What changed in this filing

/stocks — the workspaceLOADING

Item 1. Financial Statements

2021-05-17 compared with 2020-11-16 · 680 added, 421 removed, 385 unchanged (74% of the section changed)

1 unchanged sentence

BIOLARGO, INC.

AND SUBSIDIAR IES

AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

AS OF DECEMBER 31, 2019 AND SEPTEMBER 30 , 2020

AS OF MARCH 31, 2021 AND DECEMBER 31, 2020

(in thousands, except for per share data)

SEPTEMBER 30 , 2020

March 31, 2021

Current assets:

4 unchanged sentences

Total current assets

Non-current assets

In-process research and development (Note 8)

Property and equipment, net of depreciation

Equipment, net of depreciation

Other non-current assets

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

Deferred offering cost

Investment in South Korean joint venture

Liabilities and stockholders’ deficit

Right of use operating lease, net of amortization

Clyra Medical prepaid marketing (Note 9)

Total non-current assets

Liabilities and stockholders ’ equity (deficit)

Current liabilities:

Accounts payable and accrued expenses

Clyra Medical note payable (Note 8)

Line of credit

Convertible notes payable

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

Debt obligations, net of discount and amortization (Note 4)

Deferred revenue

Customer deposits

Lease liability

Deferred revenue and deposits

Clyra Medical accounts payable and accrued expenses (See Note 9)

Clyra Medical debt obligations (See Note 9)

Total current liabilities

Long-term liabilities:

Convertible notes payable

Discount on convertible notes payable, net of amortization

Liability to Clyra Medical shareholder (Note 8)

SBA program loans (PPP, EIDL)

Debt obligations, net of discount and amortization (Note 4)

Lease liability

Common stock held for redemption (Note 9)

Total long-term liabilities

Total liabilities

1 unchanged sentence

STOCKHOLDERS’ EQUITY (DEFICIT):

Preferred Series A, $.00067 Par Value, 50,000,000 shares authorized, -0- shares issued and outstanding, at December 31, 2019 and September 30, 2020, respectively.

Common stock, $.00067 Par Value, 400,000,000 shares authorized, 166,256,024 and 221,682,140 shares issued, at December 31, 2019 and September 30, 2020, respectively.

Preferred Series A, $0.00067 Par Value, 50,000,000 Shares Authorized, -0- Shares Issued and Outstanding, at March 31, 2021 and December 31, 2020

Common stock, $0.00067 Par Value, 400,000,000 Shares Authorized, 239,963,788 and 225,885,682 Shares Issued, at March 31, 2021 and December 31, 2020

Additional paid-in capital

3 unchanged sentences

and subsidiaries stockholders’ equity (deficit)

Non-controlling interest (Note 8)

Non-controlling interest (Notes 9 and 10)

Total stockholders’ equity (deficit)

2 unchanged sentences

BIOLARGO, INC.

AND SUBSIDIAR IES

AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30 , 2019 AND 2020

FOR THE THREE MONTHS ENDED MARCH 31, 2021 AND 2020

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

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Cost of service

Total cost of revenue

Operating expenses:

Selling, general and administrative expenses

Research and development

Total operating expenses

Operating loss

Other (expense) income:

Other income (expense):

PPP loan forgiveness

Interest expense

Loss on debt extinguishment

Total other expense:

Loss on extinguishment of debt

Total other income (expense)

Net loss attributable to noncontrolling interest

Net loss attributable to common stockholders

Net loss attributable to common shareholders

Net loss per share attributable to common stockholders:

Loss per share attributable to common stockholders – basic and diluted

Loss per share attributable to shareholders – basic and diluted

Weighted average number of common shares outstanding:

Comprehensive loss:

Foreign currency translation

Comprehensive loss attributable to common shareholders

Foreign translation adjustment

Comprehensive loss

Comprehensive loss attributable to noncontrolling interest

Comprehensive loss attributable to common stockholders

Comprehensive loss attributable to shareholders

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

2 unchanged sentences

CONSOLIDATED STATEMENT OF STOCKHOLDERS ’ EQUITY (DEFICIT)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30 , 2019 AND 2020

FOR THE THREE MONTHS ENDED MARCH 31, 2021 AND 2020

(in thousands, except for share data)

3 unchanged sentences

Balance, December 31, 2020

Conversion of notes

Sale of common stock for cash

Issuance of common stock for service

Issuance of common stock for interest

Stock option compensation expense

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

Fair value of warrants for extension of debt

Deemed dividend

Issuance of Clyra Medical common stock

Warrants and conversion feature issued as discount on convertible note payable

Clyra Medical stock option expense

Noncontrolling interest allocation

Clyra Medical securities offering

Foreign currency translation

Balance, March 31, 2021

Conversion of notes

Issuance of common stock for service

Issuance of common stock for interest

Warrant exercise

Stock issuance to officer (see note 7)

Stock option compensation expense

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

Issuance of Clyra Medical common stock

Deemed dividend

Foreign currency translation

Balance, June 30, 2019

Conversion of notes

Issuance of common stock for service

Issuance of common stock for interest

Warrant exercise

Convert BioLargo convertible note to Clyra Medical shares

Stock option compensation expense

Debt extinguishment expense

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

Issuance of Clyra Medical common stock

Foreign currency translation

Balance,September 30, 2019

comprehensive

other comprehensive

Total stockholders ’

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Stock option compensation expense

Deemed dividend

Issuance of Clyra Medical common stock

Deemed dividend for the change in accounting for derivative liability

Clyra Medical securities offering

Clyra Medical stock option expense

1 unchanged sentence

Balance, March 31, 2020

Conversion of notes

Issuance of common stock for service

Issuance of common stock for interest

Sale of common stock for cash

Stock option compensation expense

Issuance of Clyra Medical common stock

Clyra Medical stock option expense

Clyra Medical stock for other asset (See Note 2)

Noncontrolling interest allocation

Foreign currency translation

Balance, June 30, 2020

Conversion of notes

Issuance of common stock for service

Issuance of common stock for interest

Sale of common stock for cash

Stock option compensation expense

Loss on extinguishment

Clyra Medical shares issued as commitment fee

Clyra Medical stock option expense

Noncontrolling interest allocation

Foreign currency translation

Balance, September 30, 2020

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

BIOLARGO, INC.

AND SUBSIDIAR IES

AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30 , 2019 AND 2020

FOR THE THREE MONTHS ENDED MARCH 31, 2021 AND 2020

(in thousands, except for per share data)

5 unchanged sentences

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

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

PPP loan forgiveness

Loss on extinguishment of debt

Loss on investment in ODIN

Deferred offering expense

Depreciation expense

Loss on investment in South Korean joint venture

Bad debt expense

Depreciation expense

Changes in assets and liabilities:

Accounts receivable

Prepaid expenses and other current assets

Accounts payable and accrued expenses

Deferred revenue

Accounts payable and accrued expenses

Clyra Medical accounts payable and accrued expenses

Prepaid expenses and other current assets

Customer deposits

2 unchanged sentences

Investment in South Korean joint venture

Leasehold improvements

Sale of equipment

Purchase and sale of equipment

Net cash used in investing activities

1 unchanged sentence

Proceeds from sales of common stock

Proceeds from convertible notes payable

Proceeds from the sale of stock in Clyra Medical

Repayment of note payable

Proceeds from warrant exercise

Proceeds from SBA program loans

Proceeds from line of credit Clyra Medical

Repayment of line of credit Clyra Medical

Payment of debt obligations

Payment of Clyra Medical debt obligations

Net cash provided by financing activities

1 unchanged sentence

Net change in cash

Cash at beginning of period

Cash at beginning of year

Cash at end of period

2 unchanged sentences

Non-cash investing and financing activities

Common stock issued for convertible debt

Fair value of warrants issued with convertible notes

Conversion of convertible notes payable into common stock

Convertible notes issued with original issue discount, beneficial conversion feature

Exchange of consulting services for Clyra common shares

Lincoln Park deferred offering costs, recorded as additional paid-in capital

Conversion of notes payable to common stock

Deemed dividend

Increase in liability to Clyra Medical shareholder

Fair value of Clyra shares issued as a commitment fee

Allocation of Clyra stock to noncontrolling interest

Allocation of stock option expense within noncontrolling interest

Allocation of noncontrolling interest

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

5 unchanged sentences

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 Technologies and it plans to spin out or sell when the appropriate opportunity is identified.

is an innovative technology developer and environmental engineering company driven by a mission to “make life better” by delivering robust, sustainable solutions for a broad range of industries and applications, with a focus on clean water, clean air and a cleaner earth.

The company also owns a minority interest in a medical products subsidiary that has licensed BioLargo’s technologies.

Our business strategy is straightforward:

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Liquidity / Going concern

For the nine months ended September 30, 2020, we had a net loss of $7,707,000, used $3,318,000 cash in operations, and at September 30, 2020, we had a working capital deficit of $1,316,000, and current assets of $1,873,000.

We do not believe operating profits in the immediate future will be sufficient to fund our current level of operations.

We have been, and anticipate that we will continue to be, limited in terms of our capital resources.

None of our business segments (see Note 10, “Business Segment Information”) have ever generated enough revenues to fund their operations, or to contribute to our corporate operations or overhead.

Thus, in light of our cash position at year end, in order to continue operations, in calendar year 2020 we have continued to sell our stock in private securities offerings and to Lincoln Park (see Note 3).

Thus far this year, we have received approximately $1.7 million from Lincoln Park (an average of approximately $160,000 per month).

The proceeds we receive from stock sales to Lincoln Park is a function of stock price and volume – a lower stock price and less trading volume results in less money we can receive from Lincoln Park.

Although we have relied on investment funds through our agreement with Lincoln Park this year, there is no assurance that it will continue to provide the funds we need for our operations, and if it does not, we will have to rely on other forms of financing, and there is no assurance that we will be able to do so, or if we do so, it will be on favorable terms.

We also regularly pay officers and vendors equity in lieu of cash, and anticipate that we will continue to be able to do so in the future.

The foregoing factors raise substantial doubt about our ability to continue as a going concern, unless we are able to continue to raise funds through stock sales to Lincoln Park or other private financings, and in the long term, our ability to attain a reasonable threshold of operating efficiencies and achieve profitable operations by licensing or otherwise commercializing products incorporating our technologies.

The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of our business.

For the three months ended March 31, 2021, we had a net loss of $1,878,000, used $845,000 cash in operations, and at March 31, 2021, we had a working capital deficit of $1,051,000, and current assets of $1,922,000.

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, such as through our purchase agreement with Lincoln Park Capital.

(See Note 3.) We have been, and anticipate that we will continue to be, limited in terms of our capital resources.

During the three months ended March 31, 2021, we generated revenues of $571,000 through our operational subsidiaries.

(See Note 11.) Our subsidiaries did not individually or in the aggregate generate profits sufficient to fund their operations, or for our corporate operations or other business segments.

Thus, we continued to sell securities to raise cash (see Note 3), and received additional grant aid through our Canadian subsidiary.

As of March 31, 2021, our cash and cash equivalents totaled $1,341,000, and our total liabilities included $406,000 in current debt that is convertible at the option of the debtholders , $100,000 of debt that we converted to equity at the April 2021 maturity date (see Note 13), $50,000 of debt that is due March 2023, $200,000 due on a line of credit by our partially owned subsidiary Clyra Medical Technologies, Inc.

(“Clyra”) due in June 2021, and $1,007,000 owed by Clyra related to a 2018 acquisition with a maturity date that automatically extends each June (see Note 9, “ Note Payable (Scion) ”).

We have $314,000 of loans issued as part of the Small Business Administration’s (“SBA”) Paycheck Protection Program.

We have applied for forgiveness of the entire balance owed on these loans and are awaiting decisions.

We have a $150,000 loan accruing interest at 3.75% annually from the SBA’s Economic Injury Disaster Loan program that is payable over 30 years beginning August 2021.

During the three months ended March 31, 2021, we received $2,001,000 in proceeds from stock sales to Lincoln Park and $105,000 from stock sales from our 2020 Unit Offering (see Note 3), and made cash payments to retire debt obligations totaling $674,000 (see Note 4 and Note 9 (“ Line of Credit ”)).

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 a fixed price of $0.14 per share.

If the holders do not voluntarily convert the notes to equity, we intend to pay the notes with cash, although there is no guarantee that we will be able to do so.

The cash 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 would 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.

To reduce our operational cash burdens, we regularly issue officers and vendors stock or options in lieu of cash compensation, and we anticipate that we will continue to be able to do so in the future.

In the three months ended March 31, 2021, our CEO and CSO accepted stock in lieu of $31,000 in unpaid salary.

Our CFO has also agreed to receive warrants in lieu of cash, (see note xx) as compensation for his services.

Each has indicated a willingness to do so in the future.

BIOLARGO, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The foregoing factors raise substantial doubt about our ability to continue as a going concern.

Ultimately, our ability to continue as a going concern is dependent upon our ability to attract significant new sources of capital, attain a reasonable threshold of operating efficiencies and achieve profitable operations by licensing or otherwise commercializing products incorporating our technologies.

The consolidated financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern.

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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;

ONM Environmental, 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 97.5% (see Note 9) of BioLargo Engineering Science and Technologies, LLC (“BLEST”), organized under the laws of the State of Tennessee in 2017.

Additionally, we own 94% of BioLargo Engineering Science and Technologies, LLC (“BLEST”), organized under the laws of the State of Tennessee in 2017 (see Note 10).

We also own 45% of Clyra Medical Technologies, Inc.

(“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 8).

(“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 9).

The unaudited consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and pursuant to Rule 8-03 of Regulation S-X under the Securities Act of 1933, as amended.

1 unchanged sentence

In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been included.

We are still operating in the early stages of the sales and distribution process, and therefore our operating results for the three and nine months ended September 30, 2020, are not necessarily indicative of the results that may be expected for the year ending December 31, 2020, or for any other period.

For some of our activities, we are still operating in the early stages of the sales and distribution process, and therefore our operating results for the three months ended March 31, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021, or for any other period.

These unaudited consolidated financial statements and notes should be read in conjunction with the Company’s audited consolidated financial statements and accompanying notes included in the Annual Report on Form 10-K for the year ended December 31, 2021, filed with the Securities and Exchange Commission (the “SEC”) on March 30, 2021.

BIOLARGO, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Summary of Significant Accounting Policies

1 unchanged sentence

Principles of Consolidation

The consolidated financial statements include the accounts of the Company, and its wholly- and partially-owned subsidiaries, including Clyra Medical.

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 47% 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.

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 9.)

All intercompany accounts and transactions have been eliminated.

All intercompany accounts and transactions have been eliminated in the financial statement presentation.

Foreign Currency

1 unchanged sentence

Therefore, translation gains and losses resulting from differences in exchange rates are recorded in accumulated other comprehensive income.

BIOLARGO, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Cash and Cash Equivalents

3 unchanged sentences

We do not anticipate non-performance by our financial institution.

As of March 31, 2021 and December 31, 2020, our cash balances were made up of the following (in thousands):

BioLargo, Inc.

and subsidiaries

Clyra Medical Technologies, Inc.

Accounts Receivable

1 unchanged sentence

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, 2019 was $24,000 and September 30, 2020 was $35,000.

The allowance for doubtful accounts as of March 31, 2021 and December 31, 2020, was $13,000.

Credit Concentration

We have a limited number of customers that account for significant portions of our revenue.

For the nine months ended September 30, 2019 and 2020, each period had two customers that accounted for 10% or more of our consolidated revenues, as follows:

September 30 ,

During the three months ended March 31, 2021 and 2020, we had the following customers that accounted for more than 10% of consolidated revenues, as follows:

We had three customers that each accounted for more than 10% of consolidated accounts receivable at March 31, 2021, and two customers at December 31, 2020, as follows:

March 31, 2021

December 31, 2020

Inventories are stated at the lower of cost or net realizable value using the average cost method.

The allowance for obsolete inventory as of March 31, 2021, and December 31, 2020, was $3,000.

Inventories consisted of (in thousands):

Finished goods

BIOLARGO, INC.

1 unchanged sentence

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

We had two customers that accounted for more than 10% of consolidated accounts receivable at December 31, 2019 and three customers that accounted for more than 10% of consolidated accounts receivable at September 30, 2020, as follows:

September 30 ,

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, 2019 and September 30, 2020 was $3,000.

As of December 31, 2019, and September 30, 2020, inventories consisted of (in thousands):

September 30 ,

Finished goods

Other Non-Current Assets

Other non-current assets consisted of (i) security deposits of $35,000 related to our business offices, and (ii) prepaid consulting fees from the issuance of Clyra Medical stock, resulting in a fair value of $787,500 (see Note 8).

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.

We adopted this standard effective January 1, 2019 using the effective date option, 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 the 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 September 30, 2020, the right-of-use assets on our balance sheet related to our operating leases totals $356,000.

Long-lived and definite lived intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.

If the sum of the expected future undiscounted cash flows from the use of the asset and its eventual disposition is less than the carrying amount of the asset, then an impairment loss is recognized.

The impairment loss is measured based on the fair value of the asset.

Any resulting impairment is recorded as a reduction in the carrying value of the related asset in excess of fair value and a charge to operating results.

As of September 30, 2019 and 2020, management determined that there was no impairment of its long-lived assets, including its In-process Research and Development at Clyra Medical (see Note 8).

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

Equity Method of Accounting

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Ltd., “Odin”) pursuant to a Joint Venture agreement we had entered into with BKT Co.

based subsidiary, Tomorrow Water.

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.

BIOLARGO, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

We account for our investment in the joint venture under the equity method of accounting.

1 unchanged sentence

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 September 30, 2020, the joint venture incurred a loss and our 40% ownership share reduced our investment interest by $27,000.

During the three months ended March 31, 2021, the joint venture incurred a loss and our 40% ownership share reduced our investment interest by $10,000.

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 three months ended March 31, 2021 and 2020, management determined that there was no impairment of its long-lived assets, including its In-process Research and Development (see Note 8).

Earnings (Loss) Per Share

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Diluted EPS is computed by adding to the weighted average shares the dilutive effect if stock options and warrants were exercised into common stock.

For the three and nine months ended September 30, 2019 and 2020, the denominator in the diluted EPS computation is the same as the denominator for basic EPS due to the anti-dilutive effect of the warrants and stock options on the Company’s net loss.

For the three months ended March 31, 2021 and 2020, the denominator in the diluted EPS computation is the same as the denominator for basic EPS due to the anti-dilutive effect of the warrants and stock options on the Company’s net loss.

Use of Estimates

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Share-based compensation expense is based on the grant date fair value estimated using the Black-Scholes Option Pricing Model.

BIOLARGO, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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:

1 unchanged sentence

The equity instruments are measured at the current fair value, and for stock options, the instruments are measured at fair value using the Black Scholes option model.

The following methodology and assumptions were used to calculate share-based compensation for the three and nine months ended September 30, 2019 and 2020:

The following methodology and assumptions were used to calculate share-based compensation for the three months ended March 31, 2021 and 2020:

Risk free interest rate

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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.

BIOLARGO, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Historically, we have not had significant forfeitures of unvested stock options granted to employees and Directors.

1 unchanged sentence

Therefore, we have estimated the forfeiture rate of our outstanding stock options as zero.

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

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

The warrant is first analyzed per its terms as to whether it has derivative features or not.

2 unchanged sentences

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

The convertible note issued with the warrant is recorded at its fair value, limited to a relative fair value based upon the percentage of its fair value to the total fair value including the fair value of the warrant.

Further, the convertible promissory note is examined for any intrinsic beneficial conversion feature (“BCF”) of which the convertible price of the note is less than the closing common stock price on date of issuance.

If the relative fair value method is used to value the convertible promissory note and there is an intrinsic BCF, a further analysis is undertaken of the BCF using an effective conversion price which assumes the conversion price is the relative fair value divided by the number of shares the convertible debt is converted into by its terms.

Convertible debt instruments are recorded at fair value, limited to a relative fair value based upon the percentage of its fair value to the total fair value including the fair value of the warrant.

Further, the convertible debt instrument is examined for any intrinsic beneficial conversion feature (“BCF”) of which the conversion price is less than the closing common stock price on date of issuance.

If the relative fair value method is used to value the convertible debt instrument and there is an intrinsic BCF, a further analysis is undertaken of the BCF using an effective conversion price which assumes the conversion price is the relative fair value divided by the number of shares the convertible debt is converted into by its terms.

The BCF value is accounted for as equity.

The warrant and BCF relative fair values are also recorded as a discount to the convertible promissory notes.

At present, these equity features of the convertible promissory notes have recorded a discount to the convertible notes that is substantially equal to the proceeds received.

BIOLARGO, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Non-Cash Transactions

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It identifies its contract with the customer through a written purchase order in which the details of the time to be billed and materials purchased and an estimated completion date.

The performance obligation is the completion of the installation.

Revenue is recognized over time as the work is performed.

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.

7 unchanged sentences

To date, there have been no discounts or other financing terms for the contracts.

BIOLARGO, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.

Clyra also has certain distribution agreements that call for consigned inventory.

Although the product is shipped to a third party, it is not revenue until that consigned inventory is sold to end user customer.

Government Grants

We have been awarded multiple research grants from governmental and quasi-governmental institutions.

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.

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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 nine and eighteen months and support a majority, but not all, of the related research budget costs.

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.

BIOLARGO, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.

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We continue to apply for Canadian government and agency grants to fund research and development activities.

There was no grant income for the three months ended September 30, 2020.

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.

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 March 31, 2021, and December 31, 2020.

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 March 31, 2021.

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, 2019, and September 30, 2020, approximate their respective fair values because of the short-term nature of these instruments.

Management believes the carrying amounts of the Company’s financial instruments (excluding debt and equity instruments) as of March 31, 2021 and December 31, 2020, approximate their respective fair values because of the short-term nature of these instruments.

Such instruments consist of cash, accounts receivable, prepaid assets, accounts payable, lines of credit, and other assets and liabilities.

Equity Financing

During the three months ended March 31, 2020, pursuant to our August 2017 agreement with Lincoln Park Capital Fund, LLC (“Lincoln Park”), we elected to sell to Lincoln Park 1,398,223 shares of our common stock, for which we received $295,000 in gross and net proceeds.

Additionally, we issued Lincoln Park 14,420 “additional commitment” shares required under the agreement.

We did not sell any shares to Lincoln Park during the three and nine months ended September 30, 2019.

In conjunction with the signing of the March 2020 agreement with Lincoln Park (see below), we recorded the remaining deferred offering costs on our August 2017 agreement totaling $122,000 as additional paid in capital on our consolidated balance sheet.

On March 30, , 2020, we entered into a 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.

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.

We adopted ASU 2016-12 using the effective date option.

No impairment is expected at this time.

As of March 31, 2021, the right of use assets on our balance sheet related to our operating leases totals $326,000.

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.

Management adopted the updates, and after evaluation, did not make any modifications to the financial statements.

Sale of Stock for Cash

Lincoln Park Financing

On March 30, 2020, we entered into a stock purchase agreement (the “Purchase Agreement”) with Lincoln Park Capital Fund, LLC (“Lincoln Park”), pursuant to which Lincoln Park agreed to purchase from us at our request up to an aggregate of $10,250,000 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 Purchase Agreement is the lower of (i) the lowest sale price on the date of purchase, or (ii) the average of the three lowest closing prices in the prior 12 business days.

The purchase price 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.

Lincoln Park may not assign or transfer its rights and obligations under the Purchase Agreement.

This agreement replaced the August 2017 agreement with Lincoln Park.

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This registration statement was declared effective on April 21, 2020, and as of April 29, 2020, we commenced regular purchases under the agreement.

The Purchase Agreement replaced a similar agreement with Lincoln Park dated August 2017.

During the three months ended March 31, 2021 and 2020, we sold 12,455,619 and 3,198,358 shares to Lincoln Park, and received $2,001,000 and $545,000 in gross and net proceeds.

Subsequent to March 31, 2021, we continue to draw on the Purchase Agreement for working capital from time to time (see Note 13).

BIOLARGO, INC.

1 unchanged sentence

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In the March 30, 2020 agreement, we agreed to issue 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 as of March 31, 2020.

Additionally, the Purchase Agreement provided for an initial sale of 1,785,715 shares to Lincoln Park for $250,000.

We received those funds and issued the shares on March 31, 2020.

Since inception of the March 30, 2020 agreement through September 30, 2020, not including the initial purchase, we sold 6,508,675 shares to Lincoln Park for $1,043,000.

For the three months ended September 30, 2020, we sold 4,893,981 shares to Lincoln Park for $797,000.

2020 Unit Offering

On May 1, 2020, we commenced a private offering of units, each unit consisting of (i) common stock, (ii) a four-month stock purchase warrant, and (iii) a five-year stock purchase warrant.

Unit prices are set from time-to-time based on market conditions.

The number of shares of common stock issued, and the number of shares available for purchase under each warrant, are based on the quotient of the unit price and investment amount (e.g., a $100,000 investment and unit price of $0.25 is equal to 400,000 shares).

The four-month warrant exercise price is equal to 120% of the unit price, and the five-year warrant is equal to 150% of the unit price.

During the nine months ended September 30, 2020, we received an aggregate $367,000 of investments from five investors at unit prices ranging between $0.15 and $0.18, issued 2,318,194 shares of our common stock, and issued six-month and five-year warrants (see Note 6).

During the three months ended March 31, 2021, pursuant to an offering commenced in May 2020, we sold 875,000 shares of our common stock and received $105,000 in gross and net proceeds from three accredited investors.

In addition to the shares, we issued each investor a six-month and a five-year warrant to purchase additional shares (see Note 6, “ Warrants Issued in 2020 Unit Offering ”).

Debt Obligations

The following table summarizes our debt obligations outstanding as of December 31, 2019 and as of September 30, 2020 (in thousands).

September 30 ,

C urrent liabilities:

The following table summarizes our debt obligations outstanding as of March 31, 2021, and December 31, 2020 (in thousands).

The table does not include debt obligations of our partially owned subsidiary Clyra Medical (see Note 9, “ Debt Obligations of Clyra Medical ”).

March 31, 2021

December 31, 2020

Current portion of debt:

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

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

Inventory line of credit (Clyra Medical), matures July 6, 2020 (Note 8)

Note payable issued by Clyra Medical to Scion, matures June 17, 2021 (see Note 8)

Line of credit, matures on 30-day demand

Total notes payable and line of credit

Convertible notes payable:

Convertible note, matured April 7, 2020

Convertible note, matured June 20, 2020 (1)

Convertible 12-month OID notes, mature beginning June 2020 (1)

Convertible note payable, matures April 20, 2021 (1)

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Total convertible notes payable

Debt discount, net of amortization

Total current liabilities

L ong-term liabilities :

Convertible note payable, matures August 9, 2021

Long-term debt:

Convertible note payable, matures March 1, 2023

SBA Paycheck Protection Program loans, mature April 2022

SBA EIDL Loan, matures July 2050

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

Debt discount, net of amortization

Total long-term liabilities

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

BIOLARGO, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the nine months ended September 30, 2019 and 2020, we recorded $2,773,000 and $1,823,000 of interest expense related to the amortization of discounts on convertible notes payable, and coupon interest from our convertible notes and line of credit.

(1) This note was converted at maturity (see Note 13).

For the three months ended March 31, 2021 and 2020, we recorded $93,000 and $757,000, respectively, of interest expense related to the amortization of discounts on convertible notes payable, coupon interest from our convertible notes and line of credit.

The following discussion includes debt instruments to which amendments were made or included other activity that management deemed appropriate to disclose.

Each of the debt instruments contained in the above table are disclosed more fully in the financial statements contained in the Company’s Annual Report filed March 31, 2020.

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 intends to apply for forgiveness of 100% of this debt at the appropriate time.

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.

Convertible Note, matured April 7, 2020 (Vista Capital)

On January 7, 2019, Vista Capital Investments LLC (“Vista Capital”) invested $300,000 and in exchange we issued a convertible promissory note in the principal amount of $330,000.

Originally set to mature nine months from the date of issuance, the maturity date was extended multiple times.

The note earned a one-time interest charge of 12%, which was recorded as a discount on convertible notes and was amortized over the term of the note.

The note allowed conversion of the note into our common stock 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 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, all of which was recorded in 2019.

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 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.

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 is convertible by the investor at any time at $0.17 per share.

The notes earn 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 the nine months ended September 30, 2020, $3,112,000 of the remaining outstanding principal of 12-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.

Each of the debt instruments contained in the above table are disclosed more fully in the financial statements contained in the Company’s Form 10-K filed March 30, 2021.

Cash payment of debt obligations

On March 1, 2021, we paid in cash the outstanding principal of $600,000, and $7,000 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 $1,000 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 days ’ 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.

(See Note 6).

BIOLARGO, INC.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note Maturity Extensions

On August 10, 2020, we and the holder of a convertible promissory note in the principal amount of $475,000 due August 12, 2020, entered into an agreement to extend the maturity date of the 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, we agreed extend the expiration date from September 18, 2023 to September 18, 2025, of a warrant 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 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.

The noteholder then 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 September 30, 2020 was $356,000.

On August 10, 2020, we and the holder of a convertible promissory note in the principal amount of $75,000 due August 20, 2020, entered into an agreement in which we agreed to pay $25,000, and the holder agreed to extend the maturity date of the note to August 20, 2021.

Share-Based Compensation

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Payment of Officer Salaries

On September 30, 2020, we issued 349,670 shares of our common stock at $0.15 per share in lieu of $52,000 of accrued and unpaid salary to our officers.

On June 30, 2020, we issued 367,403 shares of our common stock at $0.16 per share in lieu of $59,000 of accrued and unpaid salary to our officers.

On March 31, 2021, we issued 137,364 shares of our common stock at $0.23 per share in lieu of $31,000 of accrued and unpaid salary to our officers.

On September 30, 2019, we issued 35,080 shares of our common stock in lieu of $11,000 of accrued salary and unreimbursed business expenses owed to an officer.

The price per share of $0.31 was based on the closing price of our common stock on the last business day of the month.

On June 28, 2019, we issued 465,875 shares of our common stock at $0.23 per share in lieu of $107,000 of accrued salary and unreimbursed business expenses owed to two of our officers.

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

All of these issuances were pursuant to our 2018 Equity Incentive Plan.

On March 31, 2020, we issued 648,755 shares of our common stock at $0.17 per share in lieu of $110,000 of accrued and unpaid salary to our officers.

Payment of Consultant Fees

On September 30, 2020, we issued 270,000 shares of our common stock at $0.15 per share in lieu of $41,000 of accrued and unpaid salary to consultants.

On June 30, 2020, we issued 1,406,630 shares of our common stock at $0.16 per share in lieu of $213,000 of accrued and unpaid salary to consultants.

On March 31, 2021, we issued 610,123 shares of our common stock at $0.23 per share in lieu of $81,000 of accrued and unpaid obligations to consultants.

On September 30, 2019, we issued 594,118 shares of our common stock at $0.26 per share in lieu of $156,000 of accrued and unpaid salary to consultants.

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

On March 29, 2019, we issued 649,545 shares of our common stock at $0.17 per share in lieu of $113,000 of accrued and unpaid obligations to consultants.

On March 31, 2020, we issued 390,735 shares of our common stock at a range of $0.17 per share in lieu of $67,000 of accrued and unpaid obligations to consultants.

Payment of Accrued Interest

On September 30, 2020, we issued 1,415,221 shares of our common stock at $0.11 per share in lieu of $150,000 of accrued and unpaid interest.

On June 30, 2020, we issued 297,001 shares of our common stock at $0.16 per share in lieu of $30,000 of accrued and unpaid interest.

On March 31, 2020, we issued 19,278 shares of our common stock at $0.17 per share in lieu of $4,000 of accrued interest.

BIOLARGO, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

On September 30, 2019, we issued 87,478 shares of our common stock at $0.17 per share in lieu of $150,000 of accrued and unpaid interest.

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

During the three months ended March 31, 2019, we issued 139,362 shares of our common stock at a range of $0.17 – $0.23 per share in lieu of $25,000 of accrued interest.

Stock Option Expense

During the nine months ended September 30, 2019 and 2020, we recorded an aggregate $1,201,000 and $1,347,000, in selling general and administrative expense related to the issuance and vesting of stock options issued through our 2018 Equity Incentive Plan, our (now expired) 2007 Equity Incentive Plan, and outside of these plans.

During the three months ended March 31, 2021 and 2020, we recorded an aggregate $424,000 and $320,000, 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 9 for information on stock option expense for options issued by subsidiary Clyra Medical.

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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 for the nine months ended September 30, 2019 and September 30, 2020, is as follows:

p rice per share

Activity for our stock options under the 2018 Plan for the three months ended March 31, 2021 and March 31, 2020, is as follows:

Price per share

Balance, December 31, 2020

Balance, September 30, 2019

Vested, September 30, 2019

Balance, March 31, 2021

Vested, March 31, 2021

Balance, December 31, 2019

Balance, September 30, 2020

Vested, September 30, 2020

(1) – Aggregate intrinsic value based on closing common stock price of $0.15 at September 30, 2020.

Balance, March 31, 2020

(1) Aggregate intrinsic value based on closing common stock price of $0.23 at March 31, 2021.

BIOLARGO, INC.

1 unchanged sentence

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The options granted under the 2018 Plan to purchase 9,738,196 shares during the nine months ended September 30, 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 392,500 shares having vested during the nine months ended September 30, 2020, and the remaining shares to vest 25,000 monthly through January 31, 2021, the fair value of the options issued to our CFO totals $100,000;

(iii) we issued options to purchase 1,308,934 shares of our common stock at an exercise price on the respective grant date of $0.17 ,$0.16 and $0.15 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 $200,000;

(iv) we issued options to purchase 1,346,732 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 and $0.15 per share;

the fair value of employee retention plan options totaled $201,000 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 1,152,787 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 $156,000.

The options granted to purchase 1,217,670 shares during the three months ended March 31, 2021 were issued to an officer, board of directors, employees and consultants:

(i) we issued options to purchase 300,000 shares of our common stock at an exercise price on the respective grant date of $0.17 per share to our CFO as described below;

(ii) we issued options to purchase 296,704 shares of our common stock at an exercise price on the respective grant date of $0.23 per share to members of our board of directors for services performed, in lieu of cash;

the fair value of these options totaled $65,000 and is recorded as selling, general and administrative expenses;

(iii) we issued options to purchase 407,713 shares of our common stock to employees as part of an employee retention plan at an exercise price on the respective date of $0.23 per share;

the fair value of employee retention plan options totaled $89,000 and will vest quarterly over four years as long as they are retained as employees;

and (iv) we issued options to purchase 213,253 shares of our common stock to consultants and employees in lieu of cash for unpaid obligations totaling $37,000.

All stock option expense is recorded on our consolidated statement of operations as selling, general and administrative expense.

Chief Financial Officer Contract Extension

On March 17, 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 February 25, 2020 (the “Engagement Extension Agreement”) provides for an additional term to begin retroactively on October 1, 2019, and to expire January 31, 2021 (the “Extended Term”).

As compensation for the Extended Term, Mr.

Dargan was issued an option (“Option”) to purchase 300,000 shares of our common stock.

The Option vests over the period of the Extended Term, with 50,000 shares having vested as of March 31, 2021, and the remaining 250,000 shares to vest monthly through January 31, 2022, so long as the agreement is in full force and effect.

The Option is exercisable at $0.23 per share, the closing price of our common stock on March 17, 2021, expires ten years from the grant date, and was issued pursuant to the 2018 Equity Incentive Plan.

The fair value of these options totaled $49,000, which expense is recorded ratably over the twelve-month agreement term.

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.

Dargan is eligible to be reimbursed for business expenses he incurs in connection with the performance of his services as the Company’s Chief Financial Officer (although he has made no such requests for reimbursement in the past).

All other provisions of the Engagement Agreement not expressly amended pursuant to the Engagement Extension Agreement remain the same, including provisions regarding indemnification and arbitration of disputes.

2007 Equity Incentive Plan

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As of September 2017, the Plan was closed to further stock option grants.

Activity for our stock options under the 2007 Plan for the nine months ended September 30, 2019 and 2020 is as follows:

p rice per share

BIOLARGO, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Activity for our stock options under the 2007 Plan for the three months ended March 31, 2021 and 2020 is as follows:

price per share

Balance, December 31, 2020

Balance, September 30, 2019

Balance, March 31, 2021

Balance, December 31, 2019

Balance, September 30, 2020

(1) – Aggregate intrinsic value based on closing common stock price of $0.15 at September 30, 2020.

Balance, March 31, 2020

(1) – Aggregate intrinsic value based on closing common stock price of $0.23 at March 31, 2021.

Non-Plan Options issued

During the nine months ended September 30, 2020, we issued options to purchase 820,476 shares of our common stock at exercise prices ranging between $0.17 – $0.21 per share to vendors for fees for service.

During the three months ended March 31, 2021, we issued an option to purchase 43,956 shares of our common stock at $0.23 per share to a vendor for services.

The fair value of these options total $10,000 and is recorded in our selling, general and administrative expense.

During the three months ended March 31, 2020, we issued options to purchase 292,437 shares of our common stock at exercise prices ranging between $0.17 – $0.21 per share to vendors for fees for service.

The fair value of the options issued totaled $50,000, is recorded in our selling, general and administrative expense.

During the nine months ended September 30, 2019, we issued options to purchase 970,380 shares of our common stock at exercise prices ranging between $0.16 – $0.25 per share to vendors for fees for service resulting in a fair value totaling $194,000.

The fair value of the options issued and vested during the nine months ended September 30, 2019 totaled $367,000, is recorded in our selling, general and administrative expense.

Activity of our non-plan stock options issued for the three months ended March 31, 2021 and 2020 is as follows:

price per share

Balance, December 31, 2020

Balance, March 31, 2021

Vested, March 31, 2021

Balance, December 31, 2019

Balance, March 31, 2020

(1) – Aggregate intrinsic value based on closing common stock price of $0.23 at March 31, 2021.

BIOLARGO, INC.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Activity of our non-plan stock options issued for the nine months ended September 30, 2019 and 2020 is as follows:

As of September 30 , 2019 :

p rice per share

Balance, December 31, 2018

Balance, September 30, 2019

As of September 30 , 2020 :

Balance, December 31, 2019

Balance, September 30, 2020

Vested, September 30, 2020

(1) – Aggregate intrinsic value based on closing common stock price of $0.15 at September 30, 2020.

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

As of September 30 , 2019 :

p rice per share

We issued warrants to purchase our common stock, at various prices for the three months ended March 31, 2021 and 2020, is as follows:

price per share

Balance, December 31, 2020

Balance, September 30, 2019

As of September 30 , 2020 :

Balance, March 31, 2021

Balance, December 31, 2019

Balance, September 30, 2020

(1) – Aggregate intrinsic value based on closing common stock price of $0.15 at September 30, 2020.

Warrants issued in private offering

During the three months ended September 30, 2020, pursuant to our 2020 Unit Offering (see Note 3), we issued six-month stock purchase warrants to purchase an aggregate 746,528 shares of our common stock at prices from $0.192 to $0.216 per share, and five-year stock purchase warrants to purchase an aggregate 746,528 shares of our common stock at prices from $0.24 to $0.27 per share.

During the nine months ended September 30, 2020, we issued six-month stock purchase warrants to purchase an aggregate 2,318,194 shares of our common stock at prices from $0.18 to $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 $0.225 to $0.27 per share.

Balance, March 31, 2020

– Aggregate intrinsic value based on closing common stock price of $0.23 at March 31, 2021.

Warrants issued in 2020 Unit Offering

During the three months ended March 31, 2021, pursuant to our 2020 Unit Offering (see Note 3), we issued six-month stock purchase warrants to purchase an aggregate 875,000 shares of our common stock at $0.14 per share, and five-year stock purchase warrants to purchase an aggregate 875,000 shares of our common stock at $0.18 per share.

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

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.

The fair value of these warrants totaled $35,000 and is recorded as a debt discount on our consolidated balance sheets, of which amount will be amortized to interest expense over the two-year term of the debt.

Fair Value – Interest Expense

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The principal assumptions we used in applying this model were as follows:

BIOLARGO, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30,

Risk free interest rate

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

September 30 ,

Accounts payable and accrued expenses

Accounts payable and accrued expense

Accrued interest

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Total accounts payable and accrued expenses

BIOLARGO, INC.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Accounts payable and accrued expenses includes ordinary business payables incurred by the Company and its operational subsidiaries.

See Note 9, “ Accounts Payable and Accrued Expenses ”, for the accounts payable and accrued expenses of Clyra Medical.

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.

Noncontrolling Interest – Clyra Medical

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

As discussed in Note 2, we consolidate the operations of our partially owned subsidiary Clyra Medical, of which we owned 45% of its outstanding shares as of March 31, 2021.

Acquisition of In-process Research and Development

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(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 held by Clyra Medical;

(ii) 10,000 shares of Clyra Medical common stock redeemable for 7,142,858 BioLargo common shares (detailed below);

and (iii) a promissory note in the principal amount of $1,250,000 to be paid through new capital investments and revenue, as detailed below.

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at that time, one-half of the shares of Clyra Medical common stock exchanged for the Scion assets were released to Scion.

The remaining Clyra Medical common shares (a total of 15,500 shares) remain subject to the Escrow Agreement’s performance metrics, each vesting one-fifth of the remaining shares of common stock (e.g., 2,000 shares of Clyra common stock, and an additional 1,100 shares redeemable for 785,714 BioLargo shares):

The remaining Clyra Medical common shares (a total of 15,500 shares) remain subject to the Escrow Agreement’s performance metrics, each vesting one-fifth of the remaining shares of common stock:

(a) notification of FDA premarket clearance of certain orthopedics products, or recognition by Clyra Medical of $100,000 gross revenue;

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and (e) recognition by Clyra Medical of $2 million in gross revenue.

During the three months ended September 30, 2020, Clyra gross revenue exceeded $100,000, and thus the first performance metric was met.

As a result, Scion vested 3,100 common shares.

The fair value of the shares vested total $128,000 and was recorded on our balance sheet as In-Process Research and Development, and Liability to Clyra Medical Shareholder.

BIOLARGO, INC.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Scion Solutions – Note Payable and Clyra Liability

The promissory note in the principal amount of $1,250,000 issued by Clyra Medical to Scion on September 26, 2018 (“Clyra-Scion Note”) accrues interest at the rate of 5%.

Principal and interest due under the note are to be paid periodically at a rate of 25% of investment proceeds received by Clyra Medical.

At the initial maturity of June 17, 2020, the maturity date of the note automatically extended for 12 months and will continue to automatically extend for additional 12-month periods until the note is repaid in full.

Clyra is required to make annual payments on the note in an amount equal to the greater of (i) 25% of investment proceeds received during the 12-month period, and (ii) 5% of Clyra Medical’s gross revenues.

At September 30, 2020, the balance due on the Clyra-Scion Note equaled $1,007,000.

The shares of BioLargo common stock held by Clyra for the benefit of Scion (the redemption shares) totals $771,000 and is recorded on our balance sheet as a liability to “Clyra Medical Shareholder”.

Debt Obligations of Clyra Medical

Note Payable (Scion)

In conjunction with the transaction in which certain intellectual property was purchased from Scion, 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 due annually each June 26th until paid.

At March 31, 2021 and December 31, 2020, the balance due on the Clyra Medical Note Payable totaled $1,007,000.

Inventory 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, with a first draw of $200,000 received July 6, 2020.

Clyra is required to use funds from the line of credit to manufacture inventory.

On June 30, 2020, Clyra entered into a one-year 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 has received $260,000 in draws since the inception of the line of credit.

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.

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Clyra may prepay the note at any time.

Clyra has received a second draw under this line of credit (see Note 12).

Clyra Financing

During the nine months ended September 30, 2020, Clyra sold 2,742 shares of its common stock at $310 per Clyra share.

During 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.

BIOLARGO, INC.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

During the three months ended March 31, 2021, we made payments on the line of credit totaling $24,000.

As of March 31, 2021, the balance outstanding on this line of credit totals $200,000.

(See Note 13.)

As of September 30, 2020, Clyra Medical had the following common (and no preferred) shares outstanding:

Clyra Medical Equity transactions

As of March 31, 2021, Clyra Medical had the following common and preferred shares outstanding:

BioLargo, Inc.

1 unchanged sentence

Scion Solutions (1)

(1) Does not include an additional 12,400 shares held in escrow subject to performance metrics.

(2) Does not include options to purchase 10,153 of shares of Clyra stock.

BIOLARGO, INC.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

During 2019, Clyra began issuing options to its employees and consultants in lieu of compensation owed.

Does not include an additional 9,300 shares held in escrow subject to performance metrics that have not been met.

Sales of Common Shares

During the three months ended March 31, 2021, Clyra raised $50,000 at $310 per Clyra share.

Stock Options

Clyra issues options to its employees and consultants in lieu of compensation owed on a regular basis.

As of December 31, 2020, the Company had issued options to purchase 11,411 shares of Clyra stock.

In the three and nine months ended September 30, 2020, Clyra issued options to purchase 645 and 2,685 shares of Clyra Medical common stock.

During the three months ended March 31, 2021 and 2020, Clyra issued options to purchase 777 and 1,945 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 the three and nine months ended September 30, 2020, totaled $140,000 and $580,000, respectively, and the additional fair value totaling $214,000 was recorded as a loss on extinguishment of debt in our consolidated statement of operations.

The fair value of the options issued in in the three months ended March 31, 2021 and 2020 totaled $161,000 and $420,000.

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%.

Consulting Agreement

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 as full payment of the consulting fee, in lieu of cash.

The obligation to provide the consulting services is dependent on Clyra generating an average of $250,000 in monthly sales over three consecutive months.

The value of the shares issued to Beach House is recorded as a prepaid asset (see Note 2).

Clyra Accounts Payable and Accrued Expenses

Clyra had the following accounts payable and accrued expenses as follows:

Accounts payable and accrued expense

Accrued interest

Accrued payroll

Total Clyra Medical accounts payable and accrued expenses

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 (since extended), and entered into employment agreements with six scientists and engineers.

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 had no “profit interest,” as that term is defined in Tennessee law.

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 11, “ 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 were also granted options to purchase up to an aggregate 1,750,000 shares of BioLargo, Inc.

They also have been granted options to purchase up to an aggregate 1,750,000 shares of BioLargo, Inc.

common stock.

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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.

Since the commencement of operations, the Compensation Committee has met twice, once in September 2018, and once in November 2019.

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.

The Committee decided to roll forward one additional year to the time allowed for the performance metrics to be met and for the Class B units and stock options to be awarded.

In November 2019, the Compensation Committee again reviewed the operating performance and determined that a portion of the performance metrics were met.

It was agreed that one-half of the eligible profits interests would be vested (2.5% in the aggregate).

The fair value of the profit interest was nominal and not recorded.

Nevertheless, Biolargo treats the 2.5% profits interest as part of the noncontrolling interest on both the balance sheet and the statement of operations.

BIOLARGO, INC.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Business Segment Information

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The four operational business segments are:

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

Clyra Medical Technologies (“Clyra Medical”) -- which develops and sells medical products based on our technologies, including Clyraguard Personal Protective Spray;

ONM Environmental, Inc.

(“ONM”) -- which sells odor and volatile organic control products and services(located in Westminster, California);

Clyra Medical Technologies (“Clyra”) -- which develops and sells medical products based on our technologies;

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);

BIOLARGO, INC.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

BioLargo Water (“Water”) -- which historically focused entirely on R&D, and has now shifted its focus to commercializing the AOS technology, developing manufacturing operations for hand sanitizers and supporting the development of iodine based disinfecting products for the company (located in Edmonton, Alberta Canada).

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.

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Clyra Medical has been funded by third party investors who invest directly in Clyra Medical in exchange for equity ownership in that entity.

The segment information for the three and nine months ended September 30, 2019 and 2020, is as follows (in thousands):

Three months ended September 30,

Nine months ended September 30,

Clyra Medical

Intercompany revenue

The segment information for the three months ended March 31, 2021 and 2020, is as follows (in thousands):

March 31, 2021

Intersegment revenue

Research and development

Operating loss

BioLargo corporate

Clyra Medical

As of September 30, 2020

Elimination (1)

Interest expense

March 31, 2020

Intersegment revenue

Research and development

Operating loss

Interest expense

BIOLARGO, INC.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of March 31, 2021

Tangible assets

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As of December 31, 2020

Elimination (1)

Tangible assets

Investment in South Korean joint venture

Intangible assets

(1) – the “elimination” column reflects the net adjustment for receivables and payables generated between our related entities that are eliminated in consolidation.

BIOLARGO, INC.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Commitments and Contingencies

On March 11, 2020, the World Health Organization declared the outbreak of Coronavirus Disease 2019 (“COVID-19” or “virus”) as a global pandemic.

The full impact of COVID-19 is unknown and rapidly evolving.

The outbreak and any preventative or protective actions that the Company or its customers may take in respect of this virus may result in a period of disruption, including the Company’s financial reporting capabilities or its operations generally, and could potentially impact the Company’s customers and other third parties.

Any resulting financial impact cannot be reasonably estimated at this time, but may materially affect the business and the Company’s financial condition and results of operations.

The extent to which the COVID-19 impacts the Company’s results will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of COVID-19 and the actions to contain the virus or treat its impact, among others.

The Company has been operating remotely without any significant disruption of operations, although its clients have been disrupted.

The Company is currently evaluating the impact, if any, on its financial statements, and has not yet quantified what material impacts to the financial statements may result from the actions taken by the Company and its customers in respect of this virus.

Office Leases

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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 nine months ended September 30, 2019 and 2020, rental expense was $156,000 and $167,000, respectively.

For the three months ended March 31, 2021 and 2020, rental expense was $56,000 and $55,000, respectively.

As of March 31, 2021, our weighted average remaining lease term is three years and the total remaining operating lease payments is $479,000.

On January 1, 2019, we adopted ASC 842 which resulted in a right-of-use asset and lease liability.

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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.

We exercised our option to extend the lease for four years.

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 executed 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 renewal option for the Oak Ridge facility.

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.

there are not any common area maintenance charges or tax sharing arrangements, easement provisions or any free rent.

Since there is no explicit interest rate in leases, management used its incremental borrowing rate, which is estimated to be 18%.

As of September 30, 2020, our weighted average remaining lease term is three years and the total remaining operating lease payments is $578,000.

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.

Subsequent Events.

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

Sales of Stock to Lincoln Park

From October 1, 2020, through November 11, 2020, we sold 943,667 shares of our common stock to Lincoln Park (see Note 3) and received $135,000 in gross and net proceeds.

These sales were registered with the SEC on Form S-1, Registration Number 333-237651.

Inventory Line of Credit (Clyra Medical)

Subsequent to September 30, 2020, Clyra received a draw of $60,000 on its inventory line of credit (see Note 8).

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

Unit Offering Investment

From April 1, 2021, through May 12, 2021, we received one investment in our 2020 Unit Offering (see Note 3) of $50,000 and issued 285,714 shares of common stock, a six-month warrant to purchase 285,714 shares of common stock, and a five-year warrant to purchase 285,714 shares of common stock.

Sales to Lincoln Park

From April 1, 2021, through May 12, 2021, we sold 2,658,955 shares of our common stock to Lincoln Park and received $454,000 in gross proceeds.

(See Note 3.)

Conversion of Debt due April 2021

On its maturity date of April 20, 2021, we converted to equity a promissory note in the principal balance of $100,000, plus $9,995 of accrued interest, into 448,706 shares of our common stock.

Extension of Clyra Line of Credit

Subsequent to March 31, 2021, Clyra and the holder of its inventory line of credit (See Note 9) extended the maturity date to June 30, 2022.

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

This quarterly report on Form 10-Q contains forward-looking statements.

These forward-looking statements involve risks and uncertainties, including statements regarding BioLargo’s capital needs, business plans and expectations.

Such forward-looking statements involve risks and uncertainties regarding BioLargo’s ability to carry out its planned development and production of products.

Forward-looking statements are made, without limitation, in relation to BioLargo’s operating plans, BioLargo’s liquidity and financial condition, availability of funds, operating and exploration costs and the market in which BioLargo competes.

Any statements contained herein that are not statements of historical facts may be deemed to be forward-looking statements.

In some cases, you can identify forward-looking statements by terminology such as “may”, “will”, “should”, “expect”, “plan”, “intend”, “anticipate”, “believe”, “estimate”, “predict”, “potential” or “continue”, the negative of such terms or other comparable terminology.

Actual events or results may differ materially.

In evaluating these statements, you should consider various factors, including the risks outlined in our Form most recent annual report on Form 10-K, and, from time to time, in other reports BioLargo files with the SEC.

These factors may cause BioLargo’s actual results to differ materially from any forward-looking statement.

BioLargo disclaims any obligation to publicly update these statements, or disclose any difference between its actual results and those reflected in these statements.

The information constitutes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Given these uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.

Unless otherwise expressly stated herein, all statements, including forward-looking statements, set forth in this Form 10-Q are as of March 31, 2021, unless expressly stated otherwise, and we undertake no duty to update this information.

As used in this report, “we” and “Company” refers to (i) BioLargo, Inc., a Delaware corporation;

(ii) its wholly-owned subsidiaries BioLargo Life Technologies, Inc., a California corporation, ONM Environmental, Inc., a California corporation, BioLargo Development Corp., a California corporation, (iii) its majority-owned subsidiary BioLargo Engineering, Science & Technologies, LLC, a Tennessee limited liability company, and Canadian subsidiary BioLargo Water, Inc.;

and (iv) Clyra Medical Technologies, Inc.

(“Clyra”), a partially owned subsidiary.

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

Our Business - Innovator and Solution Provider

BioLargo, Inc.

invents, develops, and commercializes innovative platform technologies to solve challenging environmental problems like PFAS contamination, advanced water and wastewater treatment, industrial odor and VOC control, air quality control, and infection control.

With over thirteen years of extensive R&D, BioLargo holds a wide array of issued patents, maintains a robust pipeline of products, and provides full-service environmental engineering.

Our peer-reviewed scientific approach allows us to invent or acquire novel technologies and develop them to maturity through our operating subsidiaries.

With a keen emphasis on collaborations with academic, municipal, and commercial organizations and associations, BioLargo has proven itself with over 80 awarded grants and numerous pilot projects.

We monetize through direct sales, recurring service contracts, licensing agreements, strategic joint venture formation and/or the sale of the IP.

In the last year, we developed and refined new technologies that are now ready for commercial trials (see Development of AEC to Combat PFAS Crisis , and New Technology – Mineral Extraction) , formalized strategic relationships to expand sales and revenues (see South Korean Joint Venture , and Full Service Environmental Engineering ), arranged for demonstration pilot projects for our AOS water treatment system (see Sunworks Farm Pilot and Municipal Wastewater Treatment Pilot – Montreal ), increased revenues, including those of our flagship product, CupriDyne Clean (see Results of Operations), and began the process to register our CupriDyne technology with the EPA to make advanced sanitization and disinfection claims, all the while we and the world struggled through the challenges presented by the COVID-19 pandemic.

Several of our technologies are commercially available and are advancing as disrupters in their respective markets.

Formula for Success:

Technology, Talent and Purpose

The Company has continually advanced its robust portfolio of technologies since the first acquisition of early iterations of the BioLargo technology in the spring of 2007.

Our innovations have primarily been developed through the company’s internal resources, and some through acquisition.

These include patents, patents pending and trade secrets that include solutions for:

SARS-CoV-2 solutions

Air quality controls and systems including odor and VOC control

Water decontamination

Micro-pollutant destruction and removal

Legionella detection and water treatment solutions

Mineral processing

Infection control

Wound management

Regenerative tissue therapy

We have steadily grown our team to 27 team members and numerous other part-time consultants, including highly qualified PhDs, engineers, MDs and medical professionals, construction professionals, field service technicians, innovators, sales marketing specialists, entrepreneurial and executive leadership.

Our mission to make life better centers our company on serving others with integrity, knowledge, technology, and solutions that protect the environment, improve quality of life, and protect lives.

We are unique in our ability to tailor our offerings to serve our customers with proven expertise, proven technology and, if needed, we often have the ability to develop new technical solutions to meet our customer’s needs.

Development of AEC to Combat PFAS Crisis

Our engineers at BLEST have developed a novel water treatment system, called the AEC (Aqueous Electrostatic Concentrator), that removes per- and poly-fluoroalkyl substances (PFAS) from water at a fraction of the cost of existing solutions.

PFAS chemicals can cause cancer, infertility, asthma, and other health problems in human beings, are present in a vast range of manufactured goods, common household products (e.g., cleaning products, cookware), and electronics, and contaminate drinking water in unsafe levels all over the globe.

Governments and industry are actively seeking less expensive technologies and processes to eliminate PFAS from groundwater and drinking water.

Environmental Protection Agency (“EPA”) has made finding an economical solution a priority, announcing in February 2021 final regulatory determinations on the safe maximum levels of PFAS in drinking water, paving the way for regulating the chemicals through the Safe Drinking Water Act and creating a regulatory environment where municipalities will be required to install technologies that help remove PFAS from their drinking water supplies prior to distribution.

PFAS water contamination is a significant problem worldwide.

In the United States, PFAS chemicals have been estimated to be present in the blood of 98% of the population and have been linked to a plethora of health problems including high cholesterol, liver dysfunction, immune disorders and various cancers.

Over 1,400 communities so far in the U.S.

have been proven to be affected by PFAS water contamination.

In Orange County, California, where our corporate offices are located, more than 40 drinking water wells have been taken out of service due to PFAS contamination, and county officials estimate that treating the wells using existing technologies will cost more than $200 million in capital costs and more than $400 million in maintenance and operating costs, with a total cost over 30 years of nearly $1 billion.

When PFAS-laden carbon is incinerated, not only does it produce vast volumes of greenhouse gases such as carbon dioxide, but new evidence suggests volatile fluorochemicals like carbon tetrafluoride, hexafluoroethane, and hydrogen fluoride are released into the air which may have serious human health impacts on adjacent communities.

Our technology does not require incineration.

Our AEC treatment system has been proven in lab-scale studies to meet or exceed the performance of current incumbent solutions (such as carbon-filtration and reverse osmosis) while consuming as little as $0.30 in electrical costs per 1,000 gallons treated.

And most significantly, the AEC produces substantially less waste than carbon-filtration and reverse osmosis systems, creating far less of a disposal liability.

We believe testing will show that total operating costs of the AEC represent a significant potential cost savings compared to reverse osmosis and carbon sequestration technologies.

In the first quarter of 2021, BioLargo Engineering achieved a critical technical milestone in the development and refinement of the AEC that may have far-reaching effects on the technology’s commercial rollout and long-term profitability as cornerstone technology for BioLargo.

The development involved modifying the electrical configuration of the AEC to extend the useful lifespan of its specialized membranes, which are a crucial component of the technology.

This advancement has improved the operating and maintenance metrics for the technology, potentially reducing the frequency of membrane replacement by a factor of six.

The company has filed at least one patent application to expand the existing intellectual property coverage for the AEC with the new modification.

We are in the final stages of refining the AEC technology prior to commercial sales.

We have received interest in the system from multiple municipal water agencies, the federal government, multiple service providers that want to partner to serve airports and military bases, and large engineering firms that want to discuss potential business alliances.

We have completed third-party testing to validate the efficacy of the system.

We have designed a modular system that can theoretically handle large projects.

We are constructing a pilot unit for testing at an ongoing project at a municipal water treatment plant in Canada (see Wastewater Treatment Pilot – Montreal, below).

We are hopeful to start multiple pre-commercial trials in the U.S.

by the end of summer.

We have also initiated discussions with potential partners to explore business alliances to serve the European markets.

There are three main markets for PFAS water treatment in the U.S., each of which we intend to address in the coming years.

The first is municipal water treatment – that is water which needs treatment for PFAS before it can be distributed to the public or water that must be treated from a wastewater treatment plant.

Southern California, Michigan and Wisconsin may be hotbeds for this market, as the states have adopted stringent regulations on PFAS limits in drinking water and wastewater, and significant initiatives have begun to implement systems to address the problem.

The second market is military bases, where the use of PFAS-containing fire-fighting foam has contaminated the soil and groundwater.

These sites are numerous and have significant groundwater and soil contamination problems which regulators are likely to require remediation for in the coming years.

The third market is treatment for water intake or outfalls of industrial facilities that use PFAS compounds in manufacturing and other industrial processes.

Our first pilot projects are in municipal water treatment.

As our engineers are already providing environmental engineering services on U.S.

Air Force bases, we believe that work may lead to sales in that arena.

While the AEC is designed to efficiently remove and collect PFAS to allow for efficient disposal, our engineers have also conceived of a number of techniques to provide efficient destruction of concentrated PFAS and the membrane collection systems involved in the AEC system.

ONM Environmental - Industrial Odor and VOC Solutions

In 2020, we changed the name of our odor control subsidiary Odor-No-More, Inc., to ONM Environmental, Inc., to reflect the expansion of its work from odor control sales to more robust environmental services.

Its flagship product, CupriDyne® Clean, reduces and eliminates tough odors and volatile organic compounds (“VOCs”) in various industrial settings.

CupriDyne Clean is delivered through misting systems, sprayers, water trucks and similar water delivery systems designed, manufactured and installed by ONM.

We believe the product is the number-one performing odor-control product in the market, and that it offers substantial savings to our customers compared with competing products.

In response to customer demand for expanded services, ONM now holds General, Electrical, Plumbing and Low Voltage contractor licenses issued by the California Contractors State License Board, and offers a menu of services to landfills, transfer stations, wastewater treatment facilities as well as facilities in non-waste related industries.

These services include engineering design, construction, installation, ongoing maintenance and on-site support services to assist our clients in the implementation and continued use of the various systems that deliver our liquid products in the field (such as misting systems).

Our customer base for our odor and VOC business was expanding prior to the COVID-19 crisis and we expect it to continue doing so as the United States recovers from the pandemic.

We have been and expect to continue selling product to the largest solid waste handling companies in the country.

Very recently, some of the capital projects that ONM previously had on hold due to logistical limitations imposed by the pandemic have begun to come back online, with decision-makers from these clients requesting that ONM resume work on these projects.

We also have a number of potential partners actively engaged in commercial trials around the globe and we are actively in discussion with a number of groups to leverage our commercial focus through distribution partnerships.

Last year, ONM Environmental acquired a deodorizing and sanitizing technology, called EcoMist®, that helps raise the customer care bar for solid waste collectors to treat all types of waste receptacles in real time during pick up.

EcoMist® is a device installed directly onto any waste collection vehicle that automatically sprays odor control products and/or sanitizer into refuse bins or dumpsters during the waste collection process.

ONM plans to test market the product directly with its major solid waste handling customers by packaging it with CupriDyne Clean.

A video showing EcoMist® in operation can be viewed here:

https://www.biolargo.com/ecomist-video .

EcoMist® is easy to install and use – it works “out-of-the-box”, allowing customers to install the system themselves, and will thus not require a significant investment in logistics and servicing to support sales.

ONM’s acquisition of EcoMist® is part of its strategy to grow revenues of its air quality control division through chemistry deployment systems that lead to more scalable sales of CupriDyne Clean.

It also helps ensure ONM can provide the largest waste handling companies in the country with a broad range of tools to solve their odor and VOC control challenges in all facets of their business.

ONM’s only obligation under the acquisition agreement is a 10% royalty on EcoMist® system sales.

Cannabis Industry

Our CupriDyne Clean product is sold to the Cannabis industry under a private-label brand through a third party, Mabre Systems.

Testing shows that CupriDyne Clean eliminates the odors emitted by Cannabis grow and production facilities.

Sales to the industry we severely impacted by the pandemic, and we expect and hope that sales will increase this fiscal year.

South Korean Joint Venture

On February 12, 2020, we executed a “Joint Venture Framework Agreement” with a leading wastewater treatment solution provider based in South Korea (BKT Co.

Ltd., “BKT”), to create a South Korean entity that would manufacture odor and VOC control products based on our CupriDyne Clean products.

We own 40% of the joint venture.

Although the joint venture established manufacturing and is marketing the product, the pandemic significantly impacted the expected growth of the company.

In late 2020, the joint venture (under the name Odin) established corporate offices at the Korea Water Cluster, which is a new world-renowned water innovation campus located in Daegu, South Korea, a center for industrial innovation in Asia.

The move positions Odin well to interface with other innovators in the water treatment sector as well as with industry leaders who may need Odin’s products for air quality control.

Full Service Environmental Engineering

Our subsidiary BioLargo Engineering, Science & Technologies, LLC (“BLEST”) offers full service environmental engineering to third parties and provides engineering support services to our internal teams to accelerate the commercialization of our technologies.

Its website is found at www.BioLargoEngineering.com.

BLEST focuses its efforts in three areas:

providing engineering services to third-party clients;

supporting internal product development and business units’ services to customers (e.g., the AOS);

advancing their own technical innovations such as the AEC.

The subsidiary is located in Oak Ridge (a suburb of Knoxville, Tennessee), and employs seven scientists and engineers who collectively worked together for almost 30 years and experience in diverse engineering fields.

The team is led by Randall Moore, who served as Manager of Operations for Consulting and Engineering for the Knoxville office of CB&I Environmental & Infrastructure and was formerly a leader at The Shaw Group, Inc., a Fortune 500 global engineering firm.

The other team members are also former employees of CB&I and Shaw.

The team is highly experienced across multiple industries and they are considered experts in their respective fields, including chemical engineering, wastewater treatment (including design, operations, data gathering and data evaluation), process safety, energy efficiency, air pollution, design and control, technology evaluation, technology integration, air quality management & testing, engineering management, permitting, industrial hygiene, applied research and development, air testing, environmental permitting, HAZOP review, chemical processing, thermal design, computational fluid dynamics, mechanical engineering, mechanical design, NEPDES permitting, RCRA/TSCA compliance and permitting, project management, storm water design & permitting, computer assisted design (CAD), bench chemistry, continuous emission monitoring system operator, data handling and evaluation and decommissioning and decontamination of radiological and chemical contaminated facilities.

The engineering team also has developed an extended network of trusted engineering subcontractors that assist in serving specific client projects as needed, from time to time.

BLEST established a partnership with Garratt-Callahan, a national industrial water treatment company, to develop and then sell custom wastewater treatment equipment to recycle water from commercial facilities.

They plan to launch the commercial sales of the new systems in late 2021 or early 2022.

BLEST will serve as the manufacturing partner and Garratt Callahan will serve as the selling distributor to leverage their national sales force and over one hundred years of providing services and products to customers.

BLEST is also working with Garratt Callahan to expand sales of other BioLargo products.

While early, the parties are working closely together and have successfully sold other BioLargo products to customers within the Garratt Callahan network of customers.

BLEST has recently hired a regional vice president to lead and open an office for BLEST at our corporate offices in Westminster, California.

New Technology – Mineral Extraction

At the request of a client, BLEST developed a proprietary and patent-pending process to extract valuable minerals from certain types of industrial waste.

As a result of this invention, the client is planning a substantial long-term project expected to generate over $1B in revenues, while avoiding expensive soil remediation costs.

We are in negotiations to take the lead as project owner/operator.

We believe there are multiple similarly situated industrial waste sites across the country and around the world that would benefit from our newly developed process, and, as resources permit, we intend to explore these opportunities.

BioLargo Water and the Advanced Oxidation System – AOS

BioLargo Water is our wholly owned subsidiary located on campus at the University of Alberta, Edmonton, Canada, that developed and is commercializing our Advanced Oxidation System (AOS).

The AOS is our patented water treatment device that generates a series of highly oxidative species of iodine and other molecules that, because of its proprietary configuration and inner constituents, allow it to eliminate pathogenic organisms and organic contaminants as water passes through the device.

The key value proposition of the AOS is its ability to eliminate a wide variety of contaminants with high performance while consuming extremely low levels of input electricity and extremely low levels of chemistry inputs – a trait made possible by the complex set of highly oxidative iodine compounds generated within the AOS reactor.

Our proof-of-concept studies and case studies have generated results that project the AOS will be more cost- and energy-efficient than commonly used advanced water treatment technologies such as UV, electro-chlorination, and ozonation.

This value proposition may enable advanced water treatment in applications where it otherwise would have been prohibitively costly.

Secondly, the AOS has been proven effective against certain soluble organic molecules, pharmaceuticals and a host of other micropollutants which are difficult to treat with other conventional tertiary water treatment technologies like UV.

This characteristic of the AOS may offer a significant incentive for prospective customers to choose this technology over established incumbents because of the need in certain contexts to address these hard-to-treat contaminants, in addition to traditional targets of tertiary treatment like microorganisms.

BioLargo’s AOS water treatment technology has completed several pre-commercial demonstration pilots, including one at a poultry farm in Alberta, one at a microbrewery in Southern California, and another in Southern California where stormwater was treated by the AOS.

It has an ongoing pilot near Montreal to treat municipal wastewater.

Presently, we are working to plan the first commercial trials for the AOS technology, starting with Sunworks Farm (read more below).

The company plans to secure additional agreements for commercial trials with suitable early-adopter industrial and agricultural wastewater treatment customers in 2021 as part of its plan to directly market the technology for its first revenue-generating projects.

To help achieve this goal, in the last quarter BioLargo participated in an invite-only Isle Utilities Industrial Technology Approval Group (iTAG) event to develop leads among potential multinational wastewater treatment customers.

At Isle Utilities’ iTAG (Industrial Technology Approval Group) events, which are held three times per year, water specialists, sustainability/innovation managers and other experts from global industries vote on promising water technologies they would like to learn about.

Some iTAG member companies include Coca-Cola, Shell, and Proctor & Gamble.

Sunworks Farm Pilot

Our efforts to establish our first commercial pilot for the AOS system, at a poultry and livestock farm in Alberta, Canada, is progressing.

We plan to have installed a fully functional treatment train featuring our AOS water system at the client’s farm in the third quarter of 2021, although ongoing Canadian pandemic lockdowns may delay the project.

When complete, the system will be the first of its kind to allow for the complete reuse of this industrial wastewater, allowing the client to significantly save on water costs and expand production.

The project budget of approximately $600,000 will be funded in part by government grants and in part by the client.

We expect the project to be successful, and to set a precedent for the AOS and BioLargo’s total water treatment solutions for future customers seeking water reuse, or even “zero liquid discharge” systems, and we believe will lead to follow-up projects with customers who follow Sunworks’ example.

Municipal Wastewater Treatment Pilot - Montreal

BioLargo Water has commenced a second commercial-scale AOS demonstration pilot, which was installed at a municipal wastewater treatment facility near Montreal, Quebec, to be run in partnership with acclaimed water experts at the Centre des Technologies de L’Eau (CTE).

The purpose of the project is to assess the AOS (and eventually, an AEC unit to be added on to the treatment train) as effective, cost-efficient, and complementary solutions for disinfecting and eliminating a broad range of recalcitrant contaminants from municipal wastewater in an operating wastewater treatment plant.

It is our belief that once these pre-commercial pilots have concluded with the AOS, our ability to entice major water industry players to partner with BioLargo Water to accelerate market adoption of the AOS will be increased dramatically.

Clyra Medical Technologies

Clyra Medical Technologies, Inc.

is our partially owned subsidiary creating medical products based on our technology.

When the COVID-19 crisis began, we immediately responded by supporting the team at Clyra Medical to develop a product that could help frontline workers battle the pandemic.

In response, they developed Clyraguard Personal Protection Spray.

Testing and peer-reviewed published data confirmed that Clyraguard inactivates the SARS CoV-2 coronavirus.

The product was registered with the FDA as a Class I general purpose disinfectant, and initially sales were brisk.

After consultation with legal and regulatory advisors, we decided that the product’s claims required an EPA registration, and sales were stopped.

We are actively working on this now (see CupriDyne Plus , below).

Clyra is preparing to launch a prescription-only product to be used by orthopedic surgeons to reduce infections in knee and hip replacement surgeries.

Its other product designs are on hold until such time as it is able to secure the capital and resources to complete any final development and support additional inventory, technical support and sales for these products.

CupriDyne Plus

At the outset of the Covid-19 pandemic, we set out to revisit and modify the CupriDyne technology with the goal of creating a powerful yet comparatively safer, non-toxic, and environmentally friendly disinfectant and/or surface sanitizer.

The result of this redevelopment process, which involved over 500 hours by our engineers and scientists, was “CupriDyne Plus”, a product that delivers a potent concentration of the active ingredient iodine (I2) as compared to traditional CupriDyne based formulations, meaning it can achieve much faster and more complete results.

We were successful in achieving these technical objectives.

EPA Registration of CupriDyne Plus

We are actively working to obtain an EPA registration for CupriDyne Plus for a number of different applications.

CupriDyne Plus has the potential to offer a safer, more environmentally friendly alternative to bleach and other common antimicrobials for applications like hard surface disinfection, sanitization of non-porous non-food contact surfaces, disinfection of air, textiles, and more.

Our scientists have conducted many of the tests required for EPA registration.

Based on our extensive work, we are confident it meets the minimum performance requirements required for EPA registration as a disinfectant and/or surface sanitizer.

We have met with and presented data to officials at the EPA for the purpose of refining our product and determining additional data requirements, and have retained a firm specializing in EPA registration work to help us through the process.

While we are not able to predict the results of any EPA application we submit, or the time it will take to complete the process, we believe the market opportunities are large, with the U.S.

market for surface disinfectants at more than $1 billion annually.

BioLargo has advanced its technologies and infrastructure to achieve a critical mass to capitalize on its commercial efforts and have a positive impact around the world with clean water, clean air, and infection control solutions.

The company presents a scalable business model that targets high impact cleantech market opportunities.

We leverage our considerable scientific, engineering, and entrepreneurial talent to monetize our technologies and ensure high-quality customer service and increased revenue potential.

We seek to unlock the value of our portfolio of disruptive technologies to advance our mission to “make life better” and continue creating shareholder value.

As we plan to retire our last convertible debt this coming summer and continue to achieve new technical and business accomplishments, we are experiencing a swell in customer awareness and market acceptance of our special skills to serve customers.

Our revenue and commercial opportunities are extensive, important and expanding.

We offer services through our team of highly qualified specialists in engineering, science and general contractor and construction and maintenance teams.

We leverage those efforts with top performing products like our CupriDyne based products, the AOS, the AEC and more.

We continue to expand our distribution and sales tools through partnerships like BKT/Odin and Garratt-Callahan.

We leverage the combination of talent and products through engagement by and through our professional engineering services company to bid and win projects.

We are expanding our technology portfolio through organic innovation, collaborations and through acquisition.

Results of Operations

We operate our business in distinct business segments:

ONM Environmental, which manufactures and sells our odor and VOC control products and services, including our flagship product, CupriDyne Clean;

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

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

Clyra Medical, our partially owned subsidiary focused on the medical device industry;

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

Of these business segments, three generate revenue:

ONM Environmental, BLEST, and Clyra Medical.

Our revenue increased for the three months ended March 31, 2021 by 30% as compared to the prior year’s period.

Due to an almost 90% decrease in interest expense as a result of payment and conversion to equity of debt instruments in the past twelve months, our net loss for the three months ended March 31, 2021, decreased by 28% as compared to the prior year’s period.

ONM Environmental

During the three months ended March 31, 2021, our wholly owned subsidiary ONM Environmental generated revenues through sales of its flagship product CupriDyne Clean, and by providing design, installation, and maintenance services on the systems that deliver CupriDyne Clean at its clients’ facilities.

Of its gross sales in the three months ended March 31, 2021, approximately 90% were to the waste handling industry.

Revenue (ONM Environmental)

ONM Environmental’s revenues for the three months ended March 31, 2021, increased $24,000 or 8% from the same period in 2020, and decreased $297,000 or 48% from the prior three months ended December 31, 2020.

Substantially all of its revenue is from sales of CupriDyne Clean products and related system installations, and the remaining from sales of our absorption products to the U.S.

The small increase in revenue in the first quarter of 2021 as compared with the first quarter of 2020 is due to a decrease last year related to the pandemic.

The decrease in revenue in the first quarter of 2021 as compared with the fourth quarter of 2020 is due seasonal increases and decreases related to the year-end, we completed multiple capital projects as our customers closed out their year of operations and budgets.

This is a pattern that the company has experienced in prior years, and historically which has rebounded as the season shifts.

Of our CupriDyne Clean sales, approximately one-half were made pursuant to “national purchasing agreements” (“NPA”) with the three largest waste handling companies in the United States.

Cost of Goods Sold (ONM Environmental)

ONM Environmental’s cost of goods sold includes costs of raw materials, contract manufacturing, and portions of salaries and expenses related to the manufacturing of our products.

As a percentage of revenue, ONM Environmental’s costs of goods was 41% in the three months ended March 31, 2021, versus 45% in the same period in 2020.

The increase in cost of goods was due to increased labor charges from prevailing-wage requirements for public works jobs in the recent quarter.

Selling, General and Administrative Expense (ONM Environmental)

ONM Environmental’s selling, general and administrative expenses remained consistent at approximately at $320,000 in the three months ended March 31, 2021 and 2020.

These expenses have remained consistent as we work to increase revenues with our current level of sales and administrative staff.

We do not expect these expenses to increase further unless and until our revenues increase.

Net Loss (ONM Environmental)

For the three months ended March 31, 2021, ONM Environmental generated $320,000 in revenue, a gross margin of $144,000, and had total costs and expenses of $320,000, resulting in a net loss of $176,000.

BLEST (engineering division)

Revenue (BLEST)

Our engineering segment (BLEST) generated $127,000 of revenues from third party clients in the three months ended March 31, 2021, versus $156,000 in revenue in comparable period in 2020.

BLEST revenues reported on our consolidated statement of operations do not include work performed on internal BioLargo projects, such as its further engineering and development of the AOS water filtration system, development of the AEC to combat the PFAS crisis (see “ Development of AEC to Combat PFAS Crisis ” above), and other new innovations.

Its revenues decreased due to its focus on these internal projects.

Cost of Goods (Services) Sold (BLEST)

BLEST’s cost of services includes employee labor as well as subcontracted labor costs.

In the three months ended March 31, 2021, its cost of services were 82% of its revenues, versus 83% in the three months ended March 31, 2020.

We expect the cost of services to remain closer to 80% in the reminder of the year ending December 31, 2021, based on our current client activity.

Selling, General and Administrative Expense (BLEST)

BLEST’S SG&A expenses include expense related to its operations, although because it primarily delivers services to its clients, most of its labor costs are included in its cost of services (for third party clients), and research and development for its work on BioLargo technologies.

BLEST selling, general and administrative expenses during the three months ended March 31, 2021 totaled $100,000 compared to $113,000 for the three months ended March 31, 2020.

Net Loss (BLEST)

BLEST generated $127,000 in revenue to outside clients, with a gross margin of $23,000, and had total costs and expenses of $206,000, resulting in a net loss of $183,000.

While we are unable to record revenues generated from intracompany services by the engineering group to other operating divisions, it is important to note that the net loss would be eliminated if BLEST were an outside contract for hire services company selling services to BioLargo or its subsidiaries.

Our wholly owned Canadian subsidiary has been awarded more than 80 research grants over the years from various Canadian public and private agencies, including the Canadian National Research Institute – Industrial Research Assistance Program (NRC-IRAP), the National Science and Engineering Research Council of Canada (NSERC), and the Metropolitan Water District of Southern California’s Innovative Conservation Program “ICP”.

The research grants received are considered reimbursement grants related to costs we incur and therefore are included as Other Income.

We continued to win grants and it is important to note that amounts paid directly to third parties are not included as income in our financial statements.

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

Selling, General and Administrative Expense – consolidated

Our SG&A expenses include both cash expenses (for example, salaries to employees) and non-cash expenses (for example, stock option compensation expense or non-cash charges to interest).

Our SG&A expenses increased by 14% ($215,000) in the three months ended March 31, 2021 compared to the three months ended March 31, 2020.

Our non-cash expenses totaled $730,000, through the issuance of stock, stock options, amortization of debt discounts and loss on extinguishment of debt in the three months ended March 31, 2021, compared to $1,590,000 in the three months ended March 31, 2020.

Our employees, vendors and consultants chose to receive a greater number of stock and stock options in lieu of cash owed and as part of an employee retention program.

The largest components of our SG&A expenses included (in thousands):

March 31, 2021

March 31, 2020

Salaries and payroll related

Professional fees

Office expense

Board of directors expense

Sales and marketing

Investor relations

The increase in salaries and payroll expenses is primarily related to the implementation of a stock option bonus compensation program for employees and other related stock option compensation expenses, and also the hiring of additional personnel to support increasing operations.

Consulting expense increased as we have engaged consultants to identify business opportunities and to help with the retail sales of the Clyraguard product.

The reduction in professional fees is largely due to the reduced use of outside legal counsel and other service providers.

Research and Development

In the three months ended March 31, 2021, we spent $327,000 in the research and development of our technologies and products.

This was a decrease of 2% ($7,000) compared to the three months ended March 31, 2020.

Interest expense

Our interest expense for the three months ended March 31, 2021, was $93,000, a decrease of $664,000 compared with the three months ended March 31, 2020, of which $26,000 was paid in cash, and $43,000 is related to the amortization of discount on convertible notes, and the remaining to other non-cash expense.

Our interest expense related to the issuance of and modification of convertible promissory notes.

Since March 31, 2020, we converted or paid almost $4 million in debt.

As such, we expect our interest expense to be significantly lower in each quarterly period of the year ending December 31, 2021, as compared with the same periods in 2020.

Loss on extinguishment of debt

In the three months ended March 31, 2020, we recorded a loss on extinguishment of debt related to transactions with current vendor and employees where Clyra Medical is unable to pay obligations in cash.

In lieu of cash, the vendors and employees accepted options to purchase shares of Clyra stock.

The fair value of those options exceeded the debt that was converted by $214,000.

Net loss for the three months ended March 31, 2021, was $1,878,000, a loss of $0.01 per share, compared to a net loss for the three months ended March 31, 2020, of $2,616,000, a loss of $0.01 per share.

The 28% decrease in net loss is due primarily to a reduction in interest expense.

As noted in above (see “ Interest Expense ”), the reduction of interest expense is directly related to our reduction of the use of debt instruments to finance our working capital requirements.

The net loss per business segment is as follows (in thousands):

March 31, 2021

March 31, 2020

ONM Environmental

Clyra Medical

BioLargo Water

Consolidated net loss

Liquidity and Capital Resources

We have been, and anticipate that we will continue to be, limited in terms of our capital resources.

During the three months ended March 31, 2021, we generated revenues of $571,000 through our subsidiaries.

Our subsidiaries did not individually or in the aggregate generate profits sufficient to fund their operations, or for our corporate operations or other business segments.

Thus, to fund our working capital requirements, we have continued to sell securities to raise cash.

As of March 31, 2021, our cash and cash equivalents totaled $1,341,000, and our total liabilities included $506,000 in debt that is convertible at the option of the debtholders, $100,000 of debt that we converted to equity at the April 2021 maturity date, $100,000 notes due on demand, $200,000 owed by our partially owned subsidiary Clyra due in June 2021, and $1,007,000 owed by Clyra with a maturity date that automatically extends each June.

During the three months ended March 31, 2021, we received $2,001,000 in proceeds from stock sales to Lincoln Park and $105,000 from investments in our 2020 Unit Offering (see Part II, Item 2 and Item 5), and made repayments of debt totaling $674,000.

We have two promissory notes due in August 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.

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.

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 three months ended March 31, 2021, they accepted shares in lieu of $31,000 of accrued and unpaid salary to our officers.

Each has indicated a willingness to do so in the future.

We operate our business in five distinct business segments.

Each of these segments obtains cash to fund operations in unique ways.

ONM and BLEST generate cash by selling products and services.

Clyra Medical obtains cash from revenues, and third-party investments of sales of its common stock.

BioLargo Water generates cash through government research grants and tax credits as well Our corporate operations currently generate cash through private offerings of stock, debt instruments, and warrants and then provides supplemental capital to support to its various subsidiaries as they advance their technologies, products and commercial efforts.

Critical Accounting Policies

Our discussion and analysis of our results of operations and liquidity and capital resources are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States.

The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and disclosure of contingent assets and liabilities.

On an ongoing basis, we evaluate our estimates and judgments, including those related to revenue recognition, valuation of offerings of debt with equity or derivative features which include the valuation of the warrant component, any beneficial conversion feature and potential derivative treatment, and share-based payments.

We base our estimates on anticipated results and trends and on various other assumptions that we believe are reasonable under the circumstances, including assumptions as to future events.

These estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.

By their nature, estimates are subject to an inherent degree of uncertainty.

Actual results that differ from our estimates could have a significant adverse effect on our operating results and financial position.

Note 2, “Summary of Significant Accounting Policies” in Part I, Item 1 of this Form 10-Q and in the Notes to Consolidated Financial Statements in Part II, Item 8 of the 2020 Form 10-K, and “Critical Accounting Policies and Estimates” in Part II, Item 7 of the 2020 Form 10-K, describe the significant accounting policies and methods used in the preparation of the Company’s consolidated financial statements.

There have been no material changes to the Company’s critical accounting policies and estimates since the 2020 Form 10-K.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements