clyra common stock $ — $ 270 See accompanying notes to consolidated financial statements and report of Independent Registered Public Accounting Firm F-9 Table of Contents BIOLARGO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1. Business and Organization Description of Business 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. The company also owns a minority interest in an advanced wound care subsidiary that has licensed BioLargo’s technologies. 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 year ended December 31, 2020, we had a net loss of $9,700,000, used $4,154,000 cash in operations, and at December 31, 2020, we had a working capital deficit of $2,039,000, and current assets of $1,505,000. We do not believe gross profits in 2021 will be sufficient to fund our current level of operations or pay our debts as they become due during the next 12 months, and therefore we 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, 2020, we generated revenues of $2,432,000 through our subsidiaries. (See Note 12.) Our segments did not individually or in the aggregate generate enough revenues or gross profits to fund their operations, or fund our corporate operations or other business segments. Thus, to operate throughout 2020, we continued to sell securities to raise cash (see Notes 3 and 10), and were able to borrow money through programs administered by the Small Business Administration. As of December 31, 2020, our cash and cash equivalents totaled $716,000, and our total liabilities included $1,006,000 in debt that is convertible at the option of the debtholders, $100,000 of debt that we may convert to equity at the April 2021 maturity date, $100,000 notes due on demand, $224,000 owed by our partially owned subsidiary Clyra Medical Technologies, Inc. (“Clyra”) due in June 2021, and $1,007,000 owed by Clyra that must be paid out of operational cash (see Note 4 and 10), with a maturity date that automatically extends each June. Since December 30, 2020, we have received over $2 million in proceeds from stock sales to Lincoln Park (see Note 3), and paid off $650,000 in debt (see also Note 14). We have two promissory notes due in August, 2021, (see Note 4, “ Notes payable, mature August 12 and 16, 2021 ”), each of which may be converted by the holder into equity at $0.14 per share. If the holders do not voluntarily convert the notes to equity, we intend to pay the notes with cash raised through sales of stock to Lincoln Park, although there is no guarantee that we will be able to do so. 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. Our agreement with Lincoln Park precludes us from selling shares to Lincoln Park on a daily basis if our stock price falls below $0.10 per share. If we are unable to make daily sales, it is not likely we will be able to sell enough shares to Lincoln Park to pay the debt due in August, 2021. In such event, we intend to negotiate for a delay in repayment with the holders of the notes. If we are unable to rely on our current arrangement with Lincoln Park to fund our working capital requirements, we will have to rely on other forms of financing, and there is no assurance that we will be able to do so, or if we do so, it will be on favorable terms. F-10 Table of Contents BIOLARGO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS To reduce our operational cash burdens, we regularly issue officers and vendors stock or options in lieu of cash, and anticipate that we will continue to be able to do so in the future. In the year ended December 31, 2020, our CEO and CSO accepted stock in lieu of $300,000 in unpaid salary and business expenses. Each has indicated a willingness 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. Organization We are a Delaware corporation formed in 1991. We have four wholly-owned subsidiaries: BioLargo Life Technologies, Inc., organized under the laws of the State of California in 2006; ONM Environmental, Inc. (formerly, Odor-No-More, Inc.), organized under the laws of the State of California in 2009; BioLargo Water Investment Group Inc. organized under the laws of the State of California in 2019, which wholly owns BioLargo Water, Inc., organized under the laws of Canada in 2014; and BioLargo Development Corp., organized under the laws of the State of California in 2016. Additionally, we own 94% (see Note 9) of BioLargo Engineering Science and Technologies, LLC (“BLEST”), organized under the laws of the State of Tennessee in 2017. We also own 45% of Clyra Medical Technologies, Inc. (“Clyra” or “Clyra Medical”), organized under the laws of the State of California in 2012, and consolidate their financial statements (see Note 2, subheading “Principles of Consolidation,” and Note 10). Note 2. Summary of Significant Accounting Policies Principles of Consolidation The consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries, BLEST, 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 45% 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. (See Note 10.) All intercompany accounts and transactions have been eliminated. Foreign Currency The Company has designated the functional currency of BioLargo Water, Inc., our Canadian subsidiary, to be the Canadian dollar. Therefore, 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. F-11 Table of Contents BIOLARGO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS As of December 31, 2020 and 2019, our cash balances were made up of the following (in thousands): 2020 2019 BioLargo, Inc. and subsidiaries $ 637 $ 652 Clyra Medical Technologies, Inc. 79 3 Total $ 716 $ 655 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, 2020 and 2019 was $13,000 and $24,000. Credit Concentration We have a limited number of customers that account for significant portions of our revenue. During the year ended December 31, 2020, there were two customers that accounted for more than 10% of consolidated revenues and during the year ended December 31, 2019, there were no customers that accounted for more than 10% of consolidated revenues, as follows: 2020 2019 Customer A 13 % <10 % Customer B 11 % <10 % We had two customers that each accounted for more than 10% of consolidated accounts receivable at December 31, 2020 and three customers at December 31, 2019 as follows: 2020 2019 Customer D 32 % <10 % Customer E 10 % <10 % C,ustomer F <10 % 20 % Customer G <10 % 14 % Customer H <10 % 13 % 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, 2020 and 2019 was $3,000. As of December 31, 2020, and 2019, inventories consisted of (in thousands): 2020 2019 Raw material $ 111 $ 11 Finished goods 166 5 Total $ 277 $ 16 Other Assets Other Assets consisted of security deposits of $35,000 related to our business offices. F-12 Table of Contents BIOLARGO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Equity Method of Accounting On March 20, 2020, we invested $100,000 into a South Korean entity (Odin Co. Ltd., “Odin”) pursuant to a Joint Venture agreement we had entered into with BKT Co. Ltd. and its U.S. based subsidiary, Tomorrow Water. We received a 40% non-dilutive equity interest, and BKT and Tomorrow Water each received 30% equity interests for an aggregate $150,000 investment. We account for our investment in the joint venture under the equity method of accounting. We have determined that while we have significant influence over the joint venture through our technology license and our position on the Board of Directors, we do not control the joint venture or are otherwise involved in managing the entity and we own less than a majority of the equity. Therefore, we record the asset on our consolidated balance sheet and record an increase or decrease the recorded balance by our percentage ownership of the profits or losses in the joint venture. During the nine months ended December 31, 2020, the joint venture incurred a loss and our 40% ownership share reduced our investment interest by $37,000. Impairment Long-lived and definite lived intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If the sum of the expected future undiscounted cash flows from the use of the asset and its eventual disposition is less than the carrying amount of the asset, then an impairment loss is recognized. The impairment loss is measured based on the fair value of the asset. Any resulting impairment is recorded as a reduction in the carrying value of the related asset in excess of fair value and a charge to operating results. For the years ended December 31, 2020 and 2019, management determined that there was no impairment of its long-lived assets, including its In-process Research and Development (see Note 9). Earnings (Loss) Per Share We report basic and diluted earnings (loss) per share (“EPS”) for common and common share equivalents. Basic EPS is computed by dividing reported earnings by the weighted average shares outstanding. Diluted EPS is computed by adding to the weighted average shares the dilutive effect if convertible notes payable, stock options and warrants were exercised into common stock. For the years ended December 31, 2020 and 2019, the denominator in the diluted EPS computation is the same as the denominator for basic EPS due to the Company’s net loss which creates an anti-dilutive effect of the convertible notes payable, warrants and stock options. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and revenues and expenses during the period reported. Actual results could differ from those estimates. Estimates are used when accounting for stock-based transactions, debt transactions, derivative liabilities, allowance for bad debt, asset depreciation and amortization, among others. The methods, estimates and judgments we use in applying these most critical accounting policies have a significant impact on the results of our financial statements. Share-Based Compensation Expense We recognize compensation expense for stock option awards on a straight-line basis over the applicable service period of the award, which is the vesting period. Fair value is determined on the grant date. Share-based compensation expense is based on the grant date fair value estimated using the Black-Scholes Option Pricing Model. For stock and stock options issued to consultants and other non-employees for services, the Company measures and records an expense as of the earlier of the date at which either: a commitment for performance by the non-employee has been reached or the non-employee’s performance is complete. The equity instruments are measured at the current fair value, and for stock options, the instruments are measured at fair value using the Black Scholes option model. F-13 Table of Contents BIOLARGO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following methodology and assumptions were used to calculate share-based compensation for the years ended December 31, 2020 and 2019: 2020 2019 Non Plan 2007 Plan Non Plan 2018 Plan Risk free interest rate 0.66 – 1.02% 0.64 – 1.90% 1.68 – 2.65% 1.68 – 2.65% Expected volatility 125 – 131% 126 – 133% 133 – 152% 133 – 152% Expected dividend yield — — — — Forfeiture rate — — — — Life in years 10 10 10 10 Expected price volatility is the measure by which our stock price is expected to fluctuate during the expected term of an option. Expected volatility is derived from the historical daily change in the market price of our common stock, as we believe that historical volatility is the best indicator of future volatility. The risk-free interest rate used in the Black-Scholes calculation is based on the prevailing U.S. Treasury yield as determined by the U.S. Federal Reserve. We have never paid any cash dividends on our common stock and do not anticipate paying cash dividends on our common stock in the foreseeable future. Historically, we have not had significant forfeitures of unvested stock options granted to employees and Directors. A significant number of our stock option grants are fully vested at issuance or have short vesting provisions. Therefore, we have estimated the forfeiture rate of our outstanding stock options as zero. Warrants Warrants issued with our convertible 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. 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. F-14 Table of Contents BIOLARGO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 four subsidiaries, ONM, BLEST, BioLargo Water, and Clyra. ONM, BioLargo Water, 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, and at that time revenue is recognized. 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 invoices 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 event that we generate revenues from royalties or license fees from our intellectual property, 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. F-15 Table of Contents BIOLARGO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Government Grants We have been awarded multiple research grants from the Canadian National Research Institute – Industrial Research Assistance Program (NRC-IRAP) and the National Science and Engineering Research Council of Canada (NSERC). The grants received are considered other income and are included in our consolidated statements of operations. We received our first grant in 2015 and have been awarded over 80 grants totaling over $3.7 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. Management believes there are no unrecognized tax benefits or uncertain tax positions as of December 31, 2020 and 2019. The Company assessed its earnings history, trends and estimates of future earnings and determined that the deferred tax asset could not be realized as of December 31, 2020. Accordingly, a valuation allowance was recorded against the net deferred tax asset. The Company recognizes interest and penalties on income taxes as a component of income tax expense, should such an expense be realized. Fair Value of Financial Instruments Management believes the carrying amounts of the Company’s financial instruments (excluding debt and equity instruments) as of December 31, 2020 and 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. Leases In February 2016, the FASB issued ASU Update No. 2016-02, “Leases,” which requires 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 are also required (see Note 13). We adopted this standard effective January 1, 2019 using the effective date option, as approved by the FASB in July 2018, which resulted in a $399,000 gross up of assets and liabilities; this balance may fluctuate over time as we enter into new leases, extend or terminate current leases. Upon the transition to ASC 842, the Company elected to use hindsight as a practical expedient with respect to determining the lease terms (as we considered our updated expectations of acceptance of the Westminster California facility lease renewal) and in assessing any impairment of right-of-use assets for existing leases. No impairment is expected at this time. As of December 31, 2020, the right-of-use assets and the lease liability on our balance sheet related to our operating leases totals $341,000. F-16 Table of Contents BIOLARGO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Recent Accounting Pronouncements In August 2020, the FASB issued Accounting Standards Update No. 2020-06, “Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging— Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity”. For convertible instruments, the FASB decided to reduce the number of accounting models for convertible debt instruments and convertible preferred stock. Limiting the accounting models results in fewer embedded conversion features being separately recognized from the host contract as compared with current GAAP. Convertible instruments that continue to be subject to separation models are (1) those with embedded conversion features that are not clearly and closely related to the host contract, that meet the definition of a derivative, and that do not qualify for a scope exception from derivative accounting and (2) convertible debt instruments issued with substantial premiums for which the premiums are recorded as paid-in capital. The FASB decided to amend the guidance for the derivatives scope exception for contracts in an entity’s own equity to reduce form-over-substance-based accounting conclusions. The FASB observed that the application of the derivatives scope exception guidance results in accounting for some contracts as derivatives while accounting for economically similar contracts as equity. The FASB also decided to improve and amend the related EPS guidance. The amendments in this Update are effective for public business entities that meet the definition of a Securities and Exchange Commission (SEC) filer, excluding entities eligible to be smaller reporting companies as defined by the SEC, for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Management is currently evaluating the effect on the Company’s financials if and when future convertible securities are issued. This Update does not affect the Company’s current financial statements. In January 2020, the FASB issued Accounting Standards Update No 2020-01, “Investments—Equity Securities (Topic 321), Investments—Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815): Clarifying the Interactions between Topic 321, Topic 323, and Topic 815”. This Update relates to the Company’s equity method of accounting and the potential interactions between the measurement alternative in Topic 321 and the equity method of accounting in Topic 323 and that diverse views have emerged about the application of the measurement alternative and the equity method of accounting since the adoption of Update 2016-01. The measurement alternative is the ability to measure certain equity securities without a readily determinable fair value at cost, minus impairment, if any. Paragraph 321- 10-35-2, as amended, states that if an entity identifies observable price changes in orderly transactions for the identical or a similar investment of the same issuer, it should measure the equity security at fair value as of the date that the observable transaction occurred (hereinafter referred to as the measurement alternative). The amendments clarify that an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting for the purposes of applying the measurement alternative in accordance with Topic 321 immediately before applying or upon discontinuing the equity method. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years. At this time management does not believe that adoption of this Update will have an effect on the Company’s financial statements. Note 3. Sale of Stock for Cash Lincoln Park Financing On August 25, 2017, we entered into a stock purchase agreement (“2017 LPC Purchase Agreement”) with Lincoln Park Capital Fund, LLC (“Lincoln Park”), pursuant to which Lincoln Park had 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. F-17 Table of Contents BIOLARGO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS On March 30, 2020, we entered into a stock purchase agreement (the “2020 LPC Purchase Agreement”) with Lincoln Park, pursuant to which Lincoln Park agreed to purchase from us at our request up to an aggregate of $10,250,000 of our common stock (subject to certain limitations) from time to time over a period of three years. The agreement allows us, at our sole discretion, to direct Lincoln Park to purchase shares of our common stock, subject to limitations in both volume and dollar amount. The purchase price of the shares that may be sold to Lincoln Park under the agreement is the lower of (i) the lowest sale price on the date of purchase, or (ii) the average of the three lowest closing prices in the prior 12 business days. There are no restrictions on future financings, rights of first refusal, participation rights, penalties or liquidated damages other than a prohibition on entering into a “Variable Rate Transaction,” as defined in the agreement. This agreement replaced the August 2017 agreement with Lincoln Park. Concurrently with the 2020 LPC Purchase Agreement, we entered into a Registration Rights Agreement, pursuant to which we filed a registration statement on Form S-1 with the SEC on April 10, 2020. This registration statement was declared effective on April 21, 2020, and as of April 29, 2020, we commenced regular purchases under the agreement. Pursuant to the 2020 LPC Purchase Agreement, we issued 2,928,571 shares to Lincoln Park as a commitment fee, valued at $527,000 and recorded as additional paid in capital on our consolidated balance sheet. During the years ended December 31, 2020 and 2019, we sold 13,388,642 and 556,144 shares to Lincoln Park, and received $2,058,000 and $125,000 in gross and net proceeds. Subsequent to December 31, 2020, we continue to draw on the 2020 LPC Purchase Agreement for working capital (see Note 14). 2020 Unit Offering Pursuant to an offering commenced in May 2020, we sold 2,374,335 of our common stock and received $367,000 in gross and net proceeds from six accredited investors. In addition to the share, we issued each shareholder a six-month and a five-year warrant to purchase additional share (see Note 6, “ Warrants Issued in 2020 Unit Offering ”). BKT 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. F-18 Table of Contents BIOLARGO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 4. Debt Obligations The following table summarizes our debt obligations outstanding as of December 31, 2020 and 2019 (in thousands). The table does not include debt obligations of our partially owned subsidiary Clyra Medical (see Note 10, “ Debt Obligations of Clyra Medical ”). December 31, 2020 2019 Current portion of debt: Note payable, matures on demand 60 days’ notice (or March 8, 2023) $ 50 $ 50 Line of credit, matures on 30-day demand 50 50 Total notes payable and line of credit $ 100 $ 100 Convertible notes payable: Convertible note, matured April 7, 2020 — 270 Convertible note, matured June 20, 2020 (1) — 25 Convertible twelve-month OID notes, mature beginning June 2020 (1) — 3,112 Convertible note payable, matures April 20, 2021 (1) 100 — Convertible note payable, matures August 9, 2021 600 — Convertible notes, mature August 12 and 16, 2021 (2) 406 550 Total convertible notes payable 1,106 3,957 Total current liabilities $ 1,206 $ 4,057 Long-term debt: Convertible note payable, matures August 9, 2021 $ — $ 600 SBA Paycheck Protection Program loans, mature April 2022 357 — SBA EIDL Loan, matures July 2050 150 — Convertible notes payable, mature April 20, 2021 (1) — 100 Total long-term liabilities $ 507 $ 700 Total $ 1,713 $ 4,757 (1) These notes are convertible at our option at maturity. (2) These notes are convertible by the noteholders, and not convertible by the Company. For the years ended December 31, 2020 and 2019, we recorded $1,923,000 and $3,996,000 of interest expense related to the amortization of discounts on convertible notes payable and coupon interest from our convertible notes and lines of credit. Note payable, matures on demand 60 day ’ s notice (or March 8, 2023) On March 8, 2018, we received $50,000 and entered into a note payable. The note is due on upon demand from the noteholder, with sixty days’ notice. In the absence of the demand, the maturity date is March 8, 2023. (See Note 14, Subsequent Events.)** if this is the Kelber note- the demand was waived in Q1 for additional consideration- check that Lines of credit, due on demand On March 1, 2018, we received $390,000, and on September 1, 2018, we received $40,000, pursuant to a line of credit accruing interest at a rate of 18% per annum, for which we have pledged our inventory and accounts receivable as collateral. Interest is paid quarterly; the holder may choose to receive interest payments in (i) cash, (ii) our common stock, calculated based on the 20-day average closing price, or (iii) options to purchase our common stock, priced at the 20-day average closing price, the number of shares doubled, and expiring 10 years from the date of grant. The holders of the line of credit has the right to call due the outstanding principal amount on 30-days’ notice at any time after September 1, 2019. During July and August 2019, line of credit holders in the principal amount of $205,000, agreed to satisfy the line of credit through the issuance of an amended and restated convertible promissory note totaling $256,000 due in 12 months, August 2020, including a 25% original issue discount. They also received a warrant to purchase 1,130,515 shares of our common stock (see Note 6). The amended and restated note is convertible by the holder at $0.17 per share. The interest rate was reduced from 18% to 5% per annum. F-19 Table of Contents BIOLARGO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The total of the fair value of the warrant and the fair value of the new note and its beneficial conversion feature exceeded the carrying value of the old note by $315,000, resulting in a loss on debt extinguishment recorded on our statement of operations. During the three months ended December 31, 2019, $175,000 was paid to line of credit holder. As of December 31, 2020, and 2019, the line of credit outstanding balance totaled $50,000. The line of credit was paid subsequent to year end (see Note 14.) Convertible Note, matured April 7, 2020 (Vista Capital) On January 7, 2019, Vista Capital Investments, LLC (“Vista Capital”) invested $300,000 and we issued a convertible promissory note (the “Vista 2019 Note”) in the principal amount of $330,000, maturing nine months from the date of issuance (October 7, 2019). The Vista 2019 Note earned a one-time interest charge of 12%, recorded as a discount on convertible notes and will be amortized over the term of the note. The Vista 2019 Note allowed 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 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 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 was amortized over the term of the note as interest expense. On August 13, 2019, we and Vista Capital amended the note extending the maturity date to April 7, 2020. On November 22, 2019 and December 17, 2019, Vista Capital elected to convert $50,000, totaling $100,000, into 690,530 shares of common stock. As of December 31, 2019, the outstanding balance on this note totaled $270,000. During the three months ended March 31, 2020, Vista Capital elected to convert the remaining balance of $270,000 of the outstanding principal and interest due on the note, and we issued 2,417,059 shares of our common stock. Convertible Notes, mature June 20, 2020 (Summer 2017 Unit Offering) We received a total of $604,000 of investments in our Summer 2017 Unit Offering and issued convertible promissory notes at $0.42 a share. As of December 31, 2019, one note in the principal amount of $25,000 remained outstanding on this offering. On June 20, 2020, we elected to convert $25,000 of the remaining outstanding principal on a convertible note issued as part of our Summer 2017 offering and issued 83,334 shares of our common stock. Convertible Twelve-month OID notes From June 7, 2019 through September 30, 2019, we received $2,235,000 and issued convertible promissory notes (each, a “Twelve-Month OID Note”) in the aggregate principal amount of $2,794,000, with a 25% original issue discount, to 34 accredited investors. The original issuance discount totaled $559,000 and is recorded as a discount on convertible notes payable on our balance sheet. The intrinsic value of the beneficial conversion features resulted in an aggregate fair value of $2,235,000, and is recorded as a discount on convertible notes on our balance sheet. The discounts were amortized and recorded to interest expense over the term of the notes. These notes each mature twelve months from the date of issuance. F-20 Table of Contents BIOLARGO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS During the three months ended September 30, 2019, in exchange for $305,000 of convertible note payables that were coming due, we issued an additional $381,000 in Twelve-Month OID Notes, with a 25% original issue discount. The original issue discount totaled $76,000 and is recorded as a discount on convertible notes payable on our balance sheet. The intrinsic value of the beneficial conversion features resulted in an aggregate fair value of $381,000 and is recorded as debt extinguishment expense on our statement of operations. The discount will be amortized and recorded to interest expense over the term of the notes. These notes mature twelve months from the date of issuance. Each Twelve-month OID Note was convertible by the investor at any time at $0.17 per share. The notes earned interest at a rate of five percent (5%) per annum, due at maturity. At the maturity of each note, the Company exercised its right to redeem the notes through the issuance of common stock at a conversion price equal to the lower of the “conversion price” (initially $0.17, as may be adjusted), and 70% of the lowest daily volume weighted average price of the Company’s common stock during the 25 trading days preceding the conversion date. During 2020, $3,112,000 of the remaining outstanding principal of Twelve-Month OID Notes was converted, and we issued 30,208,453 shares of our common stock. Of that amount, 1,415,221 shares were issued as payment for interest due on the notes. Convertible Note, matures April 20, 2021 (Spring 2018 Unit Offering) In March 2018 we received one investment of $100,000 for a promissory note convertible at $0.30 per share. This investment was received from an entity owned/controlled by a member of our board of directors. In light of the decreasing price of our common stock, in September 2018, we issued a pricing supplement reducing the unit price to $0.25 per share, reducing the unit price of the prior investor to $0.25 per share. As of December 31, 2020 and 2019, $100,000 was outstanding. We intend to convert this note to equity at its April 20, 2021 maturity. Convertible note, matures August 9, 2021 On August 9, 2019, we received $600,000 from one accredited investor and issued a promissory note in the principal amount of $600,000, maturing in two years, accruing interest at 15% to be paid in cash monthly, and which converts to common stock at the holder’s option at $0.30 per share. This investor also received a warrant to purchase 1,200,000 shares of our common stock at $0.30 per share, expiring five years from the grant date (see Note 6). Subsequent to December 31, 2020, we paid the outstanding principal of this note in full (see Note 14). Convertible notes, mature August 12 and 16, 2021 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% to two investors (Vernal Bay Investments, LLC (“Vernal”) and Chappy Bean, LLC (“Chappy Bean”)). We and the noteholders agreed to extend the maturity dates of the notes multiple times in 2019. In August, 2019, we made a partial payment to one of the noteholders, and agreed to refinance the remaining $440,000 principal and interest through the issuance of amended and restated convertible promissory notes due in 12 months, which included a 25% original issue discount, and is convertible by the holders at $0.17 per share. The interest rate was reduced from 18% to 5% per annum. The terms of the investment are similar to that offered to the Twelve-month OID note investors (see section above titled “Convertible Twelve-month OID Notes”), and thus we issued warrants in conjunction with the amended and restated notes (see Note 6). Including the OID, the principal amount due on the notes is $550,000. The total of the fair value of the warrants and the fair value of the new notes and their beneficial conversion features exceeded the carrying value of the old notes by $422,000, resulting in a loss on debt extinguishment recorded on our statement of operations. F-21 Table of Contents BIOLARGO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS On August 10, 2020, we entered into an agreement to extend the maturity date of the Vernal note to August 12, 2021. As consideration for the extension of the maturity date, we agreed to lower the conversion price from $0.17 to $0.14, extend the expiration date from September 18, 2023 to September 18, 2025, of a warrant issued to Vernal to purchase 1,734,375 shares of common stock, and extend the expiration date from August 12, 2024 to August 12, 2025 of a warrant issued to Vernal to purchase 2,095,588 shares of common stock. The fair value of the reduced conversion price and extended warrant expirations dates resulted in a fair value totaling $228,000, recorded as a loss on extinguishment on our statement of operations. Vernal subsequently converted $119,000 of principal into 848,214 shares of common stock and $24,000 of accrued interest into 169,643 shares of common stock. The outstanding balance of this note as of December 31, 2020 was $356,000. On August 10, 2020, we and Chappy Bean entered into an agreement in which we agreed to pay $25,000 in cash, and the holder agreed to extend the maturity date of the note to August 16, 2021. The outstanding balance of this note as of December 31, 2020 was $50,000. SBA Program Loans In April 2020, our subsidiaries ONM, BLEST and Clyra received $218,000, $96,000 and $43,000, respectively, received loans pursuant to the U.S. Small Business Administration Paycheck Protection Program. The loans mature in two years and incur interest at 1%. Management believes that it has fully complied with the terms of forgiveness as set forth by the Small Business Administration, and subsequent to December 31, 2020, filed forgiveness applications. Our subsidiary ONM received an Economic Injury Disaster loan from the U.S. Small Business Administration of $150,000. The term of the loan is 30 years and has a 3.75% interest rate. Monthly payments of $800 begin July 2021. Note 5. Share-Based Compensation Restricted Stock Units On May 28, 2019, our Compensation Committee, in conjunction with the approval of a new employment agreement for our Vice President of Operations and President of our subsidiary ONM, granted Joseph L. Provenzano a restricted stock unit of 500,000 shares of common stock, subject to the execution of a “lock-up agreement” whereby the shares remain unvested unless and until the earlier of (i) a sale of the Company, (ii) the successful commercialization of the Company’s products or technologies as demonstrated by its receipt of at least $3,000,000 in cash, or the recognition of $3,000,000 in revenue, over a 12-month period from the sale of products and/or the license of technology, and (iii) the Company’s breach of the employment agreement resulting in his termination. Issuance of Common Stock in exchange for payment of payables Payment of Officer Salaries During the year ended December 31, 2020, we were unable to pay our officer salaries in full, as such, our officers agreed to convert $299,000 of accrued and unpaid salary into 2,017,928 shares of our common stock. The unpaid salary is converted on the last day of each quarter as follows: December 31, 2020, we issued 652,100 shares of our common stock at $0.12 per share; on September 30, 2020, we issued 349,670 shares of our common stock at $0.15; on June 30, 2020, we issued 367,403 shares of our common stock at $0.16; on March 31, 2020, we issued 648,755 shares of our common stock at $0.17 per share. During the year ended December 31, 2019, we were unable to pay our officer salaries in full, as such, our officers agreed to convert $210,000 of accrued and unpaid salary into 1,080,951 shares of our common stock. The unpaid salary is converted on the last day of each quarter as follows: September 30, 2019, we issued 35,080 shares of our common stock at $0.31 per share; June 28, 2019, we issued 465,875 shares of our common stock at $0.23 per share; March 29, 2019, we issued 579,996 shares of our common stock at $0.16 per share. F-22 Table of Contents BIOLARGO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Shares issued to Officers are unvested at the date of grant and subject to a lock-up agreement restricting vesting and sale until the earlier of (i) the consummation of a sale (in a single transaction or in a series of related transactions) of BioLargo by means of a sale of (a) a majority of the then outstanding common stock of BioLargo (whether by merger, consolidation, sale or transfer of common stock, reorganization, recapitalization or otherwise) or (b) all or substantially all of the assets of BioLargo; and (ii) the successful commercialization of BioLargo’s products or technologies as demonstrated by its receipt of at least $3,000,000 in cash, or the recognition of $3,000,000 in revenue, over a 12-month period from the sale of products and/or the license of technology; and (iii) the Company’s breach of the employment agreement between the Company and Officer and resulting in Officer’s termination. Payment of Consultant Fees During 2020, we were unable to pay our consultant fees in full, as such, agreed to convert $366,000 accrued and unpaid obligations into 2,440,803 shares of our common stock. The unpaid obligation is converted on the last day of each quarter as follows: December 31, 2020, we issued 373,438 shares of our common stock at $0.12 per share; September 30, 2020, we issued 270,000 shares of our common stock at $0.15 per share; June 30, 2020, we issued 1,406,630 shares of our common stock at $0.16 per share; March 31, 2020, we issued 390,735 shares of our common stock at $0.17 per share. During 2019, we were unable to pay our consultant fees in full, as such, agreed to convert $500,000 of accrued and unpaid obligations into 2,237,539 shares of our common stock. The unpaid obligation is converted on the last day of each quarter as follows: December 31, 2019, we issued 528,001 shares of our common stock at $0.23 per share; September 30, 2019, we issued 594,118 shares of our common stock at $0.26 per share; June 30, 2019, we issued 515,809 shares of our common stock at an average of $0.21 per share; March 29, 2019, we issued 649,545 shares of our common stock at $0.17 per share. All of these offerings and sales were made in reliance on the exemption from registration contained in Section 4(2) of the Securities Exchange Act and/or Regulation D promulgated thereunder as not involving a public offering of securities. Payment of Interest During 2020, pursuant to terms included in our debt agreements, we converted $184,000 accrued interest into 1,728,331 shares of our common stock as follows: September 30, 2020, we issued 1,412,052 shares of our common stock at $0.11 per share; June 30, 2020, we issued 297,001 shares of our common stock at $0.16 per share; March 31, 2020, we issued 19,278 shares of our common stock at $0.17 per share. During 2019, pursuant to terms included in our debt agreements, we converted $200,000 accrued interest into 927,318 shares of our common stock as follows: December 31, 2019 we issued 292,380 shares of our common stock at $0.18 per share, we issued 395,944 shares of our common stock at $0.27 per share; during the three months ended June 30, 2019, we issued 87,478 shares of our common stock, at an average of $0.17 per share; during the three months ended March 31, 2019, we issued 139,362 shares of our common stock at an average of $0.18 per share. All of these offerings and sales were made in reliance on the exemption from registration contained in Section 4(2) of the Securities Exchange Act and/or Regulation D promulgated thereunder as not involving a public offering of securities. Stock Option Expense During the years ended December 31, 2020 and 2019, we recorded an aggregate $1,821,000 and $1,552,000, in selling general and administrative expense related to the issuance of stock options. We issued options through our 2018 Equity Incentive Plan, our now expired 2007 Equity Incentive Plan, and outside of these plans. See Note 8 for information on stock option expense for options issued by subsidiary Clyra Medical. F-23 Table of Contents BIOLARGO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2018 Equity Incentive Plan On June 22, 2018, our stockholders adopted the BioLargo 2018 Equity Incentive Plan (“2018 Plan”) as a means of providing our directors, key employees and consultants additional incentive to provide services. Both stock options and stock grants may be made under this plan for a period of 10 years. It is set to expire on its terms on June 22, 2028. Our Board of Director’s Compensation Committee administers this plan. As plan administrator, the Compensation Committee has sole discretion to set the price of the options. The plan authorizes the following types of awards: (i) incentive and non-qualified stock options, (ii) restricted stock awards, (iii) stock bonus awards, (iv) stock appreciation rights, (v) restricted stock units, and (vi) performance awards. The total number of shares reserved and available for awards pursuant to this Plan as of the date of adoption of this 2018 Plan by the Board is 40 million shares. The number of shares available to be issued under the 2018 Plan increases automatically each January 1 st by the lesser of (a) 2 million shares, or (b) such number of shares determined by our Board. Activity for our stock options under the 2018 Plan during the year ended December 31, 2019, and the year ended December 31, 2020, is as follows: Weighted Average Aggregate Options Exercise Price per intrinsic Outstanding Price per share share Value (1) Balance, December 31, 2018 1,318,517 $0.22 – 0.43 $ 0.30 Granted 7,895,839 $0.16 – 0.40 $ 0.25 Balance, December 31, 2019 9,214,356 $0.16 – 0.43 $ 0.25 Granted 11,197,687 $0.12 – 0.40 $ 0.15 Expired (1,546,518 ) Balance, December 31, 2020 18,865,525 $0.16 – 0.40 $ 0.19 Non-vested (6,418,622 ) $0.17 – 0.45 $ 0.19 Vested, December 31, 2020 12,446,903 $0.16 – 0.45 $ 0.18 $ — (1) – Aggregate intrinsic value based on closing common stock price of $0.12 at December 31, 2020. The options granted under the 2018 Plan to purchase 11,197,687 shares during 2020 were issued to officers, board of directors, employees and consultants: (i) we issued options to purchase 4,880,945 shares of our common stock at an exercise price of $0.14 per share to employees and consultants as a bonus during the COVID-19 pandemic. These options vest quarterly over one year and the fair value totaled $616,000; (ii) we issued options to purchase 517,500 shares of our common stock at an exercise price range of $0.14 – $0.21 per share to our CFO, with 492,500 shares having vested during 2020, and the remaining shares to vest 25,000 in January 31, 2021, the fair value of the options issued to our CFO totals $100,000; (iii) we issued options to purchase 1,746,434 shares of our common stock at an exercise price on the respective grant date of $0.17 ,$0.16, $0.15 and $0.12 per share to members of our board of directors for services performed, all options vested at issuance and the fair value of these options totaled $250,000; (iv) we issued options to purchase 2,019,556 shares of our common stock to employees as part of an employee retention plan at an exercise price on the respective date of $0.17, $0.16, $0.15 and $0.12 per share; the fair value of employee retention plan options totaled $277,000 and vest quarterly over four years as long as they are retained as employees; (v) we issued options to purchase 531,298 shares of our common stock to consultants in lieu of cash for unpaid obligations totaling $74,000; and (vi) we issued options to purchase 1,501,954 shares of common stock at an exercise price ranging between $0.14 – $0.17 per share to employees to convert accrued and unpaid obligations and for previously issued options that expire. All of these options vested at issuance and the fair value totaled $198,000. All stock option expense is recorded on our consolidated statement of operations as selling, general and administrative expense. The options to purchase 7,895,839 shares granted during the year ended December 31, 2019 are comprised of options issued to employees, consultants, officers, and directors. We issued options to purchase 6,614,381 shares of our common stock employees as part of their employment agreement and as part of an employee retention program on their respective grant dates ranging between $0.16 – $0.40 per share. The vesting terms for employment agreements generally called for a portion of option to vest immediately and the remaining portion to vest over four years. Certain option issuances to our officers and employees have vesting terms that are based on metrics over a period of time, these are described in more detail below. We issued options to purchase 1,281,458 shares of our common stock to members of our board of directors for services performed, in lieu of cash, at an exercise price on the respective grant dates ranging between $0.16 – $0.32 per share. F-24 Table of Contents BIOLARGO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 December 31, 2018, 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 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. See also Note 14, Subsequent Events. Vice President of Operations Contract Extension On May 28, 2019, the Compensation Committee of the Board of Directors approved the terms of an employment agreement for Joseph L. Provenzano to continue his work as Vice President of Operations and President of our subsidiary ONM, and granted to Mr. Provenzano an incentive stock option to purchase 1,000,000 shares of the Company’s common stock pursuant to the terms of our 2018 Plan. The exercise price and fair value of the option is equal to the closing price of our common stock on the May 28, 2019 grant date, at $0.17 per share. The option will vest annually in 200,000 increments over five years. The option may be exercised for up to ten years following the grant date. Notwithstanding the foregoing, any portion of the option which has not yet vested shall be immediately vested in the event of, and prior to, a change of control, as defined in Mr. Provenzano’s employment agreement. Vice President of Sales On May 28, 2019, the Compensation Committee of the Board of Directors approved the terms of an employment agreement for our Vice President of Sales and issued him options to purchase an aggregate 1,200,000 shares of the Company’s common stock pursuant to the terms of our 2018 Plan. The exercise price of the first option to purchase 200,000 shares is equal to the closing price of our common stock on the May 28 grant date, at $0.17 per share. One-third of the option vests upon grant, the next third at the first anniversary of the grant, and the final third upon the second anniversary of the grant. The remaining options to purchase an aggregate 1,000,000 shares are unvested at grant date, and contingent upon certain performance metrics based on sales of our ONM subsidiary, none of which have been met. As such, no additional fair value was recorded and we are unable to estimate at this time if these metrics will be met. Upon execution of his employment agreement on July 5, 2019, an additional option to purchase 300,000 shares was granted, with an exercise price as of July 5 ($0.25), vesting 100,000 shares on the first, second and third anniversary of the agreement. F-25 Table of Contents BIOLARGO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Director of Business Development for ONM On July 23, 2019, the Compensation Committee of the Board of Directors approved the terms of an employment agreement for ONM’s Director of Business Development, who also serves as BioLargo’s Director of Corporate Development, and issued him options to purchase an aggregate 1,000,000 shares of the Company’s common stock at $0.35 per share pursuant to the terms of our 2018 Plan. The first option allows the purchase of 400,000 shares and vests 100,000, 90 days after issuance, 100,000 shares on the first anniversary, and 200,000 shares on the second anniversary of the employment agreement. The remaining options to purchase an aggregate 600,000 shares are unvested at grant date, and contingent upon certain performance metrics based on sales of our ONM subsidiary, none of which have been met. As such, no additional fair value was recorded and we are unable to estimate at this time if these metrics will be met. This individual resigned in August, 2020, and unvested options ceased vesting after that date. 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 years ended December 31, 2019 and 2020 is as follows: Weighted Average Aggregate Options Exercise Price per intrinsic Outstanding price per share share Value (1) Balance, December 31, 2018 9,691,586 0.22 – 0.94 0.43 Expired (922,135 ) 0.45 – 0.55 0.49 Balance, December 31, 2019 8,769,451 $0.22 – 0.94 $ 0.43 Expired (3,080,088 ) 0.22 – 0.58 0.38 Balance, December 31, 2020 5,689,363 $0.23 – 0.94 $ 0.44 $ — (1) – Aggregate intrinsic value based on closing common stock price of $0.12 at December 31, 2020. Non-Plan Options issued During the year ended December 31, 2020, we issued options to purchase 1,145,476 shares of our common stock at exercise prices ranging between $0.12 – $0.21 per share to vendors for fees for services. The fair value of the options issued totaled $167,000 and is recorded in our selling, general and administrative expense. During the year ended December 31, 2019, we issued options to purchase 1,226,586 shares of our common stock at exercise prices ranging between $0.16 – $0.32 per share to vendors for fees for services. The fair value of the options issued totaled $260,000 and is recorded in our selling, general and administrative expense. F-26 Table of Contents BIOLARGO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Activity of our non-plan stock options issued for the years ended December 31, 2020 and 2019 is as follows: Weighted Non-plan average Aggregate Options Exercise price per intrinsic outstanding price per share share value (1) Balance, December 31, 2018 19,319,496 0.23 – 1.00 0.43 Granted 1,226,586 0.16 – 0.32 0.21 Expired (941,975 ) 0.45 – 0.55 0.52 Balance, December 31, 2019 19,604,107 $0.16 – 1.00 $ 0.43 Granted 1,145,476 0.12 – 0.21 0.15 Balance, December 31, 2020 20,749,583 $0.12 – 1.00 $ 0.41 Unvested (2,369,708 ) 0.45 0.45 Vested and outstanding, December 31, 2020 18,379,875 $0.23 – 1.00 $ 0.41 $ — (1) – Aggregate intrinsic value based on closing common stock price of $0.12 at December 31, 2020. Note 6. Warrants We have certain warrants outstanding to purchase our common stock, at various prices, as described in the following table: Weighted average Aggregate Warrants Exercise price per intrinsic outstanding price per share share value (1) Balance, December 31, 2018 26,872,430 $0.25 – 1.00 $ 0.43 Granted 24,490,687 0.25 – 0.48 0.29 Exercised (7,544,456 ) 0.30 0.30 Expired (587,500 ) 0.40 0.40 Balance, December 31, 2019 43,231,161 $0.25 – 1.00 $ 0.35 Granted 5,594,314 0.13 – 0.27 0.20 Expired (15,844,486 ) 0.18 – 0.70 0.43 Balance, December 31, 2020 32,980,989 $0.13 – 1.00 $ 0.29 $ — (1) – Aggregate intrinsic value based on closing common stock price of $0.12 at December 31, 2020. Warrants issued in 2020 Unit Offering During the year ended December 31, 2020, pursuant to our 2020 Unit Offering (see Note 3), we issued six-month stock purchase warrants to purchase an aggregate 2,318,194 shares of our common stock at prices from $0.18 - $0.22 per share, and five-year stock purchase warrants to purchase an aggregate 2,318,194 shares of our common stock at prices from $0.23 - $0.27 per share. Warrants Issued to One-Year Noteholders In conjunction with two investments of one-year convertible notes (see Note 4, “ Convertible notes, mature August 12 and 16, 2021 ”) we issued warrants in July 2017 to purchase an aggregate 400,000 shares to two investors at an exercise price of $0.65 per share. 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 year ended December 31, 2020, in conjunction with extensions of the maturity dates of these notes, we adjusted downward the warrant exercise price to $0.13, resulting in an increase of 957,926 warrants available for exercise. The increase in warrants resulted in a fair value totaling $117,000, recorded as a deemed dividend in our consolidated statement of stockholders’ equity. F-27 Table of Contents BIOLARGO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Warrants issued as part of debt extension and extinguishment On March 5, 2019, we executed amendments extending the maturity dates of notes issued to Vernal Bay and Chappy Bean (see Note 4, subsection titled “ Notes payable, mature August 12 and 16, 2020 (previously due September 6, 2019) ” ). As consideration for this extension, we agreed to reduce the exercise price from $0.25 to $0.20 per share, and increase the number of shares purchasable by the warrants from 1,987,500 to 2,484,375. In doing so, the maximum investment amount under each warrant remained the same. In conjunction with the refinance of the Vernal and Chappy Bean notes in August 2019, Vernal received a warrant to purchase 2,095,588 shares of our common stock, expiring in five years, and which may be exercised at $0.25 per share, and Chappy Bean received a warrant to purchase 330,882 shares of our common stock under the same terms. Warrants issued as part of line of credit extinguishment In July and August 2019, we issued warrants to purchase an aggregate 1,130,515 shares of our common stock to three line of credit holders who had agreed to convert their line of credit into an amended and restated note plus a warrant (see Note 4, “Line of credit, due on demand”). The warrant expires in five years and may be exercised at $0.25 per share. Warrants issued as part of 2018 OID extinguishment On September 12 and September 16, 2019, the holders of a convertible note in the aggregate principal amount of $100,000, agreed to satisfy the note through the issuance of an amended and restated convertible promissory note due in 12 months, September 12 and September 16, 2020, including a 25% original issue discount (see Note 4) and a warrant to purchase 551,471 shares of our common stock. The warrant expires in five years and may be exercised at $0.25 per share. Warrants issued as consent for variable rate debt waiver 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. The fair value of these warrants totaled $54,000 and was recorded as a discount on note payable on our consolidated balance sheet and will amortize to interest expense in 2019 over the term of the notes. (See Note 4.) Warrants issued concurrently with the Nine-month OID notes In conjunction with the issuance of nine-month OID notes, we issued each investor a warrant to purchase common stock for $0.25 per share, expiring 5 years from the date of issuance. During the three months ended March 31, 2019, we issued warrants to purchase 637,500 shares of our common stock to the three investors. The fair value of these warrants totaled $89,000 and was recorded as a discount on note payable on our consolidated balance sheet and will amortize to interest expense over the term of the notes. On June 7, 2019, we reduced the conversion prices of the notes from $0.25 to $0.17, and this resulted in an increase in the number of warrants purchasable by the investors by 300,000 to 937,500, which resulted our recording the fair value of $84,000, which is recorded as a deemed dividend. Warrants Issued concurrently with Twelve-month OID notes During the year ended December 31, 2019, we issued warrants to purchase 12,325,370 shares of our common stock to purchasers of our Twelve-month OID Notes (see Note 4). The warrants allow the holder to purchase common stock for $0.25 per share, expiring 5 years from the date of issuance. The number of shares purchasable under each warrant was equal to the 75% of the principal balance of the investor’s note, divided by $0.17 (thus, for example, a $300,000 investment would yield a note with principal balance of $375,000, and a warrant allowing for the purchase of up to 1,654,412 shares). The fair value and BCF of these warrants totaled $2,240,000 and was recorded as a discount on note payable on our consolidated balance sheet and will amortize to interest expense over the term of the notes. F-28 Table of Contents BIOLARGO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Warrants Issued concurrently with the Convertible Note due August 9, 2021 In conjunction with an August 2019 investment and the issuance of a convertible note due August 9, 2021 (see Note 4), we issued an investor a warrant to purchase 1,200,000 shares of our common stock for $0.30 per share, expiring 5 years from the date of issuance. The fair value and BCF of these warrants totaled $198,000 and was recorded as a discount on note payable on our consolidated balance sheet and will amortize to interest expense over the term of the note. Exercise of Warrants During the year ended December 31, 2019, we issued 7,544,456 shares of our common stock from the exercise of outstanding stock purchase warrants and in exchange we received proceeds totaling $560,000. On June 24, 2019, Vista Capital exercised its stock purchase warrant issued September 12, 2018, electing to utilize the cashless exercise feature in the warrant. The cashless exercise formula required the issuance of 2,877,790 shares of common stock. The increase of 2,520,780 available shares under the warrant was the result of the downward adjustment of the exercise price (pursuant to price protection features in the warrant), resulting in a fair value totaling $355,000, which is 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: 2020 2019 Risk free interest rate 0.10 – 0.23% 1.42 – 2.13% Expected volatility 100 – 112% 101 – 110% Expected dividend yield — — Forfeiture rate — — Expected life in years 2 – 5 1 – 5 The risk-free interest rate is based on U.S. Treasury yields in effect at the time of grant. Expected volatilities are based on historical volatility of our common stock. The expected life in years is based on the contract term of the warrant. Note 7. Accounts Payable and Accrued Expenses Accounts payable and accrued expenses included the following (in thousands): As of December 31, 2020 (in thousands): Category BioLargo ONM BLEST Water Elim Totals Accounts payable $ 125 $ 73 $ 56 $ 103 $ (42 ) $ 315 Accrued payroll 23 42 91 — — 156 Accrued interest 42 — — — — 42 Total $ 513 F-29 Table of Contents BIOLARGO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS As of December 31, 2019 (in thousands): Category BioLargo ONM BLEST Water Elim Totals Accounts payable $ 102 $ 35 $ 46 $ 43 $ (31 ) $ 195 Accrued payroll 11 34 82 — — 128 Accrued interest 71 — — — — 71 Total $ 394 See Note 10, “ Accounts Payable and Accrued Expenses ”, for the accounts payable and accrued expenses of Clyra Medical. Note 8. Provision for Income Taxes Given our historical losses from operations, income taxes have been limited to the minimum franchise tax assessed by the State of California. Since 2016, we have not consolidated for tax purposes, our subsidiary, Cyyra Medical, as our ownership interest was less than 80%. Our subsidiary BLEST is a Tennessee limited liability company and as such, is not consolidated in our corporate tax return. As a pass-through entity, it does not pay federal taxes. However, the state of Tennessee charges franchise and excise taxes for limited liability companies, and thus BLEST will incur a nominal franchise tax and will not pay an excise tax unless and until it is profitable. At December 31, 2020, we had federal and California tax net operating loss carry-forwards (“NOLs”) of approximately $104,000,000 and $47,000,000 respectively. Due to changes in our ownership through common stock issuances throughout the year, the utilization of NOLs may be subject to annual limitations and discounts under provisions of the Internal Revenue Code. We have not conducted a complete analysis to determine the extent of these limitations or any future limitation. Such limitations could result in the permanent loss of a significant portion of the NOLs. Under the Tax Cuts and Jobs Act (“TCJA”) signed into law on December 22, 2018, post‑2018 NOLs may be carried forward indefinitely, and pre‑2018 NOLs have a 20-year limitation on carryforwards; however, the NOLs are limited to the lesser of (1) the aggregate of the NOL carryovers to such year, plus the NOL carry-backs to such year, or (2) 80% of taxable income (determined without regard to the deduction) (Internal Revenue Code Sec. 172(a)). Generally, NOLs can no longer be carried back but are allowed to be carried forward indefinitely (Sec. 172(b)(1)(A), which applies to 2018 and later NOLs only). Nevertheless, for California purposes, the additional taxable income limitations on NOL carryforwards as well as the indefinite time to use the NOLs have not been adopted. Therefore, for California, NOLs expire after 20 years. As such, ours will begin to expire in for the tax period ending December 31, 2021. On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law, under which federal NOLs could be carried back for five years against taxable income. Since BioLargo does not have any taxable income, this provision of the CARES Act will not affect any tax position. Realization of our deferred tax assets, which relate to operating loss carryforwards and timing differences, is dependent on future earnings. The timing and amount of future earnings are uncertain and therefore we have established a 100% valuation allowance. Note 9. In-process Research and Development On September 26, 2018, BioLargo and Clyra Medical entered into a transaction (the “Scion Transaction”) whereby BioLargo would acquire, and then license back to Clyra, the intangible assets of Scion Solutions, LLC (“Scion”), and in particular its in-process research and development of the “SkinDisc,” a method for treating advanced hard-to-treat wounds including diabetic ulcers. In addition to a pending patent application, the assets included the technical know-how and data developed by the Scion team. F-30 Table of Contents BIOLARGO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The consideration provided to Scion is subject to an escrow agreement dated September 26, 2018 (“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 owed by Clyra Medical 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) remained 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. Immediately following Clyra Medical’s purchase of Scion’s intangible 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. The fair value of the 7,142,858 BioLargo shares as of the date of December 31, 2019, was $1,893,000. During the year ended December 31, 2020, Clyra’s gross revenue exceeded $200,000, and thus the first and second performance metrics in the Escrow Agreement were met. As a result, Scion vested 6,200 Clyra common shares, of which 2,200 are redeemable for 1,428,571 BioLargo shares. The fair value of the newly vested shares totals $257,000. On our balance sheet, the In-Process Research and Development asset, and Common Stock Held for Redemption liability, each increased by that amount as of December 31, 2020. Note 10. Noncontrolling Interest – Clyra Medical As discussed in Note 2, above, we consolidate the operations of our partially owned subsidiary Clyra Medical, of which we owned 45% of its outstanding shares as of December 31, 2020. Debt Obligations of Clyra Medical Note Payable (Scion) In conjunction with the Scion Transaction (see Note 9), Clyra issued a promissory note to Scion in the principal amount of $1,250,000 on September 26, 2018 (“Clyra-Scion Note”), accruing interest at an annual rate of 5%. Clyra is obligated to make principal and interest payments periodically, based on a percent (25%) of investment proceeds, and 5% of revenues. Payments are scheduled to be made annually beginning on June 26, 2021 and each June 26 th thereafter until paid. At December 31, 2020 and 2019, the balance due on the Clyra Medical Note Payable totaled $1,007,000. Line of Credit On June 30, 2020, Clyra entered into a Revolving Line of Credit Agreement whereby Vernal Bay Capital Group, LLC committed to provide a $1,000,000 inventory line of credit to Clyra. Clyra received $260,000 in draws and made repayments totaling $36,000. As of December 31, 2020, the balance outstanding on this line of credit totals $224,000. Clyra is required to use funds from the line of credit to produce inventory. Additional draws are conditional upon Clyra presenting invoices or purchase orders to the lender equal to the greater of one-half of principal outstanding on the line of credit, and $200,000. The line of credit note earns interest at 15%, matures in one year, and requires Clyra pay interest and principal from gross product sales. For the first 180 days, on a monthly basis, Clyra is required to pay 30% of gross product sales to reduce amounts owed, and thereafter 60% of gross sales. Clyra issued Vernal Bay 323 shares of its common stock as a commitment fee for the line of credit, valued at $70,000. A security agreement of the same date grants Vernal Bay a security interest in Clyra’s inventory, as that term is defined in the Uniform Commercial Code. Clyra may prepay the note at any time. F-31 Table of Contents BIOLARGO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Consulting Agreement On December 30, 2015, Clyra entered into a consulting agreement with Beach House Consulting, LLC, through which Jack B. Strommen will be providing consulting services to Clyra related to its sales and marketing activities, and in exchange receive $23,000 per month for a period of four years. On June 30, 2020, at Clyra’s request, Beach House Consulting agreed to accept 3,639 shares of Clyra common stock, in lieu of cash, as full prepayment of the consulting fee. The obligation to provide the consulting services is dependent on Clyra generating an average of $250,000 in monthly sales over three consecutive months, which has not been met. The value of the shares issued to Beach House totaled $788,000 and is recorded as a non-current asset on our balance sheet. Equity Transactions As of December 31, 2020, Clyra had the following common shares outstanding: Shareholder Shares Percent BioLargo, Inc. 49,207 45% Sanatio Capital 18,704 17% Scion Solutions (1) 21,700 20% Other 19,118 18% Total 108,729 (1) Does not include an additional 9,300 shares held in escrow subject to performance metrics. Common Shares During the year ended December 31, 2020, Clyra sold 2,742 shares of its common stock for $851,000 to private investors at $310 per Clyra share. In June 2020, BioLargo increased its investment in Clyra by 23,004 shares. Of this amount, 22,513 shares were issued to BioLargo pursuant to an amendment to the BioLargo/Clyra license agreement whereby BioLargo has granted Clyra rights to commercialize its technology in certain medical fields. The amendment provided, among other things, for the payment of the “initial license fee” through the issuance of 22,513 shares of Clyra common stock. Additionally, BioLargo acquired 490 shares of Clyra common stock by making vendor payments on Clyra’s behalf in exchange for the equity, at a price of $310 per share. During the year ended December 31, 2019, Clyra sold 2,680 shares of its common stock for $536,000 at $200 per Clyra share. Series A Preferred shares Sanatio Capital purchased Clyra Series A Preferred shares in 2015. Sanatio Capital is owned by Jack B. Strommen, who subsequently joined BioLargo’s board of directors. Clyra’s Preferred Shares accrue an annual dividend of 8% for a period of five years. On December 31, 2019, Sanatio Capital agreed to convert the accrued dividend of $270,000, and its preferred shares, into 3,544 shares of Clyra common stock. The dividend is recorded on our December 31, 2019 statement of stockholders’ deficit. F-32 Table of Contents BIOLARGO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Stock Options During 2019, Clyra began issuing options to its employees and consultants in lieu of compensation owed. As of December 31, 2019, the Company had issued options to purchase 7,624 shares of Clyra stock. During 2020, Clyra issued options to purchase 3,943 shares of its common stock. Each option issued has an exercise price of $1.00 per share, are vested upon issuance and an expiration date 10 years from the date of grant. The fair value of the options issued in 2020, totaled $853,000, which exceeded the amount of compensation owed, and the additional fair value totaling $214,000 was recorded as a loss on extinguishment of debt in our consolidated statement of operations. We used the Black-Scholes model to calculate the initial fair value, assuming a stock price on date of grant of $310 per share. Because Clyra is a private company with no secondary market for its common stock, the resulting fair value was discounted by 30%. Accounts Payable and Accrued Expenses At December 31, 2020, Clyra had the following accounts payable and accrued expenses: Category Amount (in thousands) Accounts payable $ 402 Accrued payroll 32 Accrued interest 102 Total $ 536 Note 11. BioLargo Engineering, Science and Technologies, LLC In September 2017, we commenced a full-service environmental engineering firm and formed a Tennessee entity named BioLargo Engineering, Science & Technologies, LLC (“BLEST”). In conjunction with the start of this subsidiary, we entered into a three-year office lease in the Knoxville, Tennessee area, and entered into employment agreements with six scientists and engineers. (See Note 12 “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 1,750,000 shares of BioLargo, Inc. common stock. The profit interest and option shares are subject to a five year vesting schedule tied to the performance of the subsidiary, including gross revenue targets that increase over time, obtaining positive cash flow by March 31, 2018 (which was not met), collecting 90% of its account receivables, obtaining a profit of 10% in its first year (and increasing in subsequent years), making progress in the scale-up and commercialization of our AOS system, and using BioLargo research scientists (such as our Canadian team) for billable work on client projects. These criteria are to be evaluated annually by BLEST’s compensation committee (which includes BioLargo’s president, CFO, and BLEST’s president), beginning September 2018. Given the significant performance criteria, the Class B units and the stock options will only be recognized in compensation expense if or when the criteria are satisfied. The BLEST Compensation Committee has met regularly since the subsidiary commenced operations. In 2018, it reviewed the operating performance and determined that the performance metrics were not met and as a result, did not award any Class B units or stock options. In November 2019, it determined that a portion of the performance metrics were met, and that one-half of the eligible profits interests would be vested (2.5% in the aggregate), and therefore one-half of the option interests (10%) would be vested (175,000 options shares in the aggregate). The vesting of option shares resulted in a fair value totaling $44,000, recorded on our consolidated statement of operations as selling, general and administrative expense. The fair value of the profit interest was nominal and not booked. In January 2021, the committee again reviewed the operating performance and determined that a portion of the performance metrics were met. It was agreed that one-half and one-quarter of the eligible profits interests would be vested (3.75% in the aggregate), and therefore one-half of the option interests (15%) would be vested (262,500 options shares in the aggregate). The vesting of option shares resulted in a fair value totaling $65,000, recorded on our consolidated statement of operations as selling, general and administrative expense for the year ended December 31, 2020. F-33 Table of Contents BIOLARGO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 12. 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. ONM Environmental (formerly Odor-No-More, Inc.) (“ONM”) -- which sells odor and volatile organic control products and services (located in Westminster, California); 2. Clyra Medical Technologies (“Clyra Medical”) -- which develops and sells medical products based on our technologies; 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); and 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). Historically, none of our operating business units have 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 ONM, 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. F-34 Table of Contents BIOLARGO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The segment information for the years December 31, 2020 and 2019, is as follows (in thousands): 2020 2019 Revenues BioLargo corporate $ 14 $ — ONM Environmental 1,568 1,459 Clyra Medical 240 — BLEST 1,050 999 BioLargo Water 37 — Intersegment revenue (477 ) (597 ) Total $ 2,432 $ 1,861 Operating loss BioLargo corporate $ (3,947 ) $ (3,651 ) ONM Environmental (493 ) (335 ) Clyra Medical (1,827 ) (1,233 ) BLEST (619 ) (749 ) BioLargo Water (697 ) (728 ) Total $ (7,583 ) $ (6,696 ) Interest expense BioLargo corporate $ (1,823 ) $ (3,944 ) ONM Environmental — (2 ) Clyra Medical (100 ) (50 ) Total $ (1,923 ) $ (3,996 ) Research and development BioLargo corporate $ (754 ) $ (892 ) BLEST (351 ) (354 ) Clyra Medical (164 ) (219 ) BioLargo Water (505 ) (610 ) BioLargo corporate - intercompany 436 603 Total $ (1,338 ) $ (1,472 ) As of December 31, 2020 BioLargo ONM Clyra BLEST Water Elimination Total Tangible assets $ 603 $ 624 $ 1,125 $ 314 $ 105 $ (42 ) $ 2,729 Investment in South Korean joint venture 63 — — — — — 63 Intangible assets 2,150 — — — — — 2,150 As of December 31, 2019 BioLargo ONM Clyra BLEST Water Elimination Total Tangible assets $ 1,050 $ 420 $ 3 $ 264 $ 50 $ (59 ) $ 1,728 Intangible assets 1,893 — — — — — 1,893 Note 13. Commitments and Contingencies Provenzano Employment Agreement On June 18, 2019, we and the head of our ONM subsidiary, Joseph L. Provenzano, entered into an employment agreement (the “Provenzano Employment Agreement”), replacing in its entirety the previous employment agreement with Mr. Provenzano dated January 1, 2008. F-35 Table of Contents BIOLARGO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Provenzano Employment Agreement provides that Mr. Provenzano will serve as our Executive Vice President of Operations, as well as the President and Chief Executive Officer of our wholly owned subsidiary ONM. Mr. Provenzano’s base compensation will remain at his current rate of $170,000 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 our Board of Directors, health insurance premium payments for himself and his immediate family, a car allowance covering the expenses of his personal commercial grade truck which the company uses in company operations on a continual basis, paid vacation of four weeks per year, and bonuses in such amount as the Compensation Committee may determine from time to time. In conjunction with this agreement, our Compensation Committee awarded Mr. Provenzano an option to purchase common stock and restricted stock units under our 2018 Equity Incentive Plan (see Note 5). The Provenzano Employment Agreement has a term of five years, unless earlier terminated in accordance with its terms. The Provenzano Employment Agreement provides that Mr. Provenzano’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 Provenzano Employment Agreement means physical or mental incapacity or illness rendering Mr. Provenzano 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. Provenzano 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. Provenzano’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 Provenzano Employment Agreement requires Mr. Provenzano 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 Provenzano 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 years ended December 31, 2020 and 2019, rental expense was $228,000 and $208,000, respectively. On January 1, 2019, we adopted ASC 842 which resulted in a right-of-use asset and lease liability. Short-term leases are not included in our analysis. The adoption resulted in an immaterial cumulative effect of an accounting change that was not recorded. The lease of our Westminster facility qualifies for the new treatment; it originated in August 2016, was originally scheduled to expire August 2020, contains a yearly escalation of 3%, and includes a four-year renewal option whereby the base rent is adjusted to then market value. During 2020, we exercised our option to extend the lease for four years. It is too early for management to determine if it will extend another four years, therefore the additional four-year extension is not included in the analysis. The lease of our Oak Ridge, Tennessee facility also qualifies, and it had one three-year extension to September 2022, and has one renewal option for another five years where the rental rate would adjust to greater of the current price and fair market value. No determination has been made whether to exercise the five-year renewal option for the Oak Ridge facility. The lease of our Canadian facility is less than one year. None of our leases have additional terms related to the payments or mechanics of the lease. 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. Since there is no explicit interest rate in our leases, management used its incremental borrowing rate, which is estimated to be 18% to determine lease liability. F-36 Table of Contents BIOLARGO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS As of December 31, 2020, our weighted average remaining lease term is three years and the total remaining operating lease payments is $522,000. Our minimum lease payments over the next five years are as follows: Years ending BioLargo Corp / ONM BLEST Total December 31, 2021 $ 111,000 $ 65,000 $ 176,000 December 31, 2022 115,000 43,000 158,000 December 31, 2023 118,000 -- 118,000 December 31, 2024 70,000 -- 70,000 December 31, 2025 -- -- -- Total minimum lease payments $ 414,000 $ 108,000 $ 522,000 Note 14. Subsequent Events. Management has evaluated subsequent events through the date of the filing of this Annual Report and management noted the following for disclosure. Lincoln Park Capital Purchase of Shares From January 1, 2021, through March 24, 2021, we have sold 12,511,674 shares of common stock to Lincoln Park pursuant to our the 2020 LPC Purchase Agreement (see Note 3), and received $2,020,000 in gross and net proceeds. These sales were registered with the SEC on Form S-1 (file number 333-237651). Satisfaction of Notes On March 1, 2021, we paid in cash the outstanding principal of $600,000, and $7,371 in accrued interest, on the promissory note issued August 9, 2019, and scheduled to mature on August 9, 2021 On March 1, 2021, we paid in cash the outstanding principal of $50,000, and $1,455 in accrued interest, on the remaining amount due on a line of credit in which was due on demand at any time after September 1, 2019. There is no remaining balance on this line of credit, and we no longer have the ability to draw on the line of credit. Amendment to Note payable matures on 60 day ’ s notice (or March 8, 2023) On March 1, 2021, we and the holder of a $50,000 note payable modified the note to set a specific maturity date of March 1, 2023, and allow the investor to convert the note to our common stock at a price of $0.16 per share. In lieu of interest during the extended period of the note, we issued the investor a warrant to purchase 225,000 shares of our common stock at $0.16 per share for a period of five years. Chief Financial Officer Contract Extension On March 18, 2021, we and our Chief Financial Officer Charles K. Dargan, II formally agreed to extend the engagement agreement dated February 1, 2008 (the “Engagement Agreement”, which had been previously extended multiple times), pursuant to which Mr. Dargan has been and continues to serve as the Company’s Chief Financial Officer. The Engagement Extension Agreement dated as of March 18, 2021 (the “Engagement Extension Agreement”) provides for an additional one-year term to expire January 31, 2022 (the “Extended Term”). F-37 Table of Contents BIOLARGO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS As the sole compensation for the Extended Term, Mr. Dargan was issued an option (“Option”) to purchase 25,000 shares of the Company’s common stock for each month during the Extended Term (thus, an option to purchase 300,000 shares reflecting an extended term of 12 months). The Option vests over the period of the Extended Term, with 25,000 shares having vested as of March 15, 2021, and the remaining shares to vest 25,000 shares monthly beginning March 31, 2021, and each month thereafter, so long as the agreement is in full force and effect. The Option is exercisable at $0.174 per share, the closing price of BioLargo’s common stock on the March 18, 2021 grant date, expires ten years from the grant date, and was issued pursuant to the Company’s 2018 Equity Incentive Plan. The Option is Mr. Dargan’s sole compensation for the Extended Term. As was the case in all prior terms of his engagement, there is no cash component of his compensation for the Extended Term. Mr. Dargan is eligible to be reimbursed for business expenses he incurs in connection with the performance of his services as the Company’s Chief Financial Officer (although he has made no such requests for reimbursement in the past). All other provisions of the Engagement Agreement not expressly amended pursuant to the Engagement Extension Agreement remain the same, including provisions regarding indemnification and arbitration of disputes. PPP loan forgiveness We received a notice dated March 19, 2021, that the Small Business Administration had approved our application for forgiveness of Paycheck Protection Act loan to Clyra Medical in the amount of $43,000. F-38