Item 9A. Controls and Procedures
ITEM 9A. CONTROLS AND PROCEDURES
 
Evaluation of Disclosure Controls and Procedures
 
We conducted an evaluation, under the supervision and with the participation of management, including our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this Annual Report.
 
Our procedures have been designed to ensure that the information relating to our company, including our consolidated subsidiaries, required to be disclosed in our SEC reports is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow for timely decisions regarding required disclosure. However, our Company is continuing to grow and evolve. The volume of our product sales continues to grow, increasing strain on our accounting systems. And, our operations do not yet generate enough cash to fund operations, and thus we rely on financing activities to maintain our level of operations and fund our anticipated growth. In combination, these activities put stress on our overall controls and procedures. Based on this evaluation, our chief executive officer and chief financial officer concluded that as of the evaluation date our disclosure controls and procedures were not effective, due to the material weakness identified below.
 
It should be noted that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.
 
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Management ’ s Report on Internal Control over Financial Reporting
 
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Our internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements.
 
Under the supervision and with the participation of our management, including our chief executive officer and the chief financial officer, we have established internal control procedures in accordance with the guidelines established in the 2013 Framework —Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Management evaluated the effectiveness of our internal controls, and concluded that due to our limited financial and personnel resources, and the fact that we operate our business in three distinct locations in the U.S. and Canada, we continue to have a material weakness in our internal controls with respect to the closing our financial statements. Until the Company has the financial resources to implement more robust automated systems, or to hire additional dedicated accounting personnel, we expect this material weakness to continue. In reaching this conclusion, management considered that despite this weakness, and others identified in past years, the company has not identified material misstatements in prior financial statements, and believes that the material weakness identified herein is not likely to lead to a material misstatement in the financial statements contained within this report.
 
Management has concluded that its internal controls over financial reporting are not effective. Management identified a material weakness with respect to deficiencies in its financial closing and reporting procedures. Management believes this is due to a lack of resources. Management intends to add accounting personnel and operating staff and more sophisticated systems in order to improve its reporting procedures and internal controls, subject to available capital. A material weakness is a significant deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected. While management has recognized the material weakness, nothing additionally has changed in internal controls over financial reporting in the fourth quarter or the fiscal year ended December 31, 2021.
 
This Annual Report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s independent registered public accounting firm pursuant to rules of the SEC that permit the Company to provide only management’s report in this Annual Report.
 
Our management, including our chief executive officer and chief financial officer, does not expect that our disclosure controls or our internal control over financial reporting, or any system we design or implement in the future, will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
 
Changes in Internal Control over Financial Reporting
 
There were no changes in the Company’s internal control over financial reporting during the fourth quarter of 2021, which were identified in connection with management’s evaluation required by paragraph (d) of Rules 13a-15 and 15d-15 under the Exchange Act, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
 
ITEM 9B. OTHER INFORMATION
 
None.
 
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PART III
 
Certain information required by Part III is incorporated by reference from our Proxy Statement to be filed with the SEC in connection with the solicitation of proxies for our 2022 Annual Meeting of Stockholders, currently scheduled to be held on June 2, 2022 (the “Proxy Statement”).
 
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
 
The information required by this section is incorporated by reference from the section entitled “Proposal One—Election of Directors” in the Proxy Statement. Item 405 of Regulation S-K calls for disclosure of any known late filing or failure by an insider to file a report required by Section 16 of the Exchange Act. This disclosure is incorporated by reference to the section entitled “Section 16(a) Beneficial Ownership Reporting Compliance” in the Proxy Statement. The information required by this Item with respect to our executive officers is contained in Item 1 of Part I of this Annual Report under the heading “Business—Executive Officers”.
 
ITEM 11. EXECUTIVE COMPENSATION
 
The information required by this section is incorporated by reference from the information in the section entitled “Executive Compensation” in the Proxy Statement.
 
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
 
The information required by this section is incorporated by reference from the information in the section entitled “Security Ownership of Certain Beneficial Owners and Management” in the Proxy Statement.
 
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
 
The information required by this section is incorporated by reference from the information in the section entitled “Certain Relationships and Related Transactions” in the Proxy Statement.
 
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
 
The information required by this section is incorporated by reference from the information in the section entitled “Ratification of Appointment of Independent Auditor” in the Proxy Statement.
 
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PART IV
 
ITEM   15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
 
The following documents are filed as a part of this report:
 
1.  Financial Statements . The consolidated financial statements required to be filed in this report are listed on the Index to Financial Statements immediately preceding the financial statements.
 
2.  Financial Statement Schedules . Separate financial statement schedules have been omitted either because they are not applicable or because the required information is included in the consolidated financial statements or the notes thereto.
 
3.  Exhibits.  See the Exhibit Index for a list of the exhibits being filed or furnished with or incorporated by reference into this report.
 
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Table of Contents
 
Exhibit Index
 
 
 
Incorporated by
Reference Herein
Exhibit
Number
Exhibit Description
Form
File Date
3.1
Bylaws of BioLargo, Inc., as amended and restated
Form 10-KSB
5/23/2003
3.2
Amended and Restated Certificate of Incorporation for BioLargo, Inc. filed March  16, 2007
Form 10-KSB
5/4/2007
3.3
Certificate of Amendment to Certificate of Incorporation, filed May 25, 2018
Pos Am
6/22/2018
3.4
Amended and Restated Articles of Incorporation of Clyra Medical Technologies, Inc.
Form 8-K
1/6/2016
4.1
BioLargo, Inc. 2007 Equity Incentive Plan
Form 10-QSB
11/19/2007
4.2
Amendment No. 1 to BioLargo 2007 Equity Incentive Plan
Def 14C (Exhibit A)
5/2/2011
4.3
2018 Equity Incentive Plan
Form S-8
6/22/2018
4.4
Stock Option Award Agreement under 2018 Equity Incentive Plan
Form S-8
6/22/2018
4.5
Notice of Stock Option Grant under 2018 Equity Incentive Plan
Form S-8
6/22/2018
4.6
Restricted Stock Unit Award Agreement under 2018 Equity Incentive Plan
Form S-8
6/22/2018
4.7
Notice of Restricted Stock Unit Award under 2018 Equity Incentive Plan
Form S-8
6/22/2018
4.8
Form of Stock Options issued in exchange for reduction in accounts payable.
Form 10-K
3/31/2015
4.9
Promissory note issued by Clyra Medical to Scion Solutions dated September 26, 2018
Form 8-K
10/2/2018
4.10
Promissory Note issued to Vernal Bay Investments, LLC on September 19, 2018
Form 8-K
9/24/2018
4.11
Stock Purchase Warrant issued to Vernal Bay Investments, LLC on September 19, 2018
Form 8-K
9/24/2018
4.12
Promissory Note issued to Chappy Bean, LLC on September 19, 2018
Form 8-K
9/24/2018
4.13
Stock Purchase Warrant issued to Chappy Bean, LLC on September 19, 2018
Form 8-K
9/24/2018
4.14
Warrant issued with Line of credit that matures September 1, 2019
Form 10-Q
5/14/2018
4.15
Amendment dated March 5, 2019 to Promissory Note issued to Vernal Bay Investments, LLC on September 19, 2018
Form 8-K
3/8/2019
4.16
Amendment dated March 5, 2019 to Promissory Note issued to Chappy Bean, LLC on September 19, 2018
Form 8-K
3/8/2019
 
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Table of Contents
 
4.17
$50,000 convertible note, matures March 8, 2020
Form 10-Q
5/14/2018
4.18
Amendment dated August 12, 2019 to Promissory Note issued to Vernal Bay Investments, LLC on September 19, 2018
Form 10-Q
8/14/2019
4.26
Amended and restated note issued to Vernal August 12, 2019
Form 10-Q
8/14/2019
4.19
Form of convertible notes that mature April 20, 2021 (Spring 2018 Offering)
Form 10-Q
5/14/2018
4.20
Warrant issued to Vernal August 12, 2019
Form 10-Q
8/14/2019
4.21
Revolving Line of Credit Agreement dated June 30, 2020, between Clyra Medical and Vernal Bay
Form 8-K
7/7/2020
4.22
Form of warrant issued with convertible notes that mature April 20, 2021 (Spring 2018 Offering)
Form 10-Q
5/14/2018
4.23
Security Agreement dated June 30, 2020, between Clyra Medical and Vernal Bay
Form 8-K
7/7/2020
4.24
Revolving Line of Credit Note issued by Clyra Medical to Vernal Bay on June 30, 2020
Form 8-K
7/7/2020
4.25
Stock Purchase Agreement and Plan of Reorganziation dated September 26, 2018, with Scion Solutions, LLC
Form 8-K
10/2/2018
4.426
OID twelve-month promissory note
Form 8-K
8/2/2019
4.27
Stock purchase warrant issued to OID twelve-month investors
Form 8-K
8/2/2019
4.29
$600,000 Promissory note dated August 9, 2019
Form 10-Q
8/14/2019
4.29
Warrant to purchase 1.2 million shares issued August 9, 2019
Form 10-Q
8/14/2019
4.30
Amendment to $440,000 convertible notes that matures July 20, 2019
Form 10-Q
5/14/2018
4.31
Warrant issued March 2018, expiring March 2023
S-1
8/29/2019
4.32
Form of warrant issued January 2019 to Lincoln Park, expiring January 2024
S-1
8/29/2019
4.33
Registration Rights Agreement, dated as of March 30, 2020, by and between BioLargo, Inc. and Lincoln Park Capital Fund, LLC
Form 8-K
3/31/2020
4.34
Warrant issued in 2020 Unit Offering
Form 10-Q
8/14/2020
4.35
Amendment to $50,000 Convertible Note dated March 8, 2018
Form 10-K
3/30/2021
4.36
Warrant issued to $50,000 Convertible Noteholder on March 1, 2020
Form 10-K
3/30/2021
4.37
Second Amendment dated August 12, 2019, to Promissory Note issued to Chappy Bean, LLC dated September 19, 2018
Form 8-K
5/19/2021
4.38
Amended and restated note issued to Chappy Bean on August 12, 2019
Form 8-K
5/19/2021
4.39
Third Amendment dated August 10, 2020 to Promissory Note issued to Vernal Bay Investments, LLC on September 19, 2018
Form 8-K
5/19/2021
4.40
Third Amendment dated August 10, 2020, to Promissory Note issued to Chappy Bean, LLC dated September 19, 2018
Form 8-K
5/19/2021
4.41
Final Payoff Agreement dated May 17, 2021 to Promissory Note issued to Vernal Bay Investments, LLC on September 19, 2018
Form 8-K
5/19/2021
4.42
Final Payoff Agreement dated May 18, 2021 to Promissory Note issued to Chappy Bean, LLC dated September 19, 2018
Form 8-K
5/19/2021
 
40
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10.1
License Agreement to Clyra Medical Technologies, Inc., dated December 17, 2012
Form 8-K
1/6/2016
10.2
December 30, 2015 amendment to License Agreement with Clyra Medical Technologies, Inc.
Form 8-K
1/6/2016
10.3
Escrow Agreement dated September 26, 2018 regarding Clyra/Scion transaction
Form 8-K
10/2/2018
10.4
Closing Agreement dated December 17, 2018 between Clyra Medical and Scion Solutions
Form 8-K
12/19/2018
10.5
Amendment dated June 30, 2020 to License Agreement with Clyra Medical Technologies, Inc.
Form 8-K
7/7/2020
10.6
Amendment dated June 30, 2020 to Consulting Agreement dated December 30, 2015 between Clyra Medical and Beach House Consulting LLC
Form 8-K
7/7/2020
10.7
Consulting Agreement dated December 30, 2015 with Beach House Consulting LLC
Form 8-K
1/6/2016
10.8
Commercial Office Lease Agreement for 14921 Chestnut St., Westminster, CA 92683
Form 8-K
8/24/2016
10.9
Commercial Office Lease Agreement for Oak Ridge Tennessee
Form 8-K
9/8/2017
10.10
Form of Employment Agreement for Engineering Subsidiary
Form 8-K
9/8/2017
10.11
Form of Option issued to founding employees of Engineering subsidiary (BLEST)
Form 8-K
9/8/2017
10.12†
2020 Engagement Extension Agreement with CFO
Form 8-K
2/27/2020
10.13
Purchase Agreement, dated as of March 30, 2020 by and between BioLargo, Inc. and Lincoln Park Capital Fund, LLC.
Form 8-K
3/31/2020
10.14†
2021 Engagement Extension Agreement with CFO
Form 8-K
3/19/2021
10.15
Agreement dated March 1, 2022, by and between Scion Solutions, LLC, Clyra Medical Technologies, Inc., and BioLargo, Inc .
Form 8-K
3/3/2022
10.16
Agreement dated March 1, 2022, by and between Clyra Medical Technologies, Inc., and BioLargo, Inc.
Form 8-K
3/3/2022
10.17†
2022 Engagement Extension Agreement with CFO
Form 8-K
3/24/2022
14.1
Code of Ethics
Form 10-KSB
11/16/2004
21.1*
List of Subsidiaries of the Registrant.
 
 
23.1*
Consent of Haskell & White LLP.
 
 
24.1
Power of Attorney (see signature page)
 
 
31.1*
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 and Rules 13(a)-14 and 15(d)-14 under the Securities Exchange Act of 1934
 
 
31.2*
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 and Rules 13(a)-14 and 15(d)-14 under the Securities Exchange Act of 1934
 
 
32.1*
Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350.
 
 
101.INS**
Inline XBRL Instance
 
 
101.SCH**
Inline XBRL Taxonomy Extension Schema
 
 
101.CAL**
Inline XBRL Taxonomy Extension Calculation
 
 
101.DEF**
Inline XBRL Taxonomy Extension Definition
 
 
101.LAB**
Inline XBRL Taxonomy Extension Labels
 
 
101.PRE**
Inline XBRL Taxonomy Extension Presentation
 
 
104
Cover Page Interactive Data File (embedded within the Inline XBRL and contained in Exhibit 101)
 
 
 
* Filed herewith
** Furnished herewith
† Management contract or compensatory plan, contract or arrangement
 
41
Table of Contents
 
SIGNATURES
 
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
BIOLARGO, INC.
 
 
 
Date: March 30, 2022
By:
/s/ Dennis P. Calvert       
 
 
Dennis P. Calvert
President and Chief Executive Officer
 
POWER OF ATTORNEY
 
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints, jointly and severally, Dennis P. Calvert and Joseph L. Provenzano, and each of them, as his or her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
 
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities and on the date indicated:
 
Name
 
Title
 
Date
 
 
 
/s/ Dennis P. Calvert
 
Chairman of the Board, Chief
 
March 30, 2022
Dennis P. Calvert
 
Executive Officer and President
 
 
 
 
 
/s/ Charles K. Dargan II
 
Chief Financial Officer
 
March 30, 2022
Charles K. Dargan II
 
(principal financial officer and
principal accounting officer)
 
 
 
 
 
/s/ Kenneth R. Code
 
Chief Science Officer and Director
 
March 30, 2022
Kenneth R. Code
 
 
 
 
 
 
 
/s/ Joseph L. Provenzano
 
Executive Vice President, Corporate
 
March 30, 2022
Joseph L. Provenzano
 
Secretary and Director
 
 
 
 
 
/s/ Jack B. Strommen
 
Director
 
March 30, 2022
Jack B. Strommen
 
 
 
 
 
 
 
/s/ Dennis E. Marshall
 
Director
 
March 30, 2022
Dennis E. Marshall
 
 
 
 
 
/s/ Kent C. Roberts II
 
Director
 
March 30, 2022
Kent C. Roberts II
 
 
 
 
 
 
 
/s/John S. Runyan
 
Director
 
March 30, 2022
John S. Runyan
 
 
 
 
 
 
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Table of Contents
 
 
INDEX TO FINANCIAL STATEMENTS
 
 
 
 
 
 
 
 
 
 
Report of Independent Registered Public Accounting Firm (PCAOB ID 200 )
 
 
F-2
 
 
 
 
 
 
Consolidated Balance Sheets as of December 31, 2021 and December 31, 2020
 
 
F-5
 
 
 
 
 
 
Consolidated Statements of Operations and Comprehensive Loss for the years ended December 31, 2021 and 2020
 
 
F-6
 
 
 
 
 
 
Consolidated Statements of Stockholders ’  Equity (Deficit) for the years ended December 31, 2021 and 2020
 
 
F-7
 
 
 
 
 
 
Consolidated Statements of Cash Flows for the years ended December 31, 2021 and 2020
 
 
F-8
 
 
 
 
 
 
Notes to Consolidated Financial Statements
 
 
F-9 – F-31
 
 
F-1
Table of Contents
 
Report of Independent Registered Public Accounting Firm
 
 
To the Board of Directors and Stockholders
BioLargo, Inc. and Subsidiaries
 
Opinion on the Financial Statements
 
We have audited the accompanying consolidated balance sheets of BioLargo, Inc. and Subsidiaries (the “Company”) as of December 31, 2021 and 2020, and the related consolidated statements of operations, stockholders’ equity (deficit), and cash flows for each of the two years in the period ended December 31, 2021, and the related notes (collectively referred to as the “consolidated financial statements”).  In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2021 and 2020, and the consolidated results of its operations and its cash flows for each of the two years in the period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America.
 
Going Concern
 
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern.  As discussed in Note 1 to the consolidated financial statements, the Company has experienced recurring losses, negative cash flows from operations, significant debt due in the near term, and has limited capital resources.  These matters raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
 
Basis for Opinion
 
These consolidated financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
 
We conducted our audits in accordance with the standards of the PCAOB.  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.  The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
 
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements.  Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
 
Critical Audit Matters
 
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
 
F-2
 
 
Fair Value of Stock Options — Refer to Notes 2, 5 and 10 to the Consolidated Financial Statements
 
Critical Audit Matter Description
 
The Company issues options from both BioLargo, Inc. as well as its partially-owned subsidiary, Clyra Medical. Management uses the Black-Scholes option-pricing model to estimate the fair value of its stock options. The Black-Scholes option-pricing model involves the use of significant estimates, including the following:
 
 
☐
Risk-free interest rate;
 
☐
Expected share price volatility;
 
☐
Expected dividend yield; and
 
☐
Expected life of the award.
 
In addition, management discounts the estimated fair value of the Clyra Medical stock options because the partially-owned subsidiary is a private company with no secondary market for its common stock. Given the significant estimates involved in estimating the fair value of stock options, the related audit effort in evaluating management’s estimates in determining the fair value of stock options was extensive and required a high degree of auditor judgment.
 
How the Critical Audit Matter was Addressed in the Audit
 
We obtained an understanding over the Company’s process to estimate the fair value of stock options, including how the Company develops each of the estimates required to utilize the Black-Scholes option-pricing model. We applied the following audit procedures related to testing the Company’s estimates utilized in the Black-Scholes option-pricing model:
 
 
☐
We compared the Company’s risk-free interest rate used to the comparable United States Treasury yield for a term comparable to the stock options’ expected term.
 
☐
We recalculated the Company’s historical share price volatility for a term comparable to the stock options’ expected term. For Clyra Medical, we recalculated a comparable public company’s historical share price volatility for a term comparable to the stock options’ expected term.
 
☐
We performed a look-back at the Company’s previously issued dividends, noting there were none. We inquired with management of the Company who informed us that no future dividends were currently anticipated.
 
☐
We agreed the expected term of stock options granted to employees and non-employees to the original contractual term of the option as management deems it likely they will remain outstanding for the entire original term. We further noted that this was consistent with historical options granted.
 
In addition, we reviewed management’s analysis over the discount used on the estimated fair value of the Clyra Medical stock options. Management concluded that both the illiquidity and lack of marketability warranted a discount to the estimated fair value calculated using the Black-Scholes option-pricing model. We noted that Clyra Medical is a private company and therefore its stock is not actively traded. We also reviewed the stock sales history of Clyra Medical noting the infrequent stock sales supports management’s assertions of both illiquidity and lack of marketability. We further researched published articles on valuation discounts and noted that the liquidity and lack of marketability discount used by management was within a reasonable range.
 
F-3
 
 
Impairment of Long-lived Asset – Refer to Notes 2 and 9 to the Consolidated Financial Statements
 
Critical Audit Matter Description
 
As reflected in the Company’s consolidated financial statements at December 31, 2021, the Company’s net carrying amount of Clyra Medical prepaid marketing is $591,000. As disclosed in Note 2 to the consolidated financial statements, long-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. As a result of these assessments, management concluded that there was an impairment to the Company’s prepaid marketing asset during the year ended December 31, 2021.
 
Auditing management’s impairment test of its prepaid marketing asset was complex and highly judgmental due to the significant measurement uncertainty in determining the fair value of the prepaid marketing asset. In particular, the fair value estimate of the prepaid marketing asset was sensitive to changes in significant assumptions such as discount rates and revenue growth rates. These assumptions are affected by expected future market or economic conditions.
 
How the Critical Audit Matter was Addressed in the Audit
 
We obtained an understanding of the Company’s process to evaluate long-lived assets for impairment and related controls. We then obtained the projected revenues of Clyra Medical as well as the Company’s calculation of the expected present value of the prepaid marketing asset that were used by management to determine the fair value of the prepaid marketing asset, in accordance with ASC 350 ( Intangibles – Goodwill and Other ).
 
We applied the following audit procedures related to testing the fair value of the prepaid marketing asset:
 
 
☐
We assessed the valuation methodologies and tested the reasonableness of significant assumptions and underlying data used by management, including forecasted revenue and discount rates.
 
☐
We agreed the triggering start date and term used in the present value calculation to the forecasted revenue and the original contractual term.
 
☐
We compared management’s summary of the fair value of the prepaid marketing asset to its carrying value, noting that the carrying value exceeded the fair value of the prepaid marketing asset. As such, we concurred with management that there was an impairment of its prepaid marketing asset.
 
 
 
/s/ HASKELL & WHITE LLP
 
We have served as the Company’s auditor since 2011.
 
Irvine, California
March 30, 2022
 
F-4
Table of Contents
 
 
BIOLARGO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except for per share data)
 
    DECEMBER 31,
 
    2021
    2020
 
Assets
 
Current assets:
               
Cash and cash equivalents
  $ 962     $ 716  
Accounts receivable, net of allowance
    513       484  
Inventories, net of allowance
    241       277  
Prepaid expenses and other current assets
    85       28  
Total current assets
    1,801       1,505  
                 
In-process research and development (Note 9)
    —       2,150  
Equipment, net of depreciation
    61       60  
Other non-current assets
    69       35  
Investment in South Korean joint venture
    48       63  
Right of use, operating lease, net of amortization
    453       341  
Clyra Medical prepaid marketing (Note 10)
    591       788  
Total assets
  $ 3,023     $ 4,942  
                 
Liabilities and stockholders ’ equity (deficit)
 
Current liabilities:
               
Accounts payable and accrued expenses
  $ 559     $ 513  
Clyra Medical accounts payable and accrued expenses
    230       536  
Debt obligations (Note 4)
    314       1,102  
Clyra Medical debt obligations (Note 10)
    —       1,231  
Deferred revenue
    89       48  
Lease liability, current
    103       114  
Deposits
    79       —  
Total current liabilities
    1,374       3,544  
                 
Long-term liabilities:
               
Debt obligations (Note 4)
    180       507  
Lease liability
    349       226  
Clyra Medical debt obligations (Note 10)
    187       —  
Common stock held for redemption (Note 9)
    —       900  
Total long-term liabilities
    716       1,633  
Total liabilities
    2,090       5,177  
                 
COMMITMENTS AND CONTINGENCIES (Note 13)
                   
                 
STOCKHOLDERS’ EQUITY (DEFICIT):
               
Preferred Series A, $ 0.00067 Par Value, 50,000,000 Shares Authorized, - 0 - Shares Issued and Outstanding, at December 31, 2021 and December 31, 2020
    —       —  
Common stock, $ 0.00067 Par Value, 400,000,000 Shares Authorized, 255,893,726 and 225,885,682 Shares Issued, at December 31, 2021 and December 31, 2020
    171       151  
Additional paid-in capital
    143,718       135,849  
Accumulated deficit
    ( 139,121 )     ( 132,041 )
Accumulated other comprehensive loss
    ( 115 )     ( 101 )
Total BioLargo Inc. and subsidiaries stockholders’ equity
    4,653       3,858  
Non-controlling interest (Note 10)
    ( 3,720 )     ( 4,093 )
Total stockholders’ equity (deficit)
    933       ( 235 )
Total liabilities and stockholders’ equity
  $ 3,023     $ 4,942  
 
See accompanying notes to consolidated financial statements and report of Independent Registered Public Accounting Firm.
 
F-5
Table of Contents
 
 
BIOLARGO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(in thousands, except for per share data)
    Year ended December 31,
 
    2021
    2020
 
                 
Revenue
               
Product revenue
  $ 1,572     $ 1,825  
Service revenue
    959       607  
Total revenue
    2,531       2,432  
                 
Cost of revenue
               
Cost of goods sold
    ( 781 )     ( 743 )
Cost of service
    ( 647 )     ( 461 )
Total cost of revenue
    ( 1,428 )     ( 1,204 )
Gross profit
    1,103       1,228  
                 
Operating expenses:
               
Selling, general and administrative expenses
    6,172       7,473  
Research and development
    1,367       1,338  
Total operating expenses
    7,539       8,811  
                 
Operating loss
    ( 6,436 )     ( 7,583 )
                 
Other income (expense):
               
Grant income
    55       137  
Tax credit income
    63       111  
Interest expense
    ( 234 )     ( 1,923 )
Impairment expense
    ( 342 )     —  
Loss on extinguishment of debt
    —       ( 442 )
Total other (expense) income
    ( 458 )     ( 2,117 )
                 
Net loss
    ( 6,894 )     ( 9,700 )
                 
Net income (loss) attributable to noncontrolling interest
    186       ( 1,268 )
Net loss attributable to common stockholders
  $ ( 7,080 )   $ ( 8,432 )
                 
Net loss per share attributable to common stockholders:
               
Loss per share attributable to stockholders – basic and diluted
  $ ( 0.03 )   $ ( 0.05 )
Weighted average number of common shares outstanding:
    247,203,625       195,993,575  
                 
Comprehensive loss attributable to common stockholders
               
                 
Net loss
  $ ( 6,894 )   $ ( 9,700 )
Foreign currency translation adjustment
    ( 14 )     ( 2 )
Comprehensive loss
    ( 6,908 )     ( 9,702 )
                 
Comprehensive income (loss) attributable to noncontrolling interest
    186       ( 1,268 )
Comprehensive loss attributable to stockholders
  $ ( 7,094 )   $ ( 8,434 )
 
See accompanying notes to consolidated financial statements and report of Independent Registered Public Accounting Firm.
 
F-6
Table of Contents
 
 
BIOLARGO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS ’ EQUITY (DEFICIT)
(in thousands, except for share data)
 
    Common stock
    Additional
paid-in
    Accumulated
    Accumulated
other comprehensive
    Non-
controlling
    Total stockholders ’
 
    Shares
    Amount
    capital
    deficit
    Loss
    interest
    equity (deficit)
 
Balance, December 31, 2019
    166,256,024     $ 111     $ 121,327     $ ( 123,492 )   $ ( 99 )   $ ( 27 )   $ ( 2,180 )
Conversion of notes
    33,157,961       22       3,504       —       —       —       3,526  
Issuance of common stock for service
    4,458,731       3       663       —       —       —       666  
Issuance of common stock for interest
    1,728,331       1       183       —       —       —       184  
Sale of stock for cash
    17,356,064       12       2,771       —       —       —       2,783  
Stock issued as a commitment fee
    2,928,571       2       ( 124 )     —       —       —       ( 122 )
Stock option compensation expense
    —       —       1,821       —       —       —       1,821  
Loss on extinguishment
    —       —       442       —       —       —       442  
Noncontrolling interest allocation
    —       —       3,157       —       —       ( 3,157 )     —  
Clyra stock options issued for service
    —       —       638       —       —       —       638  
Clyra stock issued for consulting agreement
    —       —       788       —       —       —       788  
Clyra stock issued as line of credit commitment fee
    —       —       70       —       —       —       70  
Issuance of Clyra common stock for cash
    —       —       492       —       —       359       851  
Deemed dividend
    —       —       117       ( 117 )     —       —       —  
Net loss
    —       —       —       ( 8,432 )     —       ( 1,268 )     ( 9,700 )
Foreign currency translation
    —       —       —       —       ( 2 )     —       ( 2 )
Balance, December 31, 2020
    225,885,682     $ 151     $ 135,849     $ ( 132,041 )   $ ( 101 )   $ ( 4,093 )   $ ( 235 )
Conversion of notes
    1,966,439       1       327       —       —       —       328  
Issuance of common stock for service
    2,127,467       1       366       —       —       —       367  
Issuance of common stock for interest
    81,777       —       16       —       —       —       16  
Sale of stock for cash
    29,691,886       20       4,862       —       —       —       4,882  
Warrant exercise
    1,283,333       1       163       —       —       —       164  
Return of shares held by Clyra Medical (re Scion)     ( 5,142,858 )     ( 3 )     ( 921 )     —       —       1,286       362  
Stock option compensation expense
    —       —       1,308       —       —       —       1,308  
Fair value of warrant recorded as debt discount
    —       —       35       —       —       —       35  
Noncontrolling interest allocation
    —       —       1,149       —       —       ( 1,149 )     —  
Clyra stock options issued for service
    —       —       564       —       —       —       564  
Issuance of Clyra common stock for cash
    —       —       —       —       —       50       50  
Net (loss) gain
    —       —       —       ( 7,080 )     —       186       ( 6,894 )
Foreign currency translation
    —       —       —       —       ( 14 )     —       ( 14 )
Balance, December 31, 2021
    255,893,726     $ 171     $ 143,718     $ ( 139,121 )   $ ( 115 )   $ ( 3,720 )   $ 933  
 
See accompanying notes to consolidated financial statements and report of Independent Registered Public Accounting Firm.
 
F-7
Table of Contents
 
 
BIOLARGO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, except for per share data)
    DECEMBER
31, 2021
    DECEMBER
31, 2020
 
Cash flows from operating activities
               
Net loss
  $ ( 6,894 )   $ ( 9,700 )
Adjustments to reconcile net loss to net cash used in operating activities:
               
Stock option compensation expense
    1,872       2,459  
Common stock issued in lieu of salary to officers and fees for services from vendors
    367       666  
Impairment expense
    342       —  
Common stock issued for interest
    16       184  
Interest expense related to amortization of the discount on convertible notes payable, line of credit and deferred financing costs
    119       1,618  
Loss on extinguishment of debt
    —       442  
Loss on investment in South Korean joint venture
    15       37  
PPP forgiveness
    ( 43 )     —  
Amortization and depreciation expense
    20       58  
Bad debt expense
    —       13  
Changes in assets and liabilities:
               
Accounts receivable
    ( 29 )     ( 142 )
Inventories
    36       ( 261 )
Accounts payable and accrued expenses
    47       122  
Clyra accounts payable and accrued expenses
    132       327  
Deferred revenue
    41       14  
Prepaid expenses and other assets
    ( 57 )     9  
Deposit
    79       —  
Net cash used in operating activities
    ( 3,937 )     ( 4,154 )
Cash flows from investing activities
               
Equipment purchases
    ( 21 )     ( 23 )
Patent purchase
    ( 13 )     —  
Investment in South Korean joint venture
    —       ( 100 )
Net cash used in investing activities
    ( 34 )     ( 123 )
Cash flows from financing activities
               
Proceeds from sale of common stock
    4,882       2,783  
Proceeds from SBA loans
    —       507  
Proceeds from warrant exercise
    164       —  
Repayment of note payable and line of credit
    ( 828 )     ( 25 )
Proceeds received by Clyra from inventory line of credit
    —       260  
Repayment by Clyra on inventory line of credit
    ( 37 )     ( 36 )
Proceeds from sale of stock in Clyra Medical
    50       851  
Net cash provided by financing activities
    4,231       4,340  
Net effect of foreign currency translation
    ( 14 )     ( 2 )
Net change in cash
    246       61  
Cash at beginning of year
    716       655  
Cash at end of year
  $ 962     $ 716  
Supplemental disclosures of cash flow information
               
Cash paid during the year for:
               
Interest
  $ 99     $ 118  
Income taxes
  $ 2     $ 2  
Short-term lease payments not included in lease liability   $ 228     $ 228  
Non-cash investing and financing activities
               
Return of in-process research and development (Scion)   $ 1,804     $ —  
Cancellation of Clyra debt obligations and accounts payable (Scion)   $ ( 1,465 )   $ —  
Liability to Scion shareholders   $ (540 )   $ —  
Fair value of warrants issued with convertible notes and letter of credit
  $ 35     $ —  
Conversion of convertible notes payable into common stock
  $ 328     $ 3,526  
Present value of Right of use and lease liability
  $ 186     $ —  
Deemed dividend
  $ —     $ 117  
Deferred offering costs recorded as additional paid in capital
  $ —     $ ( 122 )
Fair value of shares issued for In Process research and development
  $ —     $ 257  
Exchange of consulting services for Clyra common shares
  $ —     $ 788  
Fair value of Clyra shares issued as commitment fee
  $ —     $ 70  
Allocation of stock option expense within noncontrolling interest
  $ 1,149     $ 3,157  
 
See accompanying notes to consolidated financial statements and report of Independent Registered Public Accounting Firm
 
 
F-8
BIOLARGO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Table of Contents
 
 
Note 1. Business and Organization
 
Description of Business
 
BioLargo, Inc. (“BioLargo”, or the “Company”) is an innovative technology developer and environmental engineering company driven by a mission to “make life better” by delivering robust, sustainable solutions for a broad range of industries and applications, with a focus on clean water, clean air. The Company also owns a minority interest in an advanced wound care subsidiary that has licensed BioLargo’s technologies.  Our business strategy is straightforward: we invent or acquire technologies that we believe have the potential to be disruptive in large commercial markets; we develop and validate these technologies to advance and promote their commercial success as we leverage our considerable scientific, engineering, and entrepreneurial talent; we then monetize these technical assets through a variety of business structures that may include licensure, joint venture, sale, spin off, or by deploying direct to market strategies.
 
Liquidity / Going concern
 
The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of our business. For the year ended December 31, 2021, we had a net loss of $ 6,894,000 , used $ 3,937,000 cash in operations, and at December 31, 2021, we had working capital of $ 427,000 , and current assets of $ 1,801,000 . We do not believe gross profits in 2022 will be sufficient to fund our current level of operations or pay our debts as they become due during the next 12 months, and therefore we will have to obtain further investment capital to continue to fund operations and seek to refinance our existing debt. We have been, and anticipate that we will continue to be, limited in terms of our capital resources.
 
During the year ended December 31, 2021, we generated revenues of $ 2,531,000 through our subsidiaries. (See Note 12. )  Our subsidiaries did not individually or in the aggregate generate enough revenues or gross profits to fund their operations, or fund our corporate operations or other business segments. To meet our cash obligations during the year ended December 31, 2021, we (i) sold 24,255,920 shares of our common stock to Lincoln Park Capital (“Lincoln Park”) for $ 4,018,000 (see Note 3 ), and (ii) sold 5,435,966  shares of common stock, and issued warrants to purchase 10,876,932 shares of common stock, to private investors for $ 864,000 (see Notes 3 and 6 ).
 
As of December 31, 2021, our cash and cash equivalents totaled $ 962,000 , and our total liabilities included $ 50,000 in debt that is due at the March 2023 maturity date; $ 187,000 owed by our partially owned subsidiary Clyra Medical Technologies, Inc. (“Clyra”) due in June 2023; $ 314,000 due in SBA loans issued pursuant to the Paycheck Protection Program (see note 14 ); and $ 150,000 due to the SBA issued pursuant to the Economic Injury Disaster program (EIDL) over 30 years, with $ 800 monthly payments scheduled to in begin January 2023.
 
Subsequent to December 31, 2021, we continue to sell common stock to Lincoln Park for working capital (see Note 14 ).
 
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.
 
The foregoing factors raise substantial doubt about our ability to continue as a going concern, unless we are able to continue to raise funds through stock sales to Lincoln Park or other private financings, and in the long term, our ability to attain a reasonable threshold of operating efficiencies and achieve profitable operations by licensing or otherwise commercializing products incorporating our technologies. The consolidated financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern.
 
Organization
 
We are a Delaware corporation formed in 1991. We have four wholly-owned subsidiaries: BioLargo Life Technologies, Inc., organized under the laws of the State of California in 2006; ONM Environmental, Inc. (formerly, Odor- No -More, Inc.), organized under the laws of the State of California in 2009; BioLargo Water Investment Group Inc. organized under the laws of the State of California in 2019, which wholly owns BioLargo Water, Inc., organized under the laws of Canada in 2014; and BioLargo Development Corp., organized under the laws of the State of California in 2016. Additionally, we own 89 % (see Note 11 ) of BioLargo Engineering Science and Technologies, LLC (“BLEST”), organized under the laws of the State of Tennessee in 2017. We also own 56 % of Clyra Medical Technologies, Inc. (“Clyra” or “Clyra Medical”), organized under the laws of the State of California in 2012, and consolidate its financial statements (see Note 2, subheading “Principles of Consolidation,” and Note 10 ).
 
F-
9
BIOLARGO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Table of Contents
 
 
Note 2. Summary of Significant Accounting Policies
 
Principles of Consolidation
 
The consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries, and partially-owned subsidiaries BLEST and Clyra Medical.
 
All intercompany accounts and transactions have been eliminated.
 
Foreign Currency
 
The Company has designated the functional currency of BioLargo Water, Inc., our Canadian subsidiary, to be the Canadian dollar. Therefore, translation gains and losses resulting from differences in exchange rates are recorded in accumulated other comprehensive income.
 
Cash and Cash Equivalents
 
The Company considers all highly liquid investments with maturities of three months or less when acquired to be cash equivalents. Substantially all cash equivalents are held in short-term money market accounts at one of the largest financial institutions in the United States. From time to time, our cash account balances are greater than the Federal Deposit Insurance Corporation insurance limit of $250,000 per owner per bank, and during such times, we are exposed to credit loss for amounts in excess of insured limits in the event of non-performance by the financial institution. We do not anticipate non-performance by our financial institution.
 
As of December 31, 2021 and 2020, our cash balances were made up of the following (in thousands):
 
    December 31,
2021
    December 31,
2020
 
                 
BioLargo, Inc. and subsidiaries
  $ 941     $ 637  
                 
Clyra Medical Technologies, Inc.
    21       79  
Total
  $ 962     $ 716  
 
F-
10
BIOLARGO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Table of Contents
 
Accounts Receivable
 
Trade accounts receivable are recorded net of allowances for doubtful accounts. Estimates for allowances for doubtful accounts are determined based on payment history and individual customer circumstances. The allowance for doubtful accounts as of  December 31, 2021  and 2020 was $ 12,000 and $13,000, respectively.
 
Credit Concentration
 
We have a limited number of customers that account for significant portions of our revenue. During the year ended December 31, 2021, there were three customers that each accounted for more than 10 % of consolidated revenues, and during the year ended December 31, 2020, there were two customers that each accounted for more than 10% of consolidated revenues, as follows:
 
    December 31,
2021
    December 31,
2020
 
Customer A
    14 %   <10
%
Customer B
    11 %     11 %
Customer C
    11 %   <10
%
Customer L
  <10
%     13 %
 
We had two customers that each accounted for more than 10% of consolidated accounts receivable at December  31, 2021, and at December 31, 2020, as follows:
 
    December 31,
2021
    December 31,
2020
 
Customer M
    32 %   <10
%
Customer N
    12 %   <10
%
Customer O
  <10
%     32 %
Customer P
  <10
%     10 %
 
Inventory
 
Inventories are stated at the lower of cost or net realizable value using the average cost method. The allowance for obsolete inventory as of  December 31, 2021 and 2020 was $ 3,000 .  As of December 31, 2021, and 2020, inventories consisted of (in thousands):
 
    December 31,
2021
    December 31,
2020
 
Raw material
  $ 108     $ 111  
Finished goods
    133       166  
Total
  $ 241     $ 277  
 
Other Non-Current Assets
 
Other non-current assets consisted of (i) security deposits of $ 35,000 related to our business offices, and (ii) three patents acquired on October 22, 2021, for $ 34,000 , of which $ 13,000 was paid in cash and the remaining $ 21,000 was paid through the issuance of 125,000 shares of common stock at $ 0.17 per share.
 
F-
11
BIOLARGO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Table of Contents
 
Equity   Method of   Accounting
 
On March 20, 2020, we invested $ 100,000 into a South Korean entity (Odin Co. Ltd., “Odin”) pursuant to a Joint Venture agreement we had entered into with BKT Co. Ltd. and its U.S. based subsidiary, Tomorrow Water. We received a 40 % non-dilutive equity interest, and BKT and Tomorrow Water each received 30 % equity interests for an aggregate $ 150,000 investment.
 
We account for our investment in the joint venture under the equity method of accounting. We have determined that while we have significant influence over the joint venture through our technology license and our position on the Board of Directors, we do not control the joint venture or are otherwise involved in managing the entity and we own less than a majority of the equity. Therefore, we record the asset on our consolidated balance sheet and record an increase or decrease the recorded balance by our percentage ownership of the profits or losses in the joint venture. During the years ended December 31, 2021 and 2020, the joint venture incurred a loss and our 40 % ownership share reduced our investment interest by $ 15,000 and $ 37,000 , respectively.
 
Impairment
 
Long-lived and definite lived intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.  If the sum of the expected future undiscounted cash flows from the use of the asset and its eventual disposition is less than the carrying amount of the asset, then an impairment loss is recognized.  The impairment loss is measured based on the fair value of the asset.  Any resulting impairment is recorded as a reduction in the carrying value of the related asset in excess of fair value and a charge to operating results.  For the year ended December 31, 2021, management determined that there was an impairment expense related to the sale back to Scion Solutions, LLC (“Scion’) of certain intellectual property, recorded on our balance sheet as “In-Process Research and Development” (see Note 9 ), and an impairment of Clyra’s prepaid marketing asset (see Note 9 ).  Total impairment expense for 2021 is $342,000; there was no impairment during the year ended December 31, 2020.
 
Earnings (Loss) Per Share
 
We report basic and diluted earnings (loss) per share (“EPS”) for common and common share equivalents. Basic EPS is computed by dividing reported earnings by the weighted average shares outstanding. Diluted EPS is computed by adding to the weighted average shares the dilutive effect if convertible notes payable, stock options and warrants were exercised into common stock. For the years ended December 31, 2021 and 2020, the denominator in the diluted EPS computation is the same as the denominator for basic EPS due to the Company’s net loss which creates an anti-dilutive effect of the convertible notes payable, warrants and stock options.
 
Use of Estimates
 
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and revenues and expenses during the period reported. Actual results could differ from those estimates. Estimates are used when accounting for stock-based transactions, debt transactions, derivative liabilities, allowance for bad debt, asset depreciation and amortization, impairment expense, among others.
 
The methods, estimates and judgments we use in applying these most critical accounting policies have a significant impact on the results of our financial statements.
 
Share-Based Compensation Expense
 
We recognize compensation expense for stock option awards on a straight-line basis over the applicable service period of the award, which is the vesting period. Fair value is determined on the grant date. Share-based compensation expense is based on the grant date fair value estimated using the Black-Scholes Option Pricing Model.
 
For stock and stock options issued to consultants and other non-employees for services, the Company measures and records an expense as of the earlier of the date at which either: a commitment for performance by the non-employee has been reached or the non-employee’s performance is complete. The equity instruments are measured at the current fair value, and for stock options, the instruments are measured at fair value using the Black Scholes option model.
 
F-
12
BIOLARGO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Table of Contents
 
The following methodology and assumptions were used to calculate share-based compensation for the years ended December 31, 2021 and 2020:
 
    2021
    2020
 
    Non Plan
    2018 Plan
    Non Plan
    2018 Plan
 
Risk free interest rate
    1.49 – 1.73 %
    0.93 – 1.73 %
    0.66 – 1.02 %
    0.64 – 1.90 %
Expected volatility
    118 – 124 %
    118 – 124 %
    125 – 131 %
    126 – 133 %
Expected dividend yield
        —           —           —           —  
Forfeiture rate
        —           —           —           —  
Life in years
        10           10           10           10  
 
Expected price volatility is the measure by which our stock price is expected to fluctuate during the expected term of an option. Expected volatility is derived from the historical daily change in the market price of our common stock, as we believe that historical volatility is the best indicator of future volatility.
 
The risk-free interest rate used in the Black-Scholes calculation is based on the prevailing U.S. Treasury yield as determined by the U.S. Federal Reserve. We have never paid any cash dividends on our common stock and do not anticipate paying cash dividends on our common stock in the foreseeable future.
 
Warrants
 
Warrants issued with our convertible and non-convertible debt instruments are accounted for under the fair value and relative fair value method.
 
The warrant is first analyzed per its terms as to whether it has derivative features or not. If the warrant is determined to be a derivative and not qualify for equity treatment, then it is measured at fair value using the Black Scholes option model, and recorded as a liability on the balance sheet. The warrant is re-measured at its then current fair value at each subsequent reporting date (it is “marked-to-market”).
 
If the warrant is determined to not have derivative features, it is recorded into equity at its fair value using the Black Scholes option model, however, limited to a relative fair value based upon the percentage of its fair value to the total fair value including the fair value of the convertible note.
 
Convertible debt instruments are recorded at fair value, limited to a relative fair value based upon the percentage of its fair value to the total fair value including the fair value of the warrant. Further, the convertible debt instrument is examined for any intrinsic beneficial conversion feature (“BCF”) of which the conversion price is less than the closing common stock price on date of issuance. If the relative fair value method is used to value the convertible debt instrument and there is an intrinsic BCF, a further analysis is undertaken of the BCF using an effective conversion price which assumes the conversion price is the relative fair value divided by the number of shares the convertible debt is converted into by its terms. The BCF value is accounted for as equity.
 
The warrant and BCF relative fair values are also recorded as a discount to the convertible promissory notes. As present, these equity features of the convertible promissory notes have recorded a discount to the convertible notes that is substantially equal to the proceeds received.
 
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Table of Contents
 
Non-Cash Transactions
 
We have established a policy relative to the methodology to determine the value assigned to each intangible we acquire, and/or services or products received for non-cash consideration of our common stock. The value is based on the market price of our common stock issued as consideration, at the date of the agreement of each transaction or when the service is rendered or product is received.
 
Revenue Recognition
 
We account for revenue in accordance with ASC  606,  “Revenue from Contacts with Customers”. The guidance focuses on the core principle for revenue recognition, which is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, the guidance provides that an entity should apply the following steps:
 
Step 1: Identify the contract(s) with a customer.
 
Step 2: Identify the performance obligations in the contract.
 
Step 3: Determine the transaction price.
 
Step 4: Allocate the transaction price to the performance obligations in the contract.
 
Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation.
 
The Company’s products are sold a through a contract with the customer and a written purchase order, in which the details of the contract are defined including the transaction price and method of shipment. The only performance obligation is to create and ship the product, and each product has separate pricing. Revenue is recognized at a point in time when the goods are shipped if the agreement is FOB manufacturer, and when goods are delivered if FOB destination. Revenue is recognized with a reduction for sales discounts, as appropriate and negotiated in the customer’s purchase order.
 
Service contracts are performed through a written contract, which specifies the performance obligations and the rate at which the services will be billed, typically by time and materials. Each service is separately negotiated and priced. Revenue is recognized as services are performed and completed, or, for services related to product installations, at the completion of the installation. A few contracts have called for milestone or fixed cost payments, where we invoice an agreed-to amount per month for the life of the contract. In these instances, completed work, billed hourly, is recognized as revenue. If the billing amount is greater or lesser than the completed work, a receivable or payable is created. These accounts are adjusted upon additional billings as the work is completed. To date, there have been  no  discounts or other financing terms for the contracts.
 
In the event that we generate revenues from royalties or license fees from our intellectual property, we anticipate a licensee would pay a license fee in  one  or more installments and ongoing royalties based on their sales of products incorporating or using our licensed intellectual property. Upon entering into a licensing agreement, we will determine the appropriate method of recognizing the royalty and license fees.
 
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 the private and public Canadian research programs. Income we receive directly from grants is recorded as other income. We have been awarded over 80 grants since our first in 2015. Some of the funds from these grants are given directly to third parties (such as the University of Alberta or a third -party research scientist) to support research on our technology. The grants have terms generally ranging between six and eighteen months and support a majority, but not all, of the related research budget costs. This cooperative research allows us to utilize (i) a depth of resources and talent to accomplish highly skilled work, (ii) financial aid to support research and development costs, (iii) independent and credible validation of our technical claims.
 
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Table of Contents
 
The grants typically provide for (i) recurring monthly amounts, (ii) reimbursement of costs for research talent for which we invoice to request payment, and (iii) ancillary cost reimbursement for research talent travel related costs. All awarded grants have specific requirements on how the money is spent, typically to employ researchers. None of the funds may be used for general administrative expenses or overhead in the United States. These grants have substantially increased our level of research and development activities in Canada. We continue to apply for Canadian government and agency grants to fund research and development activities. Not all of our grant applications have been awarded, and no assurance can be made that any pending grant application, or any future grant applications, will be awarded.
 
Income Taxes
 
The asset and liability approach is used to recognize deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of asset and liabilities. Deferred tax assets and liabilities are determined based on the differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The effect on deferred tax asset and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
 
We account for uncertainties in income tax law under a comprehensive model for the financial statement recognition, measurement, presentation and disclosure of uncertain tax positions taken or expected to be taken in income tax returns as prescribed by generally accepted accounting principles (“GAAP”). Under GAAP, the tax effects of a position are recognized only if it is “more-likely-than- not” to be sustained by the taxing authority as of the reporting date. If the tax position is not considered “more-likely-than- not” to be sustained, then no benefits of the position are recognized. Management believes there are no unrecognized tax benefits or uncertain tax positions as of December 31, 2021 and 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 December 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, 2021 and 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.
 
Tax Credits
 
Our research and development activities in Canada may entitle our Canadian subsidiary to claim benefits under the “Scientific Research and Experimental Development Program”, a Canadian federal tax incentive program designed to encourage Canadian businesses of all sizes and in all sectors to conduct research and development in Canada. Benefits under the program include credits to taxable income. If our Canadian subsidiary does not have taxable income in a reporting period, we instead receive a tax refund from the Canadian Revenue Authority. Those refunds are classified in Other Income on our Consolidated Statement of Operations and Comprehensive Loss.
 
Leases
 
In accordance with ASC  842,  the Company elects 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. The Company has also elected the short-term leases recognition exemption for all leases that qualify. This means that the Company will not recognize right-of-use assets or lease liabilities, and this includes not recognizing right-of-use assets and lease liabilities, for existing short-term leases of those assets in transition. As of December 31, 2021, the right-of-use assets and the lease liability on our balance sheet related to our operating leases totals $ 453,000 .
 
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Table of Contents
 
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.
 
 
Note 3. Sale of Stock for Cash
 
Lincoln Park Financing
 
On March 30,  2020, we entered into a stock purchase agreement (the “2020 LPC Purchase Agreement”) with Lincoln Park, pursuant to which Lincoln Park agreed to purchase from us at our request up to an aggregate of $ 10,250,000 of our common stock (subject to certain limitations) from time to time over a period of three years. The agreement allows us, at our sole discretion, to direct Lincoln Park to purchase shares of our common stock, subject to limitations in both volume and dollar amount. The purchase price of the shares that may be sold to Lincoln Park under the agreement is the lower of (i) the lowest sale price on the date of purchase, or (ii) the average of the three lowest closing prices in the prior 12 business days. There are no restrictions on future financings, rights of first refusal, participation rights, penalties or liquidated damages other than a prohibition on entering into a “Variable Rate Transaction,” as defined in the agreement. This agreement replaced the August 2017 agreement with Lincoln Park. Concurrently with the 2020 LPC Purchase Agreement, we entered into a Registration Rights Agreement, pursuant to which we filed a registration statement on Form S- 1 with the SEC on April 10, 2020. This registration statement was declared effective on April 21, 2020, and as of April 29, 2020, we commenced regular purchases under the agreement.
 
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BIOLARGO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Table of Contents
 
Pursuant to the 2020 LPC Purchase Agreement, we issued 2,928,571 shares to Lincoln Park as a commitment fee, valued at $ 527,000 and recorded as additional paid in capital on our consolidated balance sheet.
 
During the years ended December 31, 2021 and 2020, we sold 24,255,920 and 13,388,642 shares to Lincoln Park, and received $ 4,018,000 and $ 2,058,000 in gross and net proceeds. Subsequent to December 31, 2021, we continue to draw on the 2020 LPC Purchase Agreement for working capital (see Note 14 ).
 
2020 Unit Offering
 
During the years ended December 31, 2021 and  2020,  pursuant to an offering commenced in  March 2020,  we sold  5,435,966  and  2,374,335  shares, respectively, of our common stock and received $ 864,000  and $ 367,000 , respectively, in gross and net proceeds, from a total of  nine  accredited investors. In addition to the shares, we issued each shareholder a six -month and a five -year warrant to purchase additional shares (see Note 6, “Warrants Issued in 2020 Unit Offering”).
 
BKT Joint Venture
 
On February 12, 2020, we executed a “Joint Venture Framework Agreement” with a leading wastewater treatment solution provider based in South Korea (BKT Co. Ltd., “BKT”), to create a South Korean entity that would manufacture odor and VOC control products based on our CupriDyne Clean products. We received a $ 350,000 investment from BKT and issued 1,593,087 shares of our common stock, and invested $ 100,000 into the joint venture for a 40 % ownership share.
 
 
Note 4. Debt Obligations
 
The following table summarizes our debt obligations outstanding as of December 31, 2021 and 2020 (in thousands). The table does not include debt obligations of our partially owned subsidiary Clyra Medical (see Note 10, “ Debt Obligations of Clyra Medical ”).
 
    December 31,
 
    2021
    2020
 
Current portion of debt:
               
Note payable, matures on demand 60 days’ notice
  $ —     $ 50  
SBA Paycheck Protection Program loans, mature April 2022
    314       —  
Line of credit, matures on 30-day demand
    —       50  
Total notes payable and line of credit
  $ 314     $ 100  
                 
Convertible notes payable:
               
Convertible note payable, matures April 20, 2021
    —       100  
Convertible note payable, matures August 9, 2021
    —       600  
Convertible notes, mature August 12 and 16, 2021
    —       406  
Total convertible notes payable
    —       1,106  
Total current liabilities
  $ 314     $ 1,206  
                 
Long-term debt:
               
Convertible note payable, matures March 1 , 2023
  $ 50     $ —  
Debt discount, net of amortization
    ( 20 )     —  
SBA Paycheck Protection Program loans, mature April 2022     —       357  
SBA EIDL Loan, matures July 2053
    150       150  
Total long-term liabilities
  $ 180     $ 507  
                 
Total
  $ 494     $ 1,713  
 
 
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Table of Contents
 
For the years ended December 31, 2021 and 2020, we recorded $ 234,000 and $ 1,923,000 of interest expense related to the amortization of discounts on convertible notes payable and coupon interest from our convertible notes and lines of credit.
 
Cash payment of Debt Obligations
 
On  August 13, 2021,  we paid $ 178,000  in cash to Vernal Bay Investments, LLC, as payment of  one -half the outstanding principal on the convertible note scheduled to mature on  August 12, 2021.  In addition, we issued  1,272,321  shares of our common stock to pay the remaining $ 228,000 principal and interest due on the note.
 
On  March 1, 2021,  we paid in cash the outstanding principal of $ 600,000  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  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.
 
Conversion of Debt Obligations
 
On its maturity date of  April 20, 2021,  we converted to equity a promissory note in the principal balance of $ 100,000 into  400,000  shares of our common stock, and $ 9,994 of accrued interest into 48,706 shares of our common stock.
 
Note payable, matures on demand 60 day ’ s notice (or March 8, 2023)
 
On March 8, 2018, we received $ 50,000 and entered into a note payable. The note is due on upon demand from the noteholder, with sixty days’ notice. 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 stock purchase warrant (see Note  6 ).
 
SBA   Program   Loans
 
In April 2020, our subsidiaries ONM, BLEST and Clyra Medical received $ 218,000 , $ 96,000 and $ 43,000 , respectively, in loans pursuant to the SBA 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 SBA, and has filed forgiveness applications. The Clyra Medical PPP loan was forgiven on March 19, 2021.
 
Our subsidiary ONM Environmental received an Economic Injury Disaster loan from the U.S. Small Business Administration in the amount of $ 150,000 . The term of the loan is 30 years and has a 3.75 % interest rate. Monthly payments of $ 800 begin January 2023.
 
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Table of Contents
 
 
Note 5. Share-Based Compensation
 
Issuance of Common Stock in exchange for payment of payables
 
Payment of Officer Salaries
 
During the year ended December 31, 2021, certain of our officers agreed to convert an aggregate $ 46,000 of accrued and unpaid salary into 214,206 shares of our common stock. The unpaid salary is converted on the last day of each quarter as follows: December 31, 2021, we issued 15,000 shares of our common stock at $ 0.21 per share; on September 30, 2021, we issued 61,842 shares of our common stock at $0.19; on March 31, 2021, we issued 137,364 shares of our common stock at $ 0.23 per share.
 
During the year ended December 31, 2020, certain of our officers agreed to convert an aggregate $ 299,000 of accrued and unpaid salary into 2,017,928 shares of our common stock. The unpaid salary is converted on the last day of each quarter as follows: December 31, 2020, we issued 652,100 shares of our common stock at $ 0.12 per share; on September 30, 2020, we issued 349,670 shares of our common stock at $0.15; on June 30, 2020, we issued 367,403 shares of our common stock at $0.16; on March 31, 2020, we issued 648,755 shares of our common stock at $ 0.17 per share.
 
Shares issued to Officers are unvested at the date of grant and subject to a lock-up agreement restricting vesting and sale until the earlier of (i) the consummation of a sale (in a single transaction or in a series of related transactions) of BioLargo by means of a sale of (a) a majority of the then outstanding common stock of BioLargo (whether by merger, consolidation, sale or transfer of common stock, reorganization, recapitalization or otherwise) or (b) all or substantially all of the assets of BioLargo; and (ii) the successful commercialization of BioLargo’s products or technologies as demonstrated by its receipt of at least $ 3,000,000 in cash, or the recognition of $ 3,000,000 in revenue, over a 12 -month period from the sale of products and/or the license of technology; and (iii) the Company’s breach of the employment agreement between the Company and Officer and resulting in Officer’s termination.
 
Payment of Consultant Fees
 
During 2021, certain of our consultants agreed to convert an aggregate $ 282,000 accrued and unpaid obligations into 1,913,261 shares of our common stock. The unpaid obligations were converted on the last day of each quarter as follows: December 31, 2021, we issued 348,772 shares of our common stock at $ 0.21 per share; September 30, 2021, we issued 586,963 shares of our common stock at $ 0.19 per share; June 30, 2020, we issued 367,403 shares of our common stock at $ 0.16 per share; March 31, 2021, we issued 610,123 shares of our common stock at $ 0.23 per share.
 
During 2020, certain of our consultants agreed to convert an aggregate $ 366,000 accrued and unpaid obligations into 2,440,803 shares of our common stock. The unpaid obligations are converted on the last day of each quarter as follows: December 31, 2020, we issued 373,438 shares of our common stock at $ 0.12 per share; September 30, 2020, we issued 270,000 shares of our common stock at $ 0.15 per share; June 30, 2020, we issued 1,406,630 shares of our common stock at $ 0.16 per share; March 31, 2020, we issued 390,735 shares of our common stock at $ 0.17 per share.
 
All of these offerings and sales were made in reliance on the exemption from registration contained in Section  4 ( 2 ) of the Securities Exchange Act and/or Regulation D promulgated thereunder as not involving a public offering of securities.
 
Payment of Interest
 
During June 2021, pursuant to terms included in our debt agreements, we converted an aggregate $ 16,000 accrued interest into 81,777 shares of our common stock at $ 0.19 per share.  
 
During 2020, pursuant to terms included in our debt agreements, we converted an aggregate $ 184,000 accrued interest into 1,728,331 shares of our common stock as follows: September 30, 2020, we issued 1,412,052 shares of our common stock at $ 0.11 per share; June 30, 2020, we issued 297,001 shares of our common stock at $ 0.16 per share; March 31, 2020, we issued 19,278 shares of our common stock at $ 0.17 per share.
 
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Table of Contents
 
All of these offerings and sales were made in reliance on the exemption from registration contained in Section  4 ( 2 ) of the Securities Exchange Act and/or Regulation D promulgated thereunder as not involving a public offering of securities.
 
Stock Option Expense
 
During the years ended December 31, 2021 and 2020, we recorded an aggregate $ 1,308,000 and $ 1,821,000 , in selling general and administrative expense related to the issuance of stock options. We issued options through our 2018 Equity Incentive Plan, and outside of this plan.  See Note 10 for information on stock option expense for options issued by subsidiary Clyra Medical.
 
2018 Equity Incentive Plan
 
On June 22, 2018, our stockholders adopted the BioLargo 2018 Equity Incentive Plan (“ 2018 Plan”) as a means of providing our directors, key employees and consultants additional incentive to provide services. Both stock options and stock grants may be made under this plan for a period of 10 years. It is set to expire on its terms on June   22, 2028. Our Board of Director’s Compensation Committee administers this plan. As plan administrator, the Compensation Committee has sole discretion to set the price of the options. The plan authorizes the following types of awards: (i) incentive and non-qualified stock options, (ii) restricted stock awards, (iii) stock bonus awards, (iv) stock appreciation rights, (v) restricted stock units, and (vi) performance awards. The total number of shares reserved and available for awards pursuant to this Plan as of the date of adoption of this 2018 Plan by the Board is 40 million shares. The number of shares available to be issued under the 2018 Plan increases automatically each January 1 st by the lesser of (a) 2 million shares, or (b) such number of shares determined by our Board. As of December 31, 2021, 46,000,000 shares are authorized under the plan.
 
Activity for our stock options under the 2018 Plan during the year ended December 31, 2021, and the year ended December 31, 2020, is as follows:
 
                        Weighted
         
                        Average
    Aggregate
 
    Options
    Exercise
    Price per     intrinsic
 
    Outstanding
    Price per share
    share
    Value (1)  
Balance, December 31, 2019
    9,214,356     $ 0.16 – 0.43     $ 0.25          
Granted
    11,197,687     $ 0.12   0.40     $ 0.15          
Expired
    ( 1,546,518 )
                           
Balance, December 31, 2020
    18,865,525     $ 0.12 – 0.43     $ 0.19          
Granted
    4,320,617     $ 0.13 – 0.23     $ 0.19          
Balance, December 31, 2021
    23,186,142     $ 0.12 – 0.43     $ 0.19          
Non-vested
    ( 4,541,241 )
  $ 0.12 – 0.40     $ 0.19          
Vested, December 31, 2021
    18,644,901     $ 0.12 – 0.43     $ 0.19     $ 725,000  
( 1 ) – Aggregate intrinsic value based on closing common stock price of $ 0.21 at December 31, 2021.
 
The options granted under the 2018 Plan to purchase 4,320,617 shares during 2021 were issued to officers, 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  1,370,454  shares of our common stock at an exercise price on the respective grant dates between $ 0.17  and $ 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  $257,000;  (iii) we issued options to purchase  2,214,594  shares of our common stock to employees as part of an employee retention and expiring options plan at exercises price on the respective date ranging between $ 0.17  and $ 0.23  per share; the fair value of employee retention plan options totaled $ 410,000  and will vest quarterly over  four  years as long as they are retained as employees; and (iv) we issued options to purchase  435,569  shares of our common stock to consultants and employees in lieu of cash for unpaid obligations totaling $ 77,000 . All stock option expense is recorded on our consolidated statement of operations as selling, general and administrative expense.
 
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Table of Contents
 
The options granted under the 2018 Plan to purchase 11,197,687 shares during 2020 were issued to officers, board of directors, employees and consultants: (i) we issued options to purchase 4,880,945 shares of our common stock at an exercise price of $ 0.14 per share to employees and consultants as a bonus during the COVID- 19 pandemic. These options vest quarterly over one year and the fair value totaled $616,000; (ii) we issued options to purchase 517,500 shares of our common stock at an exercise price range of $ 0.14 – $ 0.21 per share to our CFO, with 492,500 shares having vested during 2020, and the remaining shares to vest 25,000 in January 31, 2021, the fair value of the options issued to our CFO totals $100,000; (iii) we issued options to purchase 1,746,434 shares of our common stock at an exercise price on the respective grant date of $ 0.17 ,$ 0.16 , $ 0.15 and $ 0.12 per share to members of our board of directors for services performed, all options vested at issuance and the fair value of these options totaled $250,000; (iv) we issued options to purchase 2,019,556 shares of our common stock to employees as part of an employee retention plan at an exercise price on the respective date of $ 0.17 , $ 0.16 , $ 0.15 and $ 0.12 per share; the fair value of employee retention plan options totaled $ 277,000 and vest quarterly over four years as long as they are retained as employees; (v) we issued options to purchase 531,298 shares of our common stock to consultants in lieu of cash for unpaid obligations totaling $74,000; and (vi) we issued options to purchase 1,501,954 shares of common stock at an exercise price ranging between $ 0.14 – $ 0.17 per share to employees to convert accrued and unpaid obligations and for previously issued options that expire. All of these options vested at issuance and the fair value totaled $ 198,000 . All stock option expense is recorded on our consolidated statement of operations as selling, general and administrative expense.
 
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 extension agreement provides for an additional one -year term to expire  January 31, 2022 ( the “Extended Term”).
 
As the sole 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  275,000  shares having vested as of  March 15 , 2021,  and the remaining shares to vest 25,000 shares monthly beginning March 31, 2021, and each month thereafter, so long as the agreement is in full force and effect. The Option is exercisable at $ 0.174 per share, the closing price of BioLargo’s common stock on the March 18 , 2021 grant date, expires ten years from the grant date, and was issued pursuant to the Company’s 2018 Equity Incentive Plan. The 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. Mr. Dargan is eligible to be reimbursed for business expenses he incurs in connection with the performance of his services as the Company’s Chief Financial Officer (although he has made  no  such requests for reimbursement in the past). All other provisions of the Engagement Agreement  not  expressly amended pursuant to the Engagement Extension Agreement remain the same, including provisions regarding indemnification and arbitration of disputes.
 
See also Note 14, Subsequent Events.
 
2007 Equity Incentive Plan
 
On September  7, 2007, and as amended April 29, 2011, the BioLargo, Inc. 2007 Equity Incentive Plan ( “2007 Plan”) was adopted as a means of providing our directors, key employees and consultants additional incentive to provide services. Both stock options and stock grants may be made under this plan for a period of 10 years, which expired on September 7, 2017. The Board’s Compensation Committee administers this plan. As plan administrator, the Compensation Committee has sole discretion to set the price of the options. As of September 2017, the Plan was closed to further stock option grants.
 
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Table of Contents
 
Activity for our stock options under the 2007 Plan for the years ended December 31, 2021 and 2020 is as follows:
 
                        Weighted
         
                        Average
    Aggregate
 
 
  Options     Exercise
    Price per
    intrinsic
 
 
  Outstanding     price per share
    share
    Value (1)
 
Balance, December 31, 2019
    8,769,451     $ 0.22 – 0.94     $ 0.43          
Expired
    ( 3,080,088 )
    0.22 – 0.58       0.38          
Balance, December 31, 2020
    5,689,363     $ 0.23 – 0.94     $ 0.44          
Expired
    ( 2,810,117 )
    0.34 – 0.51       0.38          
Balance, December 31, 2021
    2,879,246     $ 0.23 – 0.94     $ 0.49     $ —  
 
( 1 ) – Aggregate intrinsic value based on closing common stock price of $ 0.21 at December 31, 2021.
 
Non-Plan Options issued
 
Activity of our non-plan stock options issued for the years ended December 31, 2021 and 2020 is as follows:
 
                        Weighted
         
    Non-plan
                average
    Aggregate
 
    Options
    Exercise
    price per
    intrinsic
 
    outstanding
    price per share     share
    value (1)
 
Balance, December 31, 2019
    19,604,107     $ 0.16 – 1.00     $ 0.43          
Granted
    1,145,476       0.12 – 0.21       0.15          
Balance, December 31, 2020
    20,749,583     $ 0.12 – 1.00     $ 0.41          
Granted
    169,624       0.17 – 0.23       0.20          
Expired
    ( 800,000 )
      1.00         1.00          
Balance, December 31, 2021
    20,119,207     $ 0.12 – 0.83     $ 0.39          
Unvested
    ( 1,360,944 )
    0.45       0.45          
Vested and outstanding, December 31, 2021
    18,758,263     $ 0.12 – 0.83     $ 0.38     $ 93,000  
 
( 1 ) – Aggregate intrinsic value based on closing common stock price of $ 0.21 at December 31, 2021.
 
During the year ended December 31, 2021, we issued options to purchase an aggregate 169,624 shares of our common stock at exercise prices ranging between $ 0.17 – $ 0.23 per share to vendors for fees for services. The fair value of the options issued totaled an aggregate $ 34,000 and is recorded in our selling, general and administrative expense.
 
During the year ended December 31, 2020, we issued options to purchase an aggregate 1,145,476 shares of our common stock at exercise prices ranging between $ 0.12 – $ 0.21 per share to vendors for fees for services. The fair value of the options issued totaled an aggregate $ 167,000 and is recorded in our selling, general and administrative expense.
 
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BIOLARGO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Table of Contents
 
 
Note 6. Warrants
 
We have certain warrants outstanding to purchase our common stock, at various prices, as described in the following table:
 
                        Weighted
         
                        average
    Aggregate
 
 
    Warrants     Exercise
    price per     intrinsic
 
 
    outstanding     price per share     share     value (1)
 
Balance, December 31, 2019
    43,231,161     $ 0.25 – 1.00     $ 0.35          
Granted
    5,594,314       0.13 – 0.27       0.20          
Expired
    ( 15,844,486 )
    0.18 – 0.70       0.43          
Balance, December 31, 2020
    32,980,989     $ 0.13 – 1.00     $ 0.29          
Granted
    11,096,992       0.12 – 0.14       0.21          
Exercised
    ( 1,283,333 )
    0.12 – 0.14       0.13          
Expired
    ( 6,029,086 )
    0.12 – 0.70       0.30          
Balance, December 31, 2021
    36,765,562     $ 0.13 – 1.00     $ 0.27     $ 280,000  
( 1 ) – Aggregate intrinsic value based on closing common stock price of $ 0.21 at December 31, 2021.
 
Warrants issued in 2020 Unit Offering
 
During the years ended December 31, 2021 and 2020, pursuant to our 2020 Unit Offering (see Note 3 ), we issued six -month stock purchase warrants to purchase an aggregate 5,435,996 shares of our common stock at prices from $ 0.14 - $ 0.23 per share, and five -year stock purchase warrants to purchase an aggregate 5,435,996 shares of our common stock at prices from $ 0.16 - $ 0.29 per share.
 
Warrant issued in conjunction with amendment to note payable
 
On  March 1, 2021,  we and the holder of a $ 50,000  note payable modified the note (see Note  4 ). 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.
 
Exercise of Warrants
 
During the year ended December 31, 2021, we issued an aggregate 1,283,333 shares of our common stock from the exercise of outstanding stock purchase warrants and in exchange we received proceeds totaling an aggregate $ 164,000 .
 
Fair Value – Interest Expense
 
To determine interest expense related to our outstanding warrants issued in conjunction with debt offerings, the fair value of each award grant is estimated on the date of grant using the Black-Scholes option pricing model and the relative fair values are amortized over the life of the warrant. For the determination of expense of warrants issued for services, extinguishment of debt and settlement management also uses the option-pricing model. The principal assumptions we used in applying this model were as follows:
 
    2021
    2020
 
Risk free interest rate
        0.71 %
    0.10 – 0.23 %
Expected volatility
        100 %
    100 – 112 %
Expected dividend yield
        —           —  
Forfeiture rate
        —           —  
Expected life in years
    .5 – 5       2 – 5  
 
The risk-free interest rate is based on U.S. Treasury yields in effect at the time of grant. Expected volatilities are based on historical volatility of our common stock. The expected life in years is based on the contract term of the warrant.
 
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BIOLARGO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Table of Contents
 
 
Note 7. Accounts Payable and Accrued Expenses
 
As of December 31, 2021, accounts payable and accrued expenses included the following (in thousands):
 
Category
  BioLargo
    ONM
    BLEST
    Water
    Elim
    Totals
 
Accounts payable
  $ 156     $ 72     $ 73     $ 96     $ ( 47 )   $ 350  
Accrued payroll
    37       53       94       —       —       184  
Accrued interest
    25       —       —       —       —       25  
Total
                                $ 559  
 
 
As of December 31, 2020, accounts payable and accrued expenses included the following (in thousands):
 
Category
  BioLargo
    ONM
    BLEST
    Water
    Elim
    Totals
 
Accounts payable
  $ 125     $ 73     $ 56     $ 103     $ ( 42 )   $ 315  
Accrued payroll
    23       42       91       —       —       156  
Accrued interest
    42       —       —       —       —       42  
Total
                                $ 513  
 
 
See Note 10, “ Accounts Payable and Accrued Expenses ”, for the accounts payable and accrued expenses of Clyra Medical.
 
 
Note 8. Provision for Income Taxes
 
Given our historical losses from operations, income tax obligations have been limited to the minimum franchise tax assessed by the State of California. Since 2016, we have not consolidated for tax purposes, our subsidiary, Clyra Medical, as our ownership interest was less than 80%. Our subsidiary BLEST is a Tennessee limited liability company and as such, is not consolidated in our corporate tax return. As a pass-through entity, it does not pay federal taxes. However, the state of Tennessee charges franchise and excise taxes for limited liability companies, and thus BLEST will incur a nominal franchise tax and will not pay an excise tax unless and until it is profitable.
 
At December 31, 2021, we had federal and California tax net operating loss carry-forwards (“NOLs”) of approximately $109,000,000 and $52,000,000 respectively. Due to changes in our ownership through common stock issuances throughout the year, the utilization of NOLs may be subject to annual limitations and discounts under provisions of the Internal Revenue Code. We have not conducted a complete analysis to determine the extent of these limitations or any future limitation. Such limitations could result in the permanent loss of a significant portion of the NOLs. Under the Tax Cuts and Jobs Act (“TCJA”) signed into law on December 22, 2018, post‑2018 NOLs may be carried forward indefinitely, and pre‑2018 NOLs have a 20 -year limitation on carryforwards; however, the NOLs are limited to the lesser of ( 1 ) the aggregate of the NOL carryovers to such year, plus the NOL carry-backs to such year, or ( 2 ) 80% of taxable income (determined without regard to the deduction) (Internal Revenue Code Sec. 172 (a)). Generally, NOLs can no longer be carried back but are allowed to be carried forward indefinitely (Sec. 172 (b)( 1 )(A), which applies to 2018 and later NOLs only). Nevertheless, for California purposes, the additional taxable income limitations on NOL carryforwards as well as the indefinite time to use the NOLs have not been adopted. Therefore, for California, NOLs expire after 20 years. As such, ours will begin to expire in for the tax period ending December 31, 2021. On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law, under which federal NOLs could be carried back for five years against taxable income. Since BioLargo does not have any taxable income, this provision of the CARES Act will not affect any tax position. Realization of our deferred tax assets, which relate to operating loss carryforwards and timing differences, is dependent on future earnings. The timing and amount of future earnings are uncertain and therefore we have established a 100 % valuation allowance.
 
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BIOLARGO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Table of Contents
 
 
Note 9.  In-Process Research and Development; Impairment expense
 
Scion Solutions Transaction dated March 1, 2022
 
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.
 
The consideration provided to Scion, which was subject to an escrow agreement dated September 26, 2018 ( “Escrow Agreement”) and earn out provisions, included: (i) 21,000 shares of the Clyra Medical common stock; (ii) 10,000 shares of Clyra Medical common stock redeemable for 7,142,858 BioLargo common shares (detailed below); and (iii) a promissory note in the principal amount of $ 1,250,000 owed by Clyra Medical (“Clyra-Scion Note”). The Clyra-Scion note accrued interest at an annual rate of 5 %. As of December 31, 2021, $243,000 had be paid in reduction of principal owed on the Clyra-Scion note.
 
Immediately following Clyra Medical’s purchase of Scion’s intangible assets, Clyra Medical sold to BioLargo the assets, along with 12,755 Clyra Medical common shares. In exchange, BioLargo issued Clyra Medical 7,142,858 shares of BioLargo common stock. Concurrently, BioLargo licensed back to Clyra Medical the Scion assets. Scion may exchange its 10,000 Clyra Medical common shares for the 7,142,858 shares of BioLargo common stock issued to Clyra Medical, subject to the escrow and earn-out provisions described above. The fair value of the 7,142,858 BioLargo shares at December 31, 2020, was $ 2,150,000 .
 
During the year ended December 31, 2020, Clyra Medical’s gross revenue exceeded $ 200,000 , and thus the first and second performance metrics in the Escrow Agreement were met. As a result, Scion vested 6,200 Clyra Medical common shares, of which 2,200 are redeemable for 1,428,571 BioLargo shares. The fair value of the newly vested shares total was $ 257,000 at December 31, 2020. On our balance sheet, the In-Process Research and Development asset, and Common Stock Held for Redemption liability, each increased by that amount as of December 31, 2020.
 
By written agreement dated March 1, 2022, fully executed on March 3, 2022, Clyra Medical and BioLargo agreed to sell back to Scion the Scion IP purchased in the 2018 Scion Transaction. In exchange, Scion agreed to (i) accept 2,000,000 (of the 5,000,000 ) BioLargo common shares it had earned, (ii) forgive the outstanding principal (of $ 1,007,000 ) and interest (of $ 133,000 ) due on the Scion Promissory Note, and (iii) return all shares of Clyra common stock owned by Scion. Additionally, Scion members Spencer Brown, Tanya Rhodes, and Dr. Brock Liden each forgave all amounts due to them pursuant to their consulting agreements with Clyra Medical, which, in the aggregate, represented $ 305,000 on Clyra Medical’s accounts payable, and Spencer Brown resigned from Clyra Medical’s board of directors. The agreement further provided that Clyra Medical and BioLargo indemnify Scion and related parties from any claims related to the SkinDisc, and for mutual releases of any claims between the parties.
 
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BIOLARGO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Table of Contents
 
Spencer Brown and Tanya Rhodes each entered into non-disclosure agreements whereby they agreed not to disclose Clyra Medical or BioLargo’s proprietary information, and five -year non-compete provisions whereby they agreed not to engage in competition with copper-iodine complex technologies that are the same or substantially similar to Clyra Medical’s intellectual property. In exchange, Clyra Medical, BioLargo, and certain agents of Clyra Medical and BioLargo agreed not to engage in competition with Scion’s SkinDisc technology.
 
Separately, BioLargo and Clyra Medical entered into an agreement dated March 3, 2022, whereby (i) BioLargo agreed to transfer to Scion the Scion IP in accordance with the March 1, 2022 agreement listed on its balance sheet as In-process Research and Development, which was valued at $ 2,150,000 , and (ii) Clyra Medical transferred to BioLargo for its return to treasury 5,142,858 shares of BioLargo common stock.
 
Although these agreements were not fully executed until March 3, 2022, the essential terms of the agreement between Scion and Clyra Medical/BioLargo that would have a material impact on BioLargo’s financial statements remained unchanged since the first draft of the transaction document prepared and agreed to by both parties in December 2021, subject to document finalization and execution, and therefore, management considered the guidance in Accounting Standard Codification 855, whereby since the condition existed as of the balance sheet date, with further evidence arising subsequent to the balance sheet date, the Company recognizes the financial statement effects of this transaction as of December 31, 2021.
 
Impairment of Other Asset, Prepaid Marketing
 
On December 30, 2015, Clyra entered into a consulting agreement with Beach House Consulting, LLC, through which Jack B. Strommen is obligated to provide consulting services to Clyra Medical related to its sales and marketing activities, in exchange for $ 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 valued at $ 788,000 , in lieu of cash, as full prepayment of the consulting fee. The obligation to provide the consulting services is dependent on Clyra generating an average of $ 250,000 in monthly sales over three consecutive months, which has not been met. The value of the shares issued to Beach House totaled $788,000, and the obligation is recorded as a non-current asset on our balance sheet. In light of Clyra Medical’s revenues for the year ended December 31, 2021, and its shift of focus to a surgical wash product which it began selling in the three months ending March 31, 2022, Management determined as of December 31, 2021, to impair the asset by 25 % ($ 197,000 ). The impairment amount was charged to our selling, general and administrative expenses.
 
The following table summarizes the expenses related to the foregoing transactions as of December 31, 2021.
 
    Biolargo
Corporate
    Clyra
    Total
 
In-Process Research and Development
  $ ( 2,150,000 )   $ —     $ ( 2,150,000 )
Clyra debt obligations (Clyra-Scion note)
    —       1,007,000       1,007,000  
Accounts payable and accrued interest
    —       458,000       458,000  
Liability to Scion shareholders
    —       540,000       540,000  
Other asset, prepaid marketing
    —       ( 197,000 )     ( 197,000 )
Total
  $ ( 2,150,000 )   $ 1,808,000     $ ( 342,000 )
 
 
 
Note 10. Noncontrolling Interest – Clyra Medical
 
As discussed in Note 2, above, we consolidate the operations of our partially owned subsidiary Clyra Medical, of which we owned 56 % of its outstanding shares as of December 31, 2021. The increase in BioLargo’s ownership is due to the reduction in the shares outstanding through the Scion transaction (see Note 9, “ In-process Research and Development”).
 
Debt Obligations of Clyra Medical
 
Line of Credit
 
On June 30, 2020, Clyra Medical 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. Clyra Medical received $ 260,000 in draws and made repayments totaling $ 73,000 . As of December 31, 2021, the balance outstanding on this line of credit totals $ 187,000 . Funds from the line of credit must be used to produce inventory. Additional draws are conditional upon the presentation of invoices or purchase orders to the lender equal to the greater of one -half of principal outstanding on the line of credit, and $ 200,000 . The line of credit note earns interest at 15 %, matures in one year, and requires Clyra pay interest and principal from gross product sales. For the first 180 days, on a monthly basis, Clyra is required to pay 30 % of gross product sales to reduce amounts owed, and thereafter 60 % of gross sales. Clyra issued Vernal Bay 323 shares of its common stock as a commitment fee for the line of credit, valued at $ 70,000 . A security agreement of the same date grants Vernal Bay a security interest in Clyra’s inventory, as that term is defined in the Uniform Commercial Code. Clyra may prepay the note at any time.
 
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BIOLARGO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Table of Contents
 
Consulting Agreement
 
On December 30, 2015, Clyra entered into a consulting agreement with Beach House Consulting, LLC, through which Jack B. Strommen will be providing consulting services to Clyra related to its sales and marketing activities, and in exchange receive $ 23,000 per month for a period of four years. On June 30, 2020, at Clyra’s request, Beach House Consulting agreed to accept 3,639 shares of Clyra common stock, in lieu of cash, as full prepayment of the consulting fee. The obligation to provide the consulting services is dependent on Clyra generating an average of $ 250,000 in monthly sales over three consecutive months, which has not been met. The value of the shares issued to Beach House totaled $ 591,000 and is recorded as a non-current asset on our balance sheet. (See Note 9, “Other Asset, Prepaid Marketing”.)
 
Equity Transactions
 
As of December 31, 2021, Clyra had the following common shares outstanding:
 
Shareholder
  Shares
    Percent
 
BioLargo, Inc.
    49,207       56 %
Sanatio Capital
    18,704       22 %
Other
    19,280       22 %
Total
    87,191          
 
Sales of Common Shares
 
During the year ended December 31, 2021, Clyra sold 161 shares of its common stock for $ 50,000 to private investors at $ 310 per Clyra share.
 
In June 2020, BioLargo increased its investment in Clyra by 23,004 shares. Of this amount, 22,513 shares were issued to BioLargo pursuant to an amendment to the BioLargo/Clyra license agreement whereby BioLargo has granted Clyra rights to commercialize its technology in certain medical fields. The amendment provided, among other things, for the payment of the “initial license fee” through the issuance of 22,513 shares of Clyra common stock. Additionally, BioLargo acquired 490 shares of Clyra common stock by making vendor payments on Clyra’s behalf in exchange for the equity, at a price of $ 310 per share.
 
During the year ended December 31, 2020, Clyra sold 2,742 shares of its common stock for $ 851,000 at $ 200 per share.
 
Stock Options
 
Clyra issues options to its employees and consultants in lieu of compensation owed on a regular basis. As of  December 31, 2021,  the Company had issued options to purchase  11,411  shares of Clyra stock.  During the years ended December 31, 2021  and  2020,  Clyra issued options to purchase  2,594  and  3,943  shares of its common stock, respectively. 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 in the  nine  months ended  September 30, 2021  and  2020  totaled $ 564,000  and $ 788,000 , respectively. 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 %.
 
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BIOLARGO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Table of Contents
 
Accounts Payable and Accrued Expenses
 
At December 31, 2021 and 2020, Clyra had the following accounts payable and accrued expenses: Amount (in thousands)
 
Category
  December 31, 2021
    December 31, 2020
 
Accounts payable
  $ 149     $ 402  
Accrued payroll
    30       32  
Accrued interest
    51       102  
Total
  $ 230     $ 536  
 
 
Note 11. BioLargo Engineering, Science and Technologies, LLC
 
In September 2017, we commenced a full-service environmental engineering firm and formed a Tennessee entity named BioLargo Engineering, Science & Technologies, LLC (“BLEST”). In conjunction with the start of this subsidiary, we entered into a three -year office lease in the Knoxville, Tennessee area, and entered into employment agreements with six scientists and engineers. (See Note 12 “Business Segment Information”.) BLEST was capitalized with two classes of membership units: Class A, 100 % owned by BioLargo, and Class B, held by management of BLEST, and which initially have no “profit interest,” as that term is defined in Tennessee law. However, over the succeeding five years, the Class B members can earn up to a 30 % profit interest. They also have been granted options to purchase up to an aggregate 1,750,000 shares of BioLargo, Inc. common stock. The profit interest and option shares are subject to a five year vesting schedule tied to the performance of the subsidiary, including gross revenue targets that increase over time, obtaining positive cash flow by March 31, 2018 ( which was not met), collecting 90 % of its account receivables, obtaining a profit of 10 % in its first year (and increasing in subsequent years), making progress in the scale-up and commercialization of our AOS system, and using BioLargo research scientists (such as our Canadian team) for billable work on client projects. These criteria are to be evaluated annually by BLEST’s compensation committee (which includes BioLargo’s president, CFO, and BLEST’s president), beginning September 2018. Given the significant performance criteria, the Class B units and the stock options will only be recognized in compensation expense if or when the criteria are satisfied.
 
The BLEST Compensation Committee has met regularly since the subsidiary commenced operations. In 2018, it reviewed the operating performance and determined that the performance metrics were not met and as a result, did not award any Class B units or stock options.  In November 2019, it determined that a portion of the performance metrics were met, and that one -half of the eligible profits interests would be vested ( 2.5 % in the aggregate), and therefore one -half of the option interests ( 10 %) would be vested ( 175,000 options shares in the aggregate). The vesting of option shares resulted in a fair value totaling $ 44,000 , recorded on our consolidated statement of operations as selling, general and administrative expense. The fair value of the profit interest was nominal and not booked. In January 2021, the committee again reviewed the operating performance and determined that a portion of the performance metrics were met. It was agreed that one -half and one -quarter of the eligible profit interests would be vested ( 3.75 % in the aggregate), and therefore one -half of the option interests ( 15 %) would be vested ( 262,500 options shares in the aggregate). The vesting of option shares resulted in a fair value totaling $ 65,000 , recorded on our consolidated statement of operations as selling, general and administrative expense for the year ended December 31, 2020. In January 2022, the committee again reviewed the operating performance and determined that a portion of the performance metrics were met. It was agreed that an additional one -half and one -quarter of the eligible profits interests would be vested ( 6.50 % in the aggregate), and therefore an additional half of the option interests would be vested ( 525,000 options shares in the aggregate). The vesting of option shares resulted in a fair value totaling $130,000; $ 65,000 is recorded on our consolidated statement of operations as selling, general and administrative expense for each of the years ended December 31, 2021 and December 31, 2020.
 
 
Note 12. Business Segment Information
 
BioLargo currently has four operating business segments, plus its corporate entity which is responsible for general corporate operations, including administrative functions, finance, human resources, marketing, legal, etc. The four operational business segments are:
 
  1.
ONM Environmental -- which sells odor and volatile organic control products and services (located in Westminster, California);
  2.
Clyra Medical Technologies (“Clyra Medical”) -- which develops and sells medical products based on our technologies;
  3.
BLEST -- which provides professional engineering services on a time and materials basis for outside clients and supports our internal operations as needed (located in Oak Ridge, Tennessee); and
  4.
BioLargo Water (“Water”) -- which historically focused entirely on R&D, and has now shifted its focus to commercializing the AOS technology (located in Edmonton, Alberta Canada).
 
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BIOLARGO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Table of Contents
 
Historically, none of our operating business units have operated at a profit and therefore each required additional cash to meet its monthly expenses. The additional sources of the cash to fund the shortfall from operations of ONM, BLEST and BioLargo Water have been provided by BioLargo’s sales of debt or equity, research grants, and tax credits. Clyra Medical has been funded by third party investors who invest directly in Clyra Medical in exchange for equity ownership in that entity.
 
The segment information for the years December 31, 2021 and 2020, is as follows (in thousands):
 
    2021
    2020
 
                 
Revenues
               
BioLargo corporate
  $ 7     $ 14  
ONM Environmental
    1,419       1,568  
Clyra Medical
    139       240  
BLEST
    1,635       1,050  
BioLargo Water
    12       37  
Intersegment revenue
    ( 681 )     ( 477 )
Total
  $ 2,531     $ 2,432  
                 
Operating loss
               
BioLargo corporate
  $ ( 3,538 )   $ ( 3,947 )
ONM Environmental
    ( 511 )     ( 493 )
BLEST
    ( 629 )     ( 619 )
Clyra Medical
    ( 1,142 )     ( 1,827 )
BioLargo Water
    ( 616 )     ( 697 )
Total
  $ ( 6,436 )   $ ( 7,583 )
                 
Research and development
               
BioLargo corporate
  $ ( 1,001 )   $ ( 754 )
BLEST
    ( 488 )     ( 351 )
Clyra Medical
    ( 66 )     ( 164 )
BioLargo Water
    ( 486 )     ( 505 )
BioLargo corporate - intersegment
    674       436  
Total
  $ ( 1,367 )   $ ( 1,338 )
                 
Interest expense
               
BioLargo corporate
  $ ( 118 )   $ ( 1,823 )
ONM Environmental
    —       —  
Clyra Medical
    ( 116 )     ( 100 )
Total
  $ ( 234 )   $ ( 1,923 )
                 
Net loss
               
ONM Environmental
  $ ( 511 )   $ ( 483 )
BLEST
    ( 629 )     ( 619 )
Clyra Medical
    593       ( 2,139 )
BioLargo Water
    ( 566 )     ( 466 )
BioLargo corporate
    ( 5,781 )     ( 5,993 )
Consolidated net loss
  $ ( 6,894 )   $ ( 9,700 )
 
 
As of December 31, 2021
  BioLargo
    ONM
    Clyra
    BLEST
    Water
    Elimination
    Total
 
Tangible assets
  $ 555     $ 451     $ 816     $ 595     $ 152     $ ( 47 )   $ 2,522  
Right of use
    222       —       —       231       —       —       453  
Investment in South Korean joint venture
    48       —       —       —       —       —       48  
Total   $ 753     $ 451     $ 816     $ 433     $ 152     $ ( 47 )   $ 3,023  
 
As of December 31, 2020
  BioLargo
    ONM
    Clyra
    BLEST
    Water
    Elimination
    Total
 
Tangible assets
  $ 388     $ 624     $ 1,125     $ 188     $ 105     $ ( 42 )   $ 2,388  
Right of use
    215       —       —       126       —       —       341  
Investment in South Korean joint venture
    63       —       —       —       —       —       63  
Intangible assets
    2,150       —       —       —       —       —       2,150  
Total   $ 2,816     $ 624     $ 1,125     $ 314     $ 105     $ ( 42 )   $ 4,942  
 
 
F-
29
BIOLARGO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Table of Contents
 
 
Note 13. Commitments and Contingencies
 
Office Leases
 
We have long-term operating leases for office, industrial and laboratory space in Westminster, California, Oak Ridge, Tennessee, and Alberta, Canada. Payments made under operating leases are charged to the Consolidated Statement of Operations and Comprehensive Loss on a straight-line basis over the term of the operating lease agreement. For the years ended December 31, 2021 and 2020, rental expense was $ 228,000 and $ 228,000 , respectively.  On January 1, 2019, we adopted ASC 842 which resulted in a right-of-use asset and lease liability. Short-term leases are not included in our analysis. The adoption resulted in an immaterial cumulative effect of an accounting change that was not recorded.  The lease of our Westminster facility qualifies for the new treatment; it originated in August 2016, was originally scheduled to expire August 2020, contains a yearly escalation of 3 %, and includes a four -year renewal option whereby the base rent is adjusted to then market value. During 2020, we exercised our option to extend the lease for four years. It is too early for management to determine if it will extend another four years, therefore the additional four -year extension is not included in the analysis. The lease of our Oak Ridge, Tennessee facility also qualifies, and it had one three -year extension to September 2022, and has one renewal option for another five years where the rental rate would adjust to greater of the current price and fair market value. During 2021 management determined that it will exercise the five -year renewal option for the Oak Ridge facility. The lease of our Canadian facility is less than one year. None of our leases have additional terms related to the payments or mechanics of the lease. The leases have no additional payment terms such as common area maintenance payments, tax sharing payments or other allocable expenses. Likewise, the leases do not contain other terms and conditions of use, such as variable lease payments, residual value guaranties or other restrictive financial terms. Since there is no explicit interest rate in our leases, management used its incremental borrowing rate, which is estimated to be 18 % to determine lease liability.  
 
As of December 31, 2021, our weighted average remaining lease term is four years and the total remaining operating lease payments is $ 670,000 . Our minimum lease payments over the next five years are as follows:
 
Years ending
  BioLargo
Corp / ONM
    BLEST
    Total
 
December 31, 2022
  $ 115,000     $ 65,000     $ 180,000  
December 31, 2023
    118,000       65,000       183,000  
December 31, 2024
    70,000       65,000       135,000  
December 31, 2025
    --       65,000       65,000  
December 31, 2026
    --       107,000       107,000  
                         
Total minimum lease payments
  $ 303,000     $ 367,000     $ 670,000  
 
 
 
Note 14. Subsequent Events.
 
Management has evaluated subsequent events through the date of the filing of this Annual Report and management noted the following for disclosure.
 
Lincoln Park Capital Purchase of Shares
 
From January 1, 2022, through March 30, 2022, we sold 1,506,821 shares of common stock to Lincoln Park pursuant to our the 2020 LPC Purchase Agreement (see Note 3 ), and received $ 345,000 in gross and net proceeds. These sales were registered with the SEC on Form S- 1 (file number 333 - 237651 ).
 
F-
30
BIOLARGO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Table of Contents
 
Chief Financial Officer Contract Extension
 
On March 22, 2022, we and our Chief Financial Officer Charles K. Dargan, II formally agreed to extend the engagement agreement dated February 1, 2008 ( the “Engagement Agreement”, which had been previously extended multiple times), pursuant to which Mr. Dargan has been and continues to serve as the Company’s Chief Financial Officer. The Engagement Extension Agreement dated as of March 22, 2022 ( the “Engagement Extension Agreement”) provides for an additional one -year term to expire January 31, 2023 ( the “Extended Term”).
 
As the sole compensation for the Extended Term, Mr. Dargan was issued an option (“Option”) to purchase 25,000 shares of the Company’s common stock for each month during the Extended Term (thus, an option to purchase 300,000 shares reflecting an extended term of 12 months). The Option vests over the period of the Extended Term, with 25,000 shares having vested as of March 22, 2022, and the remaining shares to vest 25,000 shares monthly beginning March 22, 2022, and each month thereafter, so long as the agreement is in full force and effect. The Option is exercisable at $ 0.24 per share, the closing price of BioLargo’s common stock on the March 22, 2022, grant date, expires ten years from the grant date, and was issued pursuant to the Company’s 2018 Equity Incentive Plan.
 
The Option is Mr. Dargan’s sole compensation for the Extended Term. As was the case in all prior terms of his engagement, there is no cash component of his compensation for the Extended Term. Mr. Dargan is eligible to be reimbursed for business expenses he incurs in connection with the performance of his services as the Company’s Chief Financial Officer (although he has made no such requests for reimbursement in the past). All other provisions of the Engagement Agreement not expressly amended pursuant to the Engagement Extension Agreement remain the same, including provisions regarding indemnification and arbitration of disputes.
 
SBA Loan Forgiveness
 
We received a notice dated February 7, 2022, that the Small Business Administration had partially approved our application for forgiveness of Paycheck Protection Act loan to ONM Environmental in the amount of $ 174,000 . This leaves a balance on the loan of $ 35,000 .
 
Clyra Medical – Scion Transaction
 
BioLargo and its partially owned subsidiary Clyra Medical entered into an agreement dated March 3, 2022, whereby BioLargo agreed to convert $ 633,091 in working capital advances, made to or on behalf of Clyra Medical, into 2,042.23 shares of Clyra Medical common stock at a rate of $ 310 per share. See also Note 9 “Impairment Expense”. 
 
Unit Offering
 
During the  three months ended March 31, 2022 ,  pursuant to an offering commenced in  March 2020,  we sold  4,196,968 shares of our common stock and received $ 692,000 in gross and net proceeds from ten accredited investors. In addition to the shares, we issued the investors six -month warrants that allow the investors to purchase an aggregate 4,196,968 shares at 120 % of the share purchase price, and five -year warrants that allow the investors to purchase an aggregate 4,196,968 shares at 150 % of the share purchase price.
 
F-31
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.