Table Of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


  

 

FORM 10-Q

 


 

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

For the quarterly period ended June 30, 2014.

 or

 

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

For the transition period from              to               

 

Commission File Number 000-19709

 


BIOLARGO, INC.

(Exact name of registrant as specified in its charter)

 


  

 

Delaware

 

65-0159115

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 3500 W. Garry Avenue

Santa Ana, California 92704

(Address, including zip code, of principal executive offices)

 

(949) 643-9540

(Registrant’s telephone number, including area code)

 


 

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

 

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

  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

 Large accelerated filer     ☐

Accelerated filer ☐

 

 

 Non-accelerated filer       ☐

Smaller reporting company ☒

                   

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

 

The number of shares of the Registrant’s Common Stock outstanding as of August 12, 2014 was 80,959,722 shares.

 

 
 

Table Of Contents
 

 

 

BIOLARGO, INC.

FORM 10-Q

INDEX

 

 

PART I 

Item 1

Financial Statements

1

Item 2

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

17

Item 4

Controls and Procedures

22

     
     
PART II 
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds 23
Item 6 Exhibits 26

  

 

Exhibit Index

Exhibit No.

Description of Exhibit

   
4.1 Option to purchase common stock issued to Charles K. Dargan dated June 23, 2014 (1)
   
4.2* Form of Warrant to Purchase Common stock issued to investors in Summer 2014 Private Securities Offering
   

10.01†

Engagement Extension Agreement dated as of June 23, 2014 between BioLargo, Inc. and Charles K. Dargan, II. (1)

10.2* License Agreement

Exhibit 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

Exhibit 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

Exhibit 32*

Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350.

101.INS**

XBRL Instance

101.SCH**

XBRL Taxonomy Extension Schema

101.CAL**

XBRL Taxonomy Extension Calculation

101.DEF**

XBRL Taxonomy Extension Definition

101.LAB**

XBRL Taxonomy Extension Labels

101.PRE**

XBRL Taxonomy Extension Presentation

 

 

  † Management contract or compensatory plan, contract or arrangement
  * Filed herewith
  ** Furnished herewith
 

(1)

Incorporated herein by reference from the Form 8-K filed by the Company on June 23, 2014.

 

 

 
i

Table Of Contents
 

 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

BIOLARGO, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

AS OF DECEMBER 31, 2013 AND JUNE 30, 2014

 

   

December 31,

2013

   

June 30, 2014

(unaudited)

 
                 

ASSETS

               

CURRENT ASSETS

               

Cash and cash equivalents

  $ 92,437     $ 318,318  

Accounts receivable, net of allowance

    3,929       2,902  

Inventory

    29,830       24,730  

Prepaid expense

          45,000  

Total current assets

    126,196       390,950  
                 

OTHER ASSETS, net of amortization

    40,997       35,537  
                 

TOTAL ASSETS

  $ 167,193     $ 426,487  
                 

LIABILITIES AND STOCKHOLDERS’ EQUITY

               
                 

CURRENT LIABILITIES

               

Accounts payable and accrued expenses

  $ 407,157     $ 331,281  

Note payable

    325,000       50,000  

Customer deposit

          100,000  

Total current liabilities

    732,157       481,281  
                 

TOTAL LIABILITIES

    732,157       481,281  
                 

COMMITMENTS, CONTINGENCIES AND SUBSEQUENT EVENTS (Note 12)

               
                 

STOCKHOLDERS’ EQUITY (DEFICIT)

               

Convertible Preferred Series A, $.00067 Par Value, 50,000,000 Shares Authorized, -0- Shares Issued and Outstanding, at December 31, 2013 and June 30, 2014.

           

Common Stock, $.00067 Par Value, 200,000,000 Shares Authorized, 75,123,014 and 80,903,402 Shares Issued, at December 31, 2013 and June 30, 2014.

    50,069       53,945  

Additional Paid-In Capital

    74,849,492       77,280,798  

Accumulated Deficit

    (75,327,603

)

    (77,448,410

)

Non-controlling interest

    (136,922 )     58,873  

Total Stockholders’ Equity (Deficit)

    (564,964

)

    (54,794

)

                 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)

  $ 167,193     $ 426,487  

 

See accompanying notes to unaudited condensed consolidated financial statements 

 

  

BIOLARGO, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE AND SIX-MONTH PERIODS ENDED JUNE 30, 2013 AND 2014

 

   

For the three-month periods

ended June 30,

   

For the six-month periods

ended June 30,

 
   

2013

   

2014

   

2013

   

2014

 
   

(unaudited)

   

(unaudited)

   

(unaudited)

   

(unaudited)

 

Revenue

                               

License revenue

  $ 100,000     $     $ 100,000     $  

Product revenue

    19,983       21,086       34,346       30,373  

Total revenue

    119,983       21,086       134,346       30,373  
                                 

Cost of goods sold

    8,984       8,933       15,182       11,463  
                                 

Gross (loss) margin

    110,999       12,153       119,164       18,910  
                                 

Costs and expenses

                               

Selling, general and administrative

    475,273       948,663       934,910       1,556,029  

Research and development

    147,112       129,376       335,707       292,981  

Amortization and depreciation

    2,730       2,730       5,460       5,460  
                                 

Total costs and expenses

    625,115       1,080,769       1,276,077       1,854,470  
                                 

Loss from operations

    (514,116

)

    (1,068,616

)

    (1,156,913

)

    (1,835,560

)

                                 

Interest expense, net

    (235,528

)

    (3,326

)

    (238,028

)

    (309,452

)

                                 
                                 

Net loss

  $ (749,644

)

  $ (1,071,942

)

  $ (1,394,941

)

  $ (2,145,012

)

Net loss (non-controlling interests)

  $ (210,822 )   $ (14,122 )   $ (210,822 )   $ (24,205 )

Net loss (controlling interests)

  $ (538,822 )   $ (1,057,820 )   $ (1,184,119 )   $ (2,120,807 )
                                 

Loss per common share – basic and diluted

  $ (0.01

)

  $ (0.01

)

  $ (0.02

)

  $ (0.03

)

                                 

Weighted average common share equivalents outstanding

    72,633,696       76,693,189       72,020,069       78,275,663  

 

See accompanying notes to unaudited condensed consolidated financial statements  

 

 

BIOLARGO, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (DEFICIT)
FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 2014

(unaudited) 

 

    Common Stock                                  
    Number of     Par Value    

Additional

Paid-In

    Accumulated     Non-controlling          
    Shares     $ .00067     Capital     Deficit     Interest     Total  

BALANCE DECEMBER 31, 2013

    75,123,014     $ 50,069     $ 74,849,492     $ (75,327,603

)

  $ (136,922

)

  $ (564,964

)

Issuance of stock for cash received as part of Summer 2013 PPM @ $0.25

    3,248,400       2,180       775,320                   777,500  
                                                 

Fees paid for Summer 2013 PPM

                (12,500

)

                (12,500 )

Issuance of stock to convert Note Payables and related accrued interest

    1,360,000       911       583,889                   584,800  

Cash received from Clyra Spring 2014 PPM

                            220,000       220,000  

Issuance of stock for cash received from Winter 2012 Warrant

    374,288       250       186,894                   187,144  

Issuance of stock for cash received from Summer 2013 Warrant

    200,000       134       59,866                   60,000  

Issuance of stock for services to consultants

    313,209       210       229,047                   229,257  

Issuance of options for services to consultants

                188,463                   188,463  

Issuance of stock for accrued and unpaid obligations to officers

    284,491       191       166,416                   166,607  

Issuance of options for services and unpaid obligations to board of directors

                253,911                   253,911  

Net loss for the six-month period ended June 30, 2014

                      (2,120,807

)

    (24,205 )     (2,145,012

)

                                                 

BALANCE JUNE 30, 2014

    80,903,402     $ 53,945     $ 77,280,798     $ (77,448,410

)

    58,873     $ (54,794

)

 

See accompanying notes to unaudited condensed consolidated financial statements

 

 

BIOLARGO, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR
THE SIX-MONTH PERIODS ENDED JUNE 30, 2013 AND 2014

(unaudited)

 

   

For the six-month periods ended June 30,

 
   

2013

   

2014

 

CASH FLOWS FROM OPERATING ACTIVITIES

               

Net Loss

  $ (1,394,941

)

  $ (2,145,012

)

                 

Adjustments to Reconcile Net Loss to Net Cash Used in Operating Activities:

               
                 

Non-cash interest expense related to the amortization of the fair value of warrants issued in conjunction with our convertible notes

    233,000        

Non-cash expense related to options issued to board of directors

    41,200       253,911  

Non-cash expense related to common stock issued to officers in exchange for unpaid obligations

          141,425  

Non-cash expense related to options and warrants issued to vendors

    57,400       188,463  

Non-cash expense related to common stock issued to consultants

    15,000       221,187  

Non-cash expense related to common stock issued to convert interest related to our convertible notes

          291,574  

Amortization and depreciation expense

    5,460       5,460  

Increase (decrease) in cash from change in:

               

Accounts receivable

    (3,324

)

    1,027  

Inventory

    13,037       5,100  

Prepaid expenses

    3,575       (45,000

)

Customer deposit

          100,000  

Other assets

    (100,000

)

     

Accounts payable and accrued expenses

    328,266       (26,898

)

Deferred revenue

    (18,997

)

     
                 
                 

Net Cash Used In Operating Activities

    (827,474

)

    (1,008,763

)

                 

CASH FLOWS FROM FINANCING ACTIVITIES

         

Proceeds from sale of stock

    633,000       1,014,644  

Proceeds from sale of stock in subsidiary

    111,000       220,000  
                 

Net cash provided by financing activities

    744,000       1,234,644  
                 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

    (83,474

)

    225,881  

CASH AND CASH EQUIVALENTS — BEGINNING

    151,189       92,437  
                 

CASH AND CASH EQUIVALENTS — ENDING

  $ 67,715     $ 318,318  
                 

SUPPLEMENTAL DISCLOSURES OF CASHFLOW INFORMATION

               

Cash Paid During the Period for:

               

Interest

  $     $ 6,733  

Taxes

  $ 2,782     $ 2,400  
                 
                 
                 

SUPPLEMENTAL DISCLOSURES OF NON-CASH OPERATING ACTIVITIES:

               

Conversion of accrued expenses to shares of our common stock:

               

Consultant obligations

  $ 34,530     $ 229,257  

Board of directors and officer obligations

  $     $ 166,607  
                 

Option or warrant issued to purchase shares of our common stock:

               

Consultant obligations

  $ 57,400     $ 188,463  

Board of directors and officer obligations

  $ 41,200     $ 253,911  
                 
                 

SUPPLEMENTAL DISCLOSURES OF NON-CASH FINANCING AND INVESTING ACTIVITIES:

               
                 

Fair value of the Winter 2012 warrant extension

  $ 233,000     $  

 

See accompanying notes to unaudited condensed consolidated financial statements 

 

 

BIOLARGO, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

 

 

Note 1. Business and Organization

 

Outlook

 

The accompanying condensed 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. As reflected in the accompanying financial statements, we had a net loss of $2,145,012 for the six-month period ended June 30, 2014, and at June 30, 2014, we had negative working capital of $90,331, current assets of $390,950, and an accumulated stockholders’ deficit of $77,448,410. The foregoing factors raise substantial doubt about our ability to continue as a going concern. Ultimately, our ability to continue as a going concern is dependent upon our ability to attract significant new sources of capital, attain a reasonable threshold of operating efficiencies and achieve profitable operations by licensing or otherwise commercializing products incorporating our technology. The financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern.

 

We have been, and anticipate that we will continue to be, limited in terms of our capital resources. Our total cash and cash equivalents were $318,318 at June 30, 2014. We generated revenues of $30,373 in the six-month period ended June 30, 2014, which amount was not sufficient to fund our operations. We generally have not had enough cash or sources of capital to pay our accounts payable and expenses as they arise, and have relied on the issuance of stock options and common stock, as well as extended payment terms with our vendors to operate. We will be required to raise substantial additional capital to expand our operations, including without limitation, hiring additional personnel, additional scientific and third-party testing, costs associated with obtaining regulatory approvals and filing additional patent applications to protect our intellectual property, and possible strategic acquisitions or alliances, as well as to meet our liabilities as they become due for the next 12 months.

 

As of June 30, 2014, we had $50,000 principal amount outstanding on a note payable (see Note 10), and $331,281 of outstanding accounts payable. (See Note 9.) 

 

During the six-month period ended June 30, 2014, we received an aggregate $1,244,644 gross and $1,234,644 net proceeds pursuant to our private securities offerings, consisting of $767,500 from our Summer 2013 offering, $187,144 from the exercise of our Winter 2012 Warrants, $60,000 from the exercise of our Summer 2013 Warrants, and $220,000 from the Clyra Spring 2014 private securities offering. (See Note 4.)

 

In the opinion of management, the accompanying condensed consolidated balance sheets and related condensed consolidated statements of operations, cash flows, and stockholders’ equity include all adjustments, consisting only of normal recurring items, necessary for their fair presentation in conformity with accounting principles generally accepted in the United States of America. Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. Actual results and outcomes may differ from management’s estimates and assumptions. Estimates are used when accounting for stock-based transactions, account payables and accrued expenses and taxes, among others.

 

 The unaudited condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and pursuant to Rule 8-03 of Regulation S-X under the Securities Act of 1933, as amended. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for annual financial statements.  In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been included. We are still operating in the early stages of the sales and distribution process, and therefore our operating results for the six-month period ended June 30, 2014 are not necessarily indicative of the results that may be expected for the year ended December 31, 2013, or for any other period. These unaudited condensed consolidated financial statements and notes should be read in conjunction with the Company’s audited financial statements and accompanying notes included in the Annual Report on Form 10-K for the year ended December 31, 2013 filed with the Securities and Exchange Commission (the “SEC”) on March 30, 2014.

  

 

BIOLARGO, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Note 2. Summary of Significant Accounting Policies

 

Inventory

 

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

 

      December 31, 2013       June 30, 2014  

Raw materials

  $ 26,080     $ 18,429  

Finished goods

    3,750       6,301  

Total inventory

  $ 29,830     $ 24,730  

  

Other Assets

 

Other Assets consists of payments made to purchase patents related to our efforts in commercializing the ISAN system.

 

For the six-month periods ended June 30, 2013 and 2014 we recorded amortization expense totaling $5,460 and $5,460, respectively.

 

We review intangible assets for potential impairment using our best estimates based on reasonable assumptions and projections. An impairment loss to write such assets down to their estimated fair values is necessary if the carrying values of the assets exceed their related undiscounted expected future cash flows. We also determine impairment whenever events or changes in circumstances indicate that their carrying values may not be recoverable. No impairment has been recorded for the period ended June 30, 2014. 

 

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, uncollectible accounts receivable, asset depreciation and amortization, and taxes, among others.

 

Share-based Payments

 

All share-based payments to employees, including grants of employee stock options, are recognized in the financial statements based on their fair values.

 

For stock issued to consultants and other non-employees for services, we record the expense based on the fair market value of the securities as of the date of the stock issuance. The issuance of stock warrants or options to non-employees are valued at the time of issuance utilizing the Black Scholes calculation and the amount is charged to expense.

 

During the six-month periods ended June 30, 2013 and 2014 we recorded an aggregate $25,200 and $25,200 in selling general and administrative expense related to options issued pursuant to the 2007 Plan.

 

During the six-month periods ended June 30, 2013 and 2014 we recorded an aggregate $68,000 and $358,213 in selling general and administrative expense related to options issued outside of the 2007 Plan.

  

 

BIOLARGO, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

 

During the six-month period ended June 30, 2014 we issued an aggregate 284,491 shares of our common stock to our officers in lieu of accrued and unpaid compensation and unreimbursed expenses totaling $166,607. (See Note 9).

 

During the six-month periods ended June 30, 2013 and 2014 we issued an aggregate 106,776 and 313,209 shares of our common stock to third party vendors in lieu of accrued and unpaid compensation and unreimbursed expenses totaling $34,530 and $229,257, respectively. (See Note 9).

 

On March 28, 2014, we issued an aggregate 1,360,000 shares of our common stock to note payable holders in lieu of $584,800 note payable principal balance and related accrued interest. (See Note 5).

 

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.

 

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.

 

Revenue Recognition

 

Revenues are recognized as risk and title to products transfers to the customer (which generally occurs at the time shipment is made), the sales price is fixed or determinable, and collectability is reasonably assured. We also may generate revenues from royalties and license fees from our intellectual property. Licensees typically 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. License fees are recognized over the estimated period of future benefit to the average licensee.

 

Earnings (Loss) Per Share

 

We report basic and diluted earnings (loss) per share (“EPS”) for common and common share equivalents. Basic EPS is computed by dividing reported earnings by the weighted average shares outstanding. Diluted EPS is computed by adding to the weighted average shares the dilutive effect if stock options and warrants were exercised into common stock. For the six-month periods ended June 30, 2013 and 2014, the denominator in the diluted EPS computation is the same as the denominator for basic EPS due to the anti-dilutive effect of the warrants and stock options on the Company’s net loss.

 

Recent Accounting Pronouncements

 

There was no recent accounting guidance issued where the adoption would have a material effect on our condensed consolidated financial statements.

 

 

 

Note 3. Customer Deposit

 

In 2012, we executed a joint venture agreement with Peter Holdings Ltd., the principal funding source of the development of the Isan System, whereby we jointly purchased the intellectual property associated with the Isan System. In February 2014 we received a deposit of $100,000 from InsulTech Manufacturing, LLC, an Arizona limited liability company d/b/a Clarion Water (“Clarion Water”) towards a worldwide, exclusive license of the Isan System. On August 12, 2014, we entered into a license agreement with Clarion Water in which we granted an exclusive license to commercialize the Isan System. (See Note 12.) 

  

 

BIOLARGO, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Note 4. Private Securities Offerings

 

Summer 2013 Private Securities Offering

 

Pursuant to a private offering of our common stock at a price of $0.25 per share that commenced June 2013, through its expiration on March 31, 2014, we sold 3,370,000 shares of our common stock to 23 accredited investors and received $842,500 gross and $837,000 net cash proceeds from the sales. In addition, we received a subscription agreement for $20,000 through an individual retirement account, the funds for which had not been received by June 30, 2014. Of the aggregate 3,370,000 shares sold in the offering, for the three-month period ended March 31, 2104, we sold 3,110,000 shares of our common stock and received $767,500 gross proceeds from the sales. Fees related to this offering consisted of $15,500 cash payments, $34,600 were paid by issuing 138,400 shares of our common stock at an exercise price of $0.25 per share. The share price on the grant date was $0.47 resulting in additional expense of $65,000, and an additional $2,500 in fees are due in shares of our common stock.

 

Each purchaser of stock will receive, for no additional consideration, a stock purchase warrant which entitles the holder to purchase a number of additional shares of our common stock equal to the number of shares originally purchased. The warrant is exercisable at $0.30 per share, will expire on December 31, 2016, and is subject to a call provision in the event BioLargo’s common stock price reaches $0.60 per share over a period of 40 days.

 

Clyra Spring 2014 Private Securities Offering

 

On February 1, 2014, our subsidiary Clyra (see Note 11) began a private securities offering, selling up to 1,000 shares of its common stock at $1,000 per share. From inception through June 30, 2014, Clyra sold 220 shares of its common stock to five accredited investor and received $220,000 gross and net proceeds from the sale.

 

Each purchaser of stock will receive, for no additional consideration, (i) a stock purchase warrant entitling the holder to purchase the same number of shares of Clyra common stock as purchased in the offering for $1,833.33 per share until July 30, 2015, and (ii) a warrant issued by BioLargo that allows the holder to exchange one share of Clyra common stock for 4,000 shares of BioLargo common stock.

 

Winter 2013 Private Securities Offering

 

Pursuant to a private offering of our common stock at a price of $0.30 per share that commenced January 2013, through its expiration on June 14, 2013, we sold 2,333,329 shares of our common stock to 13 accredited investors and received $700,000 gross and $633,000 net proceeds from the sales.

 

Each purchaser of stock will receive, for no additional consideration, a stock purchase warrant entitling the holder to purchase the same number of shares as purchased in the offering, for $0.55 per share until July 30, 2015.

 

Clyra Winter 2012 Private Securities Offering

 

On December 17, 2012, our subsidiary Clyra (see Note 11) began a private securities offering, selling up to 1,000 shares of its common stock at $1,000 per share. The offering ended December 31, 2013 and Clyra sold an aggregate 240 shares of its common stock to four accredited investors and received $240,000 gross and $236,000 net proceeds from the sale.

 

In April 2013, Clyra modified the terms of its offering, such that, in addition to shares of Clyra common stock, each Clyra investor would receive a warrant (“Clyra 2012 Warrants”) to purchase an additional number of shares of Clyra common stock as originally purchased by the investor, at a price of $1,833 per share, until July 30, 2015. The offering terms were also modified to increase the number of shares of BioLargo common stock into which the Clyra investor could convert his or her Clyra shares, from 2,858 to 3,333 and 1/3 shares of BioLargo common stock. The number increased in September 2013 to 4,000 shares of BioLargo common stock. The date until which the investor may tender Clyra shares to BioLargo for conversion was extended to July 30, 2015. The Clyra investors will not receive any further warrants to purchase additional BioLargo common stock.

 

 

BIOLARGO, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

 Note 5. Conversion of Notes

 

On March 26, 2014, we issued an aggregate 1,360,000 shares of our common stock, at a conversion price of $0.25, as payment for an aggregate $275,000 in principal and $65,000 of accrued and unpaid interest expense for three promissory notes (originally issued on June 8, 2010, October 28, 2013, and November 15, 2013, detailed below). Our stock price on the date of issuance was $0.43 per share, resulting in an additional fair value of $244,800 which was recorded as interest expense.

 

On June 8, 2010, we received $100,000 and issued a promissory note with an initial maturity date of December 3, 2010, which accrues interest at a rate of 10%. The noteholder, for no additional consideration, received a stock purchase warrant entitling the holder to purchase 50,000 shares of our common stock, exercisable at $0.50 per share until June 3, 2013. The maturity date of the note was mutually extended to December 3, 2011 and then to December 3, 2012. 

 

On December 28, 2012, the noteholder agreed to extend the maturity date of the note to December 3, 2013. As consideration for the extension, we issued the noteholder 60,000 shares of our common stock at $0.25 per share and recorded $15,000 in interest expense, and a warrant to purchase 50,000 shares of common stock at $0.50 cents per share, exercisable until June 3, 2014. The fair value of this warrant totaled $6,805 and was recorded as interest expense.

 

On December 31, 2013, the note holder agreed to extend the maturity date of the note January 14, 2015. As consideration for the extension, we issued the noteholder 60,000 shares of our common stock at $0.25 per share and recorded $15,000 in interest expense, and a warrant to purchase 60,000 shares of common stock at $0.30 cents per share, exercisable until January 14, 2017. The fair value of this warrant totaled $14,412 and was recorded as interest expense. (See Note 6.) On March 26, 2014, this note was paid in full by the issuance of our common stock as detailed above.

 

On October 28, 2013, we received $75,000 and issued a promissory note with a maturity date of October 31, 2014, which accrues interest at a rate of 10%. On March 26, 2014, this note was paid in full by the issuance of our common stock as detailed above.

 

On November 15, 2013, we received $100,000 and issued a promissory note with a maturity date of November 30, 2014, which accrues interest at a rate of 10%. On March 26, 2014, this note was paid in full by the issuance of our common stock as detailed above.

 

For the six-month period ended June 30, 2013 and 2014 we recorded interest expense of $5,028 and $58,088, respectively related to these converted notes.

 

 

Note 6. Warrants

 

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

 

   

Number of

         
   

Shares

   

Price Range

 

Outstanding as of December 31, 2012

    8,390,741    

$

0.125 – 2.00  

Issued

    2,838,329    

$

0.50 – 1.00  

Exercised

           

Expired

    (1,275,298 )  

$

0.50 – 1.00  
                 

Outstanding as of June 30, 2013

    9,448,772    

$

0.125 – 1.00  

  

 

   

Number of

         
   

Shares

   

Price Range

 

Outstanding as of December 31, 2013

    10,618,771    

$

0.125 – 1.00  

Issued

    4,150,001    

$

0.25 – 1.00  

Exercised

    (574,288 )   $  

Expired

    (6,111,362 )  

$

0.50 – 1.00  
                 

Outstanding as of June 30, 2014

    8,083,122    

$

0.125 – 1.00  

 

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 calculated value is amortized over the life of the warrant. The determination of expense of warrants issued for services or settlement also uses the option-pricing model. The principal assumptions we used in applying this model were as follows:

 

   

2013

   

2014

 

Risk free interest rate

    .15

%

    .11

%

Expected volatility

    112

%

    125

%

Expected dividend yield

           

Forfeiture rate

           

Contractual life in years

    1       1  

 

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.

 

No warrants were issued in conjunction with debt or as compensation during the six-month periods ended June 30, 2013 and 2014, as such there is no corresponding expense related to the warrants issued.

 

Summer 2013 Warrants

 

Pursuant to the terms of our Summer 2013 Offering (see Note 4), since inception in June 2013 through its termination on March 31, 2014, we issued warrants to purchase up to an aggregate 3,370,000 shares of our common stock at an exercise price of $0.30 per share. Of this amount, we issued warrants to purchase up to an aggregate 3,110,000 shares of our common stock during the three-month period ended March 31, 2014. These warrants are set to expire October 15, 2015.

 

On May 8, 2014, we received $60,000 and issued 200,000 shares of our common stock from the exercise of a Summer 2013 Warrant.

 

Clyra 2014 Warrants

 

Pursuant to the terms of the Clyra 2014 Spring Offering (see Note 4), during the six-month period ended June 30, 2014 we issued warrants to purchase up to an aggregate 880,000 shares of our common stock to the investors in the Clyra 2014 Spring Offering. Pursuant to the terms of the warrant, Clyra investors may tender one share of Clyra common stock for 4,000 shares of BioLargo common stock. These warrants are set to expire July 30, 2015.

 

Clyra 2012 Warrants

 

In April 2013, Clyra modified the terms of its offering, such that, in addition to shares of Clyra common stock, each Clyra investor would receive a warrant (“Clyra 2012 Warrants”) to purchase an additional number of shares of Clyra common stock as originally purchased by the investor, at a price of $1,833 per share, until July 30, 2015. The offering terms were also modified to increase the number of shares of BioLargo common stock into which the Clyra investor could convert his or her Clyra shares, from 2,858 to 4,000 shares of BioLargo common stock. We have issued warrants to purchase up to an aggregate 960,000 shares of our common stock to the investors in the Clyra Winter 2012 private securities offering. (See Note 4). The date until which the investor may tender Clyra shares to BioLargo for conversion was extended to July 30, 2015.

  

 

BIOLARGO, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Winter 2013 Warrants

 

Pursuant to the terms of our Winter 2013 Offering (see Note 4), during the three-month period ended March 31, 2013, we issued warrants to purchase up to an aggregate 1,366,664 shares of our common stock to the investors in the Offering at an exercise price of $0.55 per share. These warrants are set to expire June 15, 2015.

 

Winter 2012 Warrant

 

Pursuant to the terms of our Winter 2012 Offering, during 2012 we issued warrants to purchase up to an aggregate 3,127,914 shares of our common stock to the investors in the Offering. These warrants were set to expire on June 30, 2013 and have an exercise price of $0.50 per share. On June 30, 2013, the expiration date of these warrants was extended by a period of one year, such that the warrants now expired on June 30, 2014. 

 

During the six-month periods ended June 30, 2014 we sold 374,288 shares of our common stock in exchange for $187,144 from the exercise of the Winter 2012 Warrant. The remaining warrants to purchase 2,553,626 shares of our common stock expired unexercised on June 30, 2014.

   

Note 7. Stockholders’ Equity

 

Preferred Stock

 

Our certificate of incorporation authorizes our Board of Directors to issue preferred stock, from time to time, on such terms and conditions as they shall determine. As of December 31, 2013 and June 30, 2014 there were no outstanding shares of our preferred stock.

 

Common Stock

 

As of December 31, 2013 and June 30, 2014 there were 75,123,014 and 80,903,402 shares of common stock outstanding, respectively. The increase in shares during the six-month period ended June 30, 2014 is comprised of the following stock issuances: (i) 3,248,400 shares of our common stock issued in connection with our Summer 2013 Offering, (ii) 1,360,000 shares as of our common stock to convert Note Payables, (iii) 374,288 shares of our common stock issued from the exercise of our 2012 Warrants, (iv) 200,000 shares of our common stock from the exercise of our Summer 2013 Warrant, (v) 313,209 shares of our common stock to third-party vendors for services performed, and (vi) 284,491 shares of our common stock to officers in payment to consultants in lieu of accrued and unpaid obligations.

 

Note 8. Stock-Based Compensation and Other Employee Benefit Plans

 

2007 Equity Incentive Plan

 

On August 7, 2007, and as amended April 29, 2011, our Board of Directors adopted the BioLargo, Inc. 2007 Equity Incentive Plan (“2007 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. The Compensation Committee administers this plan. The plan allows grants of common shares or options to purchase common shares. As plan administrator, the Compensation Committee has sole discretion to set the price of the options. The Compensation Committee may at any time amend or terminate the plan.

  

 

BIOLARGO, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

During the six-month period ended June 30, 2014, we recorded the issuance of an option to purchase an aggregate 40,000 shares of our common stock to our members of our Board of Directors, pursuant to the terms of the 2007 Equity Plan which calls for an annual automatic issuance. Each board member received an option to purchase 10,000 shares of our common stock, the option vests after a period of one year from the date of grant, expires ten years from the date of issuance, and is exercisable at $0.63 per share, the price of our common stock on the grant date. The fair value of this option totaled $25,200 and was recorded as selling, general and administrative expense.

 

During the six-month period ended June 30, 2013, we recorded the issuance of an option to purchase an aggregate 40,000 shares of our common stock to our members of our Board of Directors, pursuant to the terms of the 2007 Equity Plan which calls for an annual automatic issuance. Each board member received an option to purchase 10,000 shares of our common stock, the option vests after a period of one year from the date of grant, expires ten years from the date of issuance, and is exercisable at $0.28 per share, the price of our common stock on the grant date. The fair value of this option totaled $11,200 and was recorded as selling, general and administrative expense.

 

Activity for our stock options under the 2007 Plan for the six-month period ended June 30, 2013 and 2014 is as follows:

 

                           

Weighted

 
                           

Average

 
   

Options

   

Shares

           

Price per

 
   

Outstanding

   

Available

   

Price per share

   

share

 

Balances as of December 31, 2012

    8,521,086       4,260,742    

0.23 – 1.89

    $ 0.44  

Granted

    40,000       (40,000

)

    0.28       0.28  

Exercised

                       

Canceled

                       

Balances as of June 30, 2013

    8,561,086       4,420,742    

0.23 – 1.89

    $ 0.44  

 

                           

Weighted

 
                           

Average

 
   

Options

   

Shares

           

Price per

 
   

Outstanding

   

Available

   

Price per share

   

share

 

Balances as of December 31, 2013

    8,561,086       4,420,742    

0.23 – 1.89

    $ 0.44  

Granted

    40,000       (40,000

)

    0.63       0.63  

Exercised

                       

Canceled

                       

Balances as of June 30, 2014

    8,601,086       4,380,742    

0.23 – 1.89

    $ 0.44  

  

 

Options issued Outside of the 2007 Equity Incentive Plan

 

During the six-month periods ended June 30, 2013 and 2014 we recorded an aggregate $68,000 and $358,213 in selling general and administrative expense related to options issued outside of the 2007 Plan.

 

On June 24, 2014, we issued Options to purchase 103,847 shares of our common stock at an exercise price of $0.65 per share to our board of directors in lieu of $45,000 in accrued and unpaid fees.  The fair value of the Options totaled $67,501, resulting in $22,501 of additional selling, general and administrative expenses.

 

On June 24, 2014, we issued Options to purchase 148,848 shares of our common stock at an exercise price of $0.65 per share to vendors in lieu of $64,500 in accrued and unpaid fees. The fair value of the Options totaled $96,750, resulting in $32,250 of additional selling, general and administrative expenses.

  

 

BIOLARGO, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

On June 23, 2014, BioLargo, Inc. (the “Company”) and its 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 serving as the Company’s Chief Financial Officer. The Engagement Extension Agreement dated as of June 23, 2014 (the “Engagement Extension Agreement”) provides for an additional term to expire January 31, 2015 (the “Extended Term”), and is retroactively effective to February 1, 2014. During the Extended Term, Mr. Dargan shall be compensated through the issuance of an option to purchase 300,000 shares of the Company’s common stock, at a strike price of $0.63 per share, to expire June 23, 2024, and to vest over the term of the engagement with 100,000 shares vested as of June 23, 2014, and the remaining shares to vest 25,000 monthly, provided that the Engagement Extension Agreement with Mr. Dargan has not been terminated prior to each vesting date. During the six-month period ended June 30, 2014, we recorded $78,750 in selling, general and administrative expense for this option.

 

On March 31, 2014, we issued Options to purchase 156,888 shares of our common stock at an exercise price of $0.43 per share to our board of directors, in lieu of $45,000 in accrued and unpaid fees. The fair value of the Options totaled $67,461, resulting in $22,461 of additional selling, general and administrative expenses.

 

On March 31, 2014, we issued Options to purchase 78,488 shares of our common stock at an exercise price of $0.43 per share to a vendor, in lieu of $22,500 in accrued and unpaid fees. The fair value of the Options totaled $33,750, resulting in $11,250 of additional selling, general and administrative expenses.

 

On February 20, 2014, we issued Options to purchase 40,000 shares of our common stock at an exercise price of $0.35 per share, set to expire February 20, 2024, and to vest over the term of the agreement. The fair value of the Options totaled $14,000 of additional selling, general and administrative expenses.

  

Activity of our stock options issued outside of the 2007 Plan for the six-month period ended June 30, 2013 and 2014 is as follows:

 

                   

Weighted

 
                   

Average

 
   

Options

           

Price per

 
   

Outstanding

   

Price per share

   

share

 

Balances as of December 31, 2012

    13,338,220    

0.18 – 1.89

    $ 0.41  

Granted

    300,000     $ 0.30     $ 0.30  

Exercised

                 

Canceled

                 

Balances as of June 30, 2013

    13,638,220    

0.185 – 1.89

    $ 0.41  

 

 

 

   

Options

           

Weighted

Average

Price per

 
   

Outstanding

   

Price per share

   

share

 

Balances as of December 31, 2013

    16,398,395    

0.18 – 1.00

    $ 0.39  

Granted

    816,532    

0.43 – 0.65

   

0.43 – 0.65

 

Exercised

                 

Canceled

                 

Balances as of June 30, 2014

    17,214,927    

0.18 – 1.00

    $ 0.40  

  

 

BIOLARGO, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

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. Share-based compensation expense is based on the grant date fair value estimated using the Black-Scholes Option Pricing Model. The following methodology and assumptions were used to calculate share based compensation for the six-month period ended June 30:   

 

      2013       2014  
     

 

Non Plan

     

2007 Plan

      Non Plan      

2007 Plan

 
Risk free interest rate     2.19 – 2.64 %     2.19 %     2.63 – 2.73 %     2.63 %

Expected volatility

    928

%

    928

%

    927 - 935

%

    927

%

Expected dividend yield

                       

Forfeiture rate

                       

Expected life in years

    7       7       7       7  

 

 

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

 

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

 

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

 

 

 

Note 9. Accounts Payable and Accrued Expenses

 

Accounts payable and accrued expenses included the following:

 

   

December 31,

   

June 30,

 
   

2013

   

2014

 

Accounts payable and accrued expenses

  $ 362,194     $ 314,159  

Accrued interest

    18,226       9,868  

Officer and board of director payables

    26,737       7,254  

Total accounts payable and accrued expenses

  $ 407,157     $ 331,281  

 

 

Payment of Vendor Fees 

 

During the three- and six-month periods ended June 30, 2014 we issued an aggregate 289,629 and 451,610 shares of our common stock to vendors and consultants and incurred an aggregate expense of $199,525 and $255,820 associated with those issuances.

  

 

BIOLARGO, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

 

 

During the three- and six-month periods ended June 30, 2013 we issued an aggregate 64,684 and 106,776 shares of our common stock to vendors and consultants and incurred an aggregate expense of $18,111 and $28,641 associated with those issuances.

 

See also Note 8 for information on options issued to consultants and board of directors in lieu of accounts payable obligations. 

 

Payment of Officer Salaries

 

During the three-month period ended June 30, 2014, we issued an aggregate 200,997 shares of our common stock to our officers as payment for accrued and unpaid compensation totaling $130,705. The stock was issued at the closing price of the Company’s common stock on the day of issuance, $0.65 per share.

 

During the three-month period ended March 31, 2014, we issued an aggregate 83,493 shares of our common stock to our officers as payment for accrued and unpaid compensation totaling $35,902. The stock was issued at the closing price of the Company’s common stock on the day of issuance, $0.43 per share.

 

 

BIOLARGO, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

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.

 

Note 10.  Note Payable

 

On November 19, 2013, we received $50,000 pursuant to a line of credit whereby we have pledged our inventory and accounts receivable as collateral. The maturity date of the line of credit is May 15, 2015, which accrues interest at a rate of 24%.

 

For the six-month period ended June 30, 2013 and 2014 we recorded interest expense of $0 and $6,566, respectively.

 

Note 11. Non-Controlling Interest

 

In May 2012, we formed a subsidiary for the purpose of marketing and selling medical products containing our technology, Clyra Medical Technology, Inc. (“Clyra”). Until December 17, 2012, this subsidiary was wholly owned, with 7,500 shares issued to BioLargo, Inc. On December 17, 2012, Clyra signed executive employment agreements with three individuals, in which each was granted 500 shares of Clyra common stock, one-third of which vested immediately, and the remaining over time. The shares granted to the three executives are restricted from transfer until a sale of the company, whether by means of a sale of its stock or substantially all of its assets, or otherwise by agreement of Clyra, BioLargo and the executives. 

 

Clyra has raised $236,000 in proceeds through issuing 240 shares of its common stock during the year ended December 31, 2013 and raised an additional $220,000 in proceeds through issuing 220 shares of its common stock during the six-month period ended June 30, 2014. (See Note 4). The holdings of the executive officers and investors represent 20.7% of the issued and outstanding stock of the company.

 

Note 12. Subsequent Events.

 

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

 

Isan System License Agreement

 

In 2012, we executed a joint venture agreement with Peter Holdings Ltd., the principal funding source of the development of the Isan System, whereby we jointly purchased the intellectual property associated with the Isan System. In February 2014 we received a deposit of $100,000 from InsulTech Manufacturing, LLC, an Arizona limited liability company d/b/a Clarion Water (“Clarion Water”) towards a worldwide, exclusive license of the Isan System. On August 12, 2014, we entered into a license agreement with Clarion Water in which we granted an exclusive license to commercialize the Isan System. (See Note 12.) The license agreement provides that the $100,000 deposit is non-refundable, and is to be credited to future payments of royalties or sublicense fees due under the license agreement. The agreement further provides for a 10% royalty of licensee’s “net sales revenue”, and 40% of sublicensing fees. Licensee is required to make minimum payments beginning July 1, 2016, of $50,000 per quarter, and we are obligated to share any revenues under the agreement on an equal basis with Peter Holdings Pty. Ltd. The intellectual property subject to the license agreement includes all intellectual property related to the Isan System, including all patents, trademarks, proprietary knowledge, and other similar know-how or rights relating to or arising out of the Isan System or the patents related to the Isan System. The agreement contains other terms and conditions typically found in intellectual property license agreements. 

  

 

Summer 2014 Private Securities Offering

 

 

On June 25, 2014, we began a private offering of our common stock at a price of $0.50 per share (“Summer 2014 Offering”). Each purchaser of stock will receive, for no additional consideration, a stock purchase warrant which entitles the holder to purchase a number of additional shares of our common stock equal to the number of shares originally purchased. The warrant is exercisable at $0.75 per share, will expire on July 31, 2019, and is subject to a call provision in the event (i) the closing price of the Common Stock for each of twenty (20) consecutive business days, exceeds $1.50 per share (subject to adjustment for forward and reverse stock splits, recapitalizations, stock dividends and the like after the date of issuance of this Warrant), (ii) the Restricted Stock is subject to resale pursuant to 17 C.F.R. 230.144 (“Rule 144”) or pursuant to any other exemption from registration under to the Securities Act of 1933, as amended and (iii) the Shares underlying the Warrant are registered with the SEC.

 

Subsequent to June 30, 2014, we sold 150,000 shares of our common stock to two accredited investors, and received gross and net proceeds of $75,000 and $74,250, and issued warrants to purchase an additional 150,000 shares of our common stock. 

 

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

 

This Quarterly Report on Form 10-Q of BioLargo, Inc. (the “Company”) contains forward-looking statements. These forward-looking statements include predictions regarding, among other things:           

 

 

our business plan;

 

the commercial viability of our technology and products incorporating our technology;

 

the effects of competitive factors on our technology and products incorporating our technology;

 

expenses we will incur in operating our business;

 

our ability to end persistent operating losses and generate positive cash flow and operating income;

 

our ability to identify potential applications of our technology in industries other than the animal health industry and to bring viable products to market in such industries;

 

the application of our technology in the food and beverage industry;

 

the willingness of other companies to incorporate our technology into new or existing products or services and provide continued support for such products or services;

 

the ability of our licensees to successfully produce, advertise and market products incorporating our technology;

 

the continued success and viability of our licensees holding the exclusive right to exploit our technology in particular fields;

 

the sufficiency of our liquidity and working capital;

 

our ability to finance product field testing, hiring of personnel, required regulatory approvals, and needed patent applications;

 

continued availability and affordability of resources used in our technology and the production of our products and services; and

 

whether we are able to complete additional capital or debt financings in order to continue to fund operations and continue as a going concern.

 

 You can identify these and other forward-looking statements by the use of words such as “may”, “will”, “expects”, “anticipates”, “believes”, “estimates”, “continues”, or the negative of such terms, or other comparable terminology. Forward-looking statements also include the assumptions underlying or relating to any of the foregoing statements.

 

Such statements, which include statements concerning future revenue sources and concentrations, selling, general and administrative expenses, research and development expenses, capital resources, additional financings and additional losses, are subject to risks and uncertainties, including, but not limited to, those discussed elsewhere in this Form 10-Q, that could cause actual results to differ materially from those projected.

 

Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2013. Unless otherwise expressly stated herein, all statements, including forward-looking statements, set forth in this Form 10-Q are as of June 30, 2014, unless expressly stated otherwise, and we undertake no duty to update this information.

 

As used in this Report, the term Company refers to BioLargo, Inc., a Delaware corporation, and its wholly-owned subsidiaries, BioLargo Life Technologies, Inc., a California corporation, and Odor-No-More, Inc., a California corporation, BioLargo Water, Inc. of California and its subsidiary BioLargo Water, Inc. of Canada, and its partially owned subsidiary Clyra Medical Technologies, Inc.

  

 

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

 

By leveraging our suite of patented and patent-pending intellectual property, which we refer to as the “BioLargo Technology”, our business strategy is to harness and deliver nature’s best disinfectant – iodine – in a safe, efficient, environmentally sensitive and cost-effective manner. The core of this innovative technology is the accurate and safe delivery of iodine in a wide range of forms, moieties and conditions. Iodine is an essential nutrient and all natural broad-spectrum disinfectant with no known microbial resistance. When used effectively, it can keep people and the world safer from disease and infection, and can be engaged as a powerful oxidant and catalyst to keep our water, earth, and air clean, safe, and healthy. Our goal is to target our capabilities to create and utilize iodine to improve the quality of life for people worldwide, to protect the environment, all while producing positive economic results for our customers, partners, and shareholders.

 

Our products offer a solution to an array of pervasive problems, including odor, moisture control, disinfection, wound healing and contaminated water. The iodine most of us are familiar with, sold in pharmacies and used by hospitals, has severe limitations – it is considered toxic, causes staining, and contains a limited dose of the active oxidizing ingredient. Our technology, on the other hand, directly addresses many of these shortcomings – we can deliver iodine’s oxidizing ingredient (“free iodine”) with precision, ranging from very small doses up to very large doses with more than 20 times the power of traditional iodine. We can deliver iodine so that it is both non-toxic and non-staining, thus extending its usefulness well beyond historical product applications. Consequently, we feel our best advantage is to leverage iodine’s breadth to develop uses and products that offer a competitive edge against other technologies. These uses can secure BioLargo its highest value proposition, resulting in sales and licensing opportunities.

 

The centerpieces of our technology are embodied by our patented and proprietary CupriDyne® and its methods of delivery, the Isan™ System, and our BioLargo® AOS Filter (“Advanced Oxidation System”). These technologies offer a nearly seamless range of capabilities for the generation, delivery and control of iodine and implementation of iodine in most of its moieties.

 

Water Treatment

 

We have developed and are further refining a technology for water treatment called the BioLargo AOS Filter, an advanced oxidation system, which we believe represents a technical breakthrough in water purification. While we expect our patent-protected technology will impact a number of major water industry segments, our initial focus is in processed water from oil operations, including the Canadian Athabasca Oil Sands. 

The proof-of-claim work recently completed at the University of Alberta verifies that our AOS technology can be highly effective in addressing the issues of oil sands processed water. We have been able to show performance results (dismantling contaminants from a flow of water) at an efficiency level that has never before been seen commercially. In May 2014 we announced that the AOS filter has been proven successful at replicating earlier proof of claim results and confirmed the role of advanced oxidation within the AOS filter reactor. The pilot work included bench-scale testing of contaminated water taken from actual field operations and it has proven the AOS filter's effectiveness at dismantling and removing targeted naphthenic acids, which are considered high-value and hard to contain contaminants of keen interest to the oil sands industry for more than 15 years.

 

The Department of Agricultural, Food and Nutritional Science at the University of Alberta has agreed to expand the AOS Filter pilot testing into areas of interest in food processing and agricultural production, including livestock related areas. The initial targets include clean in place (CIP), carcass and food washing and animal drinking water applications.

 

 

 

As a result of the validation and support expressed for the project by the University of Alberta, researchers and funding agencies, a new $5+ million pilot study is scheduled to begin in 2014. The University is tasked to engineer the solution to work on the large scale required for these tailing ponds in preparation for commercialization. The lead researcher from the University, Mohamed Gamal El-Din, Ph.D., P.E., will lead the pilot study. We are working with the Dr. Gamal El-Din on funding from government and private sources. We expect to execute a formal research contract for the pilot project in the near future. Bench-scale pilot testing of the AOS Filter will continue while documents and funding are finalized. In the first quarter of 2014, we formed a Canadian entity as a subsidiary of our U.S. based BioLargo Water, Inc. subsidiary. Our Canadian subsidiary opened an office on the University of Alberta campus, and appointed Richard Smith, Ph.D., to serve as President. Dr. Smith received an MSc in Veterinary Microbiology and a PhD in Viral Immunopathology from the University of Saskatchewan and he completed a postdoctoral fellowship in the Department of Medical Microbiology and Immunology at the University of Alberta. Dr. Smith has over 10 years of experience in the industry working with several Biotech Companies in Alberta, including ChemBioMed and VirRexx. In 2003, Dr. Smith joined the University of Alberta as Coordinator, Research Development & Industry Relations for the Department of Agricultural, Food and Nutritional Science (AFNS) where he assisted academics with research development and program funding. Dr. Smith was actively involved with the many facets of major grants, including NSERC, CRC and CFI applications.

  

 

Commercial, Household and Personal Care Products

 

CHAPP includes broad product categories and many opportunities for the application of our technology. It is defined by the ability to utilize similar, if not identical, consumption products in multiple market segments. Detergents, single use absorbents, wipes, products that provide odor or disinfection control, and stain removal all fall within this category. Packaging ranges from consumer sizes of a few ounces to bulk packaging for commercial or industrial use. We are currently marketing products in this category under four brands – Odor-No-More, Nature’s Best Solution, Deodorall, and NBS - direct to consumers, through retail stores, and most recently, to the U.S. Government. 

 

In May 2014, our line of “Suction Canister Solidifiers” were issued U.S. Government “National Stocking Numbers”, making them available for order by various government and military agencies, and the Army Medical Material Agency (USAMMA) will include the "Suction Canister Solidifiers" for use in triage and surgery in future U.S. Army troop deployments. 

 

Our sales in the CHAPP product category to-date are nominal. Product development, sales, and marketing require significant financial resources that we currently do not have. As such, our progress in this area has been slower than we had hoped. We are actively marketing the technology for licensure to established companies in this industry segment, and are

 

Advanced Wound Care – Clyra Medical Technologies Subsidiary

 

In 2012 we formed a subsidiary Clyra Medical Technologies, Inc. (“Clyra”) to commercialize our technology in the medical products industry, with an initial focus on advanced wound care. Our advanced wound care products combine broad-spectrum antimicrobial capabilities with iodine’s natural and well-understood metabolic pathway to promote healing. We believe these benefits, along with reduced product costs as compared with other antimicrobials, give our products a competitive advantage in the marketplace.

 

Clyra is currently in the product development and testing phase, and intends ultimately to apply for FDA 510(k) approval for its first two products to be sold into the advanced wound care industry. While no assurances can be made about the ultimate success of such applications, given the forward looking nature of such events, Clyra has retained and engaged a team of experts in the area to guide it through the process. The product development process has been more time consuming than originally anticipated, and our limited financial resources have impacted our ability to complete the process. Given the timing of the FDA process, and the requirement for approval before product can be sold, we do not anticipate product sales until 2015. In the interim, we will continue to seek licensing partners, secure additional and dedicated capital resources for Clyra, and refine our product roll out, marketing, and distribution plans.

 

Intellectual Property

 

In the first six-months of the year ending December 31, 2014, we’ve been awarded the following four patents:

 

●     U.S. Patent 8,642,057 issued on February 14, 2014, titled “Antimicrobial and Antiodor Solutions and Delivery Systems” relating to our liquid antimicrobial solutions, including our gels, sprays and liquids imbedded into wipes and other substrates.

 

●    U.S. States Patent 8,679,515 issued on March 25, 2014, titled “Activated Carbon Associated with Alkaline or Alkali Iodide”, which provides protection for our BioLargo® AOS filter.

 

●     U.S. Patent 8,734,559 issued on May 27, 2014, relating to the moderation of animal waste environments.

 

●     U.S. Patent 8,757,253 issued on June 24, 2014, relating to the moderation of oil extraction waste environments.  

 

 The three most recent patents validate and further protect our advanced iodine technology, which utilizes iodine chemistry and polymer science for providing increased performance and functionality of flocculants to bind and extract contaminants and to enhance odor and microbial control. The patents focus on our applications within oil and gas waste streams and agriculture waste streams.

 

   

Results of Operations—Comparison of the three and six-month periods ended June 30, 2014 and 2013.

 

Revenue

 

We generated $21,086 and $30,373 in product revenues during the three and six-month periods ended June 30, 2014, and $19,983 and $34,346 in product revenues during the three and six-month periods ended June 30, 2013. In addition, in the three-month period ended June 30, 2013 we recorded $100,000 in license revenue from a customer deposit (related to a 2011 transaction with Central Garden & Pet). Our product revenue in the three and six-month periods ended June 30, 2013, consisted primarily of sales of our Deodorall branded sports equipment spray, and Odor-No-More branded products. Our product revenue for the three and six-month periods ended June 30, 2014, consisted primarily of sales of our Odor-No-More branded products. .

 

Cost of Goods Sold

 

Excluding the $100,000 of license revenue, our cost of goods sold was $8,933 or 42% and $11,463 or 38% of revenues for the three and six-month periods ended June 30, 2014, as compared with $8,984 or 45% and $15,182 or 43% of revenues for the three and six-month periods ended June 30, 2013. Our cost of goods sold includes costs of raw materials, contract manufacturing, and proportions of salaries and expenses related to the sales and marketing efforts of our Odor-No-More branded products.  Because we have not achieved a meaningful revenue base, and our number of products is increasing, the inclusion of the fixed costs related to the product development and manufacturing increases our cost of goods disproportionately, resulting in high percentage fluctuations.

  

 

Selling, General and Administrative Expense

 

Selling, General and Administrative expenses were $948,663 and $1,556,029 for the three and six-month periods ended June 30, 2014, compared to $475,273 and $934,910 for the three and six-month periods ended June 30, 2013, an increase of $473,390 and $621,119. The increase in 2014 is primarily attributable to the non-cash expense associated with the stock options and common stock issued during 2014. Our net cash used in operating activities increased $181,289 in the six-month period ended June 30, 2014 as compared with the same period in 2013. The largest components of our selling general and administrative expenses were:  

 

a. Salaries and Payroll-related Expenses: These expenses were $191,959 and $336,283 for the three and six-month periods ended June 30, 2014, compared to $145,620 and $261,240 for the three and six-month periods ended June 30, 2013, an increase of $46,339 and $75,043. The increase is primarily related to additional non-cash expense related to the option issued to our Chief Financial Officer in 2014.

 

b. Consulting Expenses: These expenses were $169,349 and $309,760 for the three and six-month periods ended June 30, 2014, compared to $61,517 and $183,216 for the three and six-month periods ended June 30, 2013, an increase of $107,832 and $126,544. As noted above, the increase is primarily attributable to the non-cash expense associated with the stock options and common stock issued in 2014.

 

c. Professional Fees: These expenses were $103,900 and $180,932 for the three and six-month periods ended June 30, 2014, compared to $86,591 and $161,916 for the three and six-month periods ended June 30, 2013, an increase of $17,309 and $23,766.

 

d. Investor Relations. These expenses were $196,837 and $264,807 for the three and six-month periods ended June 30, 2014, compared to $705 and $8,733 for the three and six-month periods ended June 30, 2013, an increase of $196,132 and $256,074. The increase is due to the retention of an investor and public relations firm that began work in January 2014. 

 

Research and Development

 

Research and development expenses were $129,376 and $292,981 for the three and six-month periods ended June 30, 2014, compared to $147,112 and $335,707 for the three and six-month periods ended June 30, 2013, a decrease of $17,736 and $42,726, respectively. The research and development levels are consistent with the expansion of our technology into the wound care and water treatment industries.

 

Interest expense

 

Interest expense totaled $3,336 and $309,452 for the three and six-month periods ended June 30, 2014, compared to $235,528 and $238,028 for the three and six-month periods ended June 30, 2013, a decrease of $232,202 and an increase of $71,424. The decrease for the three-month period is the result of the fair value of the winter 2012 Warrant one-year extension of $233,000 issued in 2013 and the increase for the six-month period is due to the interest expense related to the conversion of our note payables in the first quarter of 2014.

 

Net Loss

 

Net loss for the three and six-month periods ended June 30, 2014 was $1,071,942 and $2,145,012, a loss of $0.01 and $0.03 per share, compared to a net loss for the three and six-month periods ended June 30, 2013 of $749,644 and $1,394,941, a loss of $0.01 and $0.02 per share. The net loss per share is remaining consistent because the increase in expenses are offset by the increase in the weighted average number of shares issued and outstanding.

 

Liquidity and Capital Resources

 

We have been, and anticipate that we will continue to be, limited in terms of our capital resources. Until we are successful in commercializing products or negotiating and securing payments for licensing rights from prospective licensing candidates, we expect to continue to have operating losses. Cash and cash equivalents totaled $318,318 at June 30, 2014. Of this amount, $77,592 is held in our subsidiary Clyra. Also at June 30, 2014, Clyra has an intercompany balance due to BioLargo of $114,179, resulting from previous expenses we paid on Clyra’s behalf. As such, Clyra is continuing to seek capital to fund its on-going research and development efforts as well as to reimburse us for prior expenditures. (See Item II below.) We had negative working capital of $90,331 as of June 30, 2014, compared with negative working capital of $605,961 as of December 31, 2013. We had negative cash flow from operating activities of $1,008,763 for the six-month period ended June 30, 2014, compared to a negative cash flow from operating activities of $827,474 for the six-month period ended June 30, 2013. We used cash from financing activities to fund operations. Our cash position is insufficient to meet our continuing anticipated expenses or fund anticipated operating expenses. Accordingly, we will be required to raise significant additional capital to sustain operations and further implement our business plan and we may be compelled to reduce or curtail certain activities to preserve cash.

  

 

The accompanying condensed 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. As reflected in the accompanying financial statements, we had a net loss of $2,145,012 for the six-month period ended June 30, 2014, and an accumulated stockholders’ deficit of $77,448,410 as of June 30, 2014. The foregoing factors raise substantial doubt about our ability to continue as a going concern. Ultimately, our ability to continue as a going concern is dependent upon our ability to attract significant new sources of capital, attain a reasonable threshold of operating efficiencies and achieve profitable operations by licensing or otherwise commercializing products incorporating our BioLargo technology. The accompanying condensed consolidated financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern.

 

As of June 30, 2014, we had $50,000 principal amount outstanding on a note payable (see Note 11), and $331,281 of outstanding accounts payable. (See Note 9.) 

 

During the six-month period ended June 30, 2014, we received an aggregate $1,244,644 gross and $1,234,644 net proceeds pursuant to our private securities offerings, consisting of $767,500 from our Summer 2013 offering, $187,144 from the exercise of our Winter 2012 Warrants, $60,000 from the exercise of our Summer 2013 Warrants, and $220,000 from the Clyra Spring 2014 private securities offering. (See Note 4.)

 

We will be required to raise substantial additional capital to expand our operations, including without limitation, hiring additional personnel, additional scientific and third-party testing, costs associated with obtaining regulatory approvals and filing additional patent applications to protect our intellectual property, and possible strategic acquisitions or alliances, as well as to meet our liabilities as they become due for the next 12 months. We may also be compelled to reduce or curtail certain activities to preserve cash. We have been, and may continue to be, required to financially support the operations our subsidiaries, none of which are operating at a positive cash flow.

 

In addition to the private securities offerings discussed above, we are continuing to explore numerous alternatives for our current and longer-term financial requirements, including additional raises of capital from investors in the form of convertible debt or equity. There can be no assurance that we will be able to raise any additional capital. No commitments are in place as of the date of the filing of this report for any such additional financings. Moreover, in light of the current unfavorable economic conditions, we do not believe that any such financing is likely to be in place in the immediate future.

 

It is also unlikely that we will be able to qualify for bank or other financial institutional debt financing until such time as our operations are considerably more advanced and we are able to demonstrate the financial strength to provide confidence for a lender, which we do not currently believe is likely to occur for at least the next 12 months or more.

 

If we are unable to raise sufficient capital, we may be required to curtail some of our operations, including efforts to develop, test, market, evaluate and license our BioLargo technology. If we were forced to curtail aspects of our operations, there could be a material adverse impact on our financial condition and results of operations.

 

Critical Accounting Policies  

 

Our discussion and analysis of our results of operations and liquidity and capital resources are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates and judgments, including those related to revenue recognition, valuation of intangible assets and investments, and share-based payments. We base our estimates on anticipated results and trends and on various other assumptions that we believe are reasonable under the circumstances, including assumptions as to future events. These estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. By their nature, estimates are subject to an inherent degree of uncertainty. Actual results that differ from our estimates could have a significant adverse effect on our operating results and financial position. We believe that the following significant accounting policies and assumptions may involve a higher degree of judgment and complexity than others.

  

 

The methods, estimates and judgments the Company uses in applying these most critical accounting policies have a significant impact on the results of the Company reports in its financial statements.

 

We anticipate that revenue will come from two sources: sales of Odor-No-More products and from royalties and license fees from our intellectual property. Odor-No-More revenue is recognized upon shipment of the product and all other contingencies have been met. Licensees typically 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. License fees are recognized over the estimated period of future benefit to the average licensee.

 

It the Company’s policy to expense share based payments as of the date of grant in accordance with Auditing Standard Codification Topic 718 “Share-Based Payment.” Application of this pronouncement requires significant judgment regarding the assumptions used in the selected option pricing model, including stock price volatility and employee exercise behavior. Most of these inputs are either highly dependent on the current economic environment at the date of grant or forward-looking expectations projected over the expected term of the award. As a result, the actual impact of adoption on future earnings could differ significantly from our current estimate.

 

Recent Accounting Pronouncements

 

Recent accounting pronouncements issued by FASB and the SEC did not or are not believed by management to have a material impact on the Company’s present or future consolidated financial statements.

 

Inflation

 

Inflation affects the cost of raw materials, goods and services we use. In recent years, inflation overall has been modest, but we believe inflation may increase our costs in the near future. We seek to mitigate the adverse effects of inflation primarily through improved productivity and strategic buying initiatives. Additionally, some of our products incorporate oil-based polymers, which are subject to price fluctuations based on the price of crude oil, as well as shortages.

 

Item 4.

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 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. Based on this evaluation, our chief executive officer and chief financial officer concluded that as of the evaluation date our disclosure controls and procedures are effective.

 

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.

 

There was no change in our internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

  

 

PART II

 

OTHER INFORMATION

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

Summer 2013 Private Securities Offering

 

Pursuant to a private offering of our common stock at a price of $0.25 per share that commenced June 2013 (“Summer 2013 Offering”), through its expiration on March 31, 2014, we sold 3,370,000 shares of our common stock to 23 accredited investors and received $842,500 gross and $837,000 net cash proceeds from the sales. In addition, we received a subscription agreement for $20,000 through an individual retirement account, the funds for which had not been received by March 31, 2014. Of the aggregate 3,370,000 shares sold in the offering, for the three-month period ended March 31, 2104, we sold 3,110,000 shares of our common stock and received $777,500 gross proceeds from the sales. Fees related to this offering consisted of $5,500 cash payments, and an additional $47,100 in fees are due in shares of our common stock.

 

Each purchaser of stock will receive, for no additional consideration, a stock purchase warrant which entitles the holder to purchase a number of additional shares of our common stock equal to the number of shares originally purchased. The warrant is exercisable at $0.30 per share, will expire on December 31, 2016, and is subject to a call provision in the event BioLargo’s common stock price reaches $0.60 per share over a period of 40 days.

 

Clyra Spring 2014 Private Securities Offering

 

On February 1, 2014, our subsidiary Clyra (see Note 4) began a private securities offering, selling up to 1,000 shares of its common stock at $1,000 per share. From inception through June 30, 2014, Clyra sold 220 shares of its common stock to five accredited investor and received $220,000 gross and net proceeds from the sale.

 

Each purchaser of stock will receive, for no additional consideration, (i) a stock purchase warrant entitling the holder to purchase the same number of shares of Clyra common stock as purchased in the offering for $1,833.33 per share until July 30, 2015, and (ii) a warrant issued by BioLargo that allows the holder to exchange one share of Clyra common stock for 4,000 shares of BioLargo common stock.

 

Summer 2014 Private Securities Offering

 

On June 25, 2014, we began a private offering of our common stock at a price of $0.50 per share (“Summer 2014 Offering”). Each purchaser of stock will receive, for no additional consideration, a stock purchase warrant which entitles the holder to purchase a number of additional shares of our common stock equal to the number of shares originally purchased. The warrant is exercisable at $0.75 per share, will expire on July 31, 2019, and is subject to a call provision in the event (i) the closing price of the Common Stock for each of twenty (20) consecutive business days, exceeds $1.50 per share (subject to adjustment for forward and reverse stock splits, recapitalizations, stock dividends and the like after the date of issuance of this Warrant), (ii) the Restricted Stock is subject to resale pursuant to 17 C.F.R. 230.144 (“Rule 144”) or pursuant to any other exemption from registration under to the Securities Act of 1933, as amended and (iii) the Shares underlying the Warrant are registered with the SEC.

 

 

Payment of Vendor Fees

 

On June 26, 2014 we issued 90,000 shares of our common stock to a company providing ongoing services pursuant to a contract effective January 1, 2014, as payment for services totaling $22,500. The agreement required we issue common stock at a rate of $0.25 per share, although the stock price on the grant date was $0.63 per share, resulting in additional expense of $34,200.

 

On June 24, 2014 we issued 11,539 shares of our common stock to a consultant as payment for services totaling $7,500. The stock price on the grant date was $0.65 per share.

 

 

 
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Table Of Contents
 

 

On April 27, 2014 we issued an aggregate 138,400 shares of our common stock as payment for services to four vendors totaling $34,600. Our agreements with these vendors required we issue common stock at a rate of $0.25 per share, although the stock price on the grant date was $0.72 per share resulting in additional expense of $65,000.

 

On June 30, 2014, we issued an aggregate 31,096 shares of our common stock to a vendor as payment for services totaling $25,000. Our agreement with the vendor required we issue common stock at a 20 day average price, which in this instance was approximately $0.80 per share.

 

On June 30, 2014, we issued 18,594 shares of our common stock to a vendor as payment for services totaling $10,725. Our agreement with the vendor required we issue common stock at a 20 day average price, which in this instance was approximately $0.61 per share.

 

On June 24, 2014, we issued options to purchase 103,847 shares of our common stock at an exercise price of $0.65 per share to our board of directors in lieu of $45,000 in accrued and unpaid fees. The fair value of the Options totaled $67,501, resulting in $22,501 of additional selling, general and administrative expenses.

 

On June 24, 2014, we issued options to purchase 148,848 shares of our common stock at an exercise price of $0.65 per share to vendors in lieu of $64,500 in accrued and unpaid fees. The fair value of the Options totaled $96,750, resulting in $32,250 of additional selling, general and administrative expenses.

 

 

Exercise of Stock Purchase Warrants

  

On May 7, 2014, we received $60,000 proceeds from the holder of a stock purchase warrant issued in our Summer 2013 Offering, and issued 200,000 shares of our common stock pursuant to the terms of the warrant.

 

On June 10, 2014, we received an aggregate $30,000 proceeds from the holders of stock purchase warrants issued in our private securities offering that commenced January 2012 (the “Winter 2012 Offering”), and issued an aggregate 60,000 shares of our common stock pursuant to the terms of the warrants.

 

On June 23, 2014, we received $14,286 proceeds from the holder of a stock purchase warrant issued in our Winter 2012 Offering, and issued 28,572 shares of our common stock pursuant to the terms of the warrant.

 

On June 26, 2014, we received $10,000 proceeds from the holder of a stock purchase warrant issued in our Winter 2012 Offering, and issued 20,000 shares of our common stock pursuant to the terms of the warrant.

 

On June 27, 2014, we received $71,429 proceeds from the holder of a stock purchase warrant issued in our Winter 2012 Offering, and issued 142,858 shares of our common stock pursuant to the terms of the warrant.

 

 

 
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On June 30, 2014, we received an aggregate $61,429 proceeds from holders of stock purchase warrants issued in our Winter 2012 Offering, and issued an aggregate 122,858 shares of our common stock pursuant to the terms of the warrant.

  

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.

 

   

Item 5.

Other Information

  

Isan License Agreement

 

In 2012, we executed a joint venture agreement with Peter Holdings Ltd., the principal funding source of the development of the Isan System, whereby we jointly purchased the intellectual property associated with the Isan System. In February 2014 we received a deposit of $100,000 from InsulTech Manufacturing, LLC, an Arizona limited liability company d/b/a Clarion Water (“Clarion Water”) towards a worldwide, exclusive license of the Isan System. On August 12, 2014, we entered into a license agreement with Clarion Water in which we granted an exclusive license to commercialize the Isan System. The license agreement provides that the $100,000 deposit is non-refundable, and is to be credited to future payments of royalties or sublicense fees due under the license agreement. The agreement further provides for a 10% royalty of licensee’s “net sales revenue”, and 40% of sublicensing fees. Licensee is required to make minimum payments beginning July 1, 2016, of $50,000 per quarter, and we are obligated to share any revenues under the agreement on an equal basis with Peter Holdings Pty. Ltd. The intellectual property subject to the license agreement includes all intellectual property related to the Isan System, including all patents, trademarks, proprietary knowledge, and other similar know-how or rights relating to or arising out of the Isan System or the patents related to the Isan System. The agreement contains other terms and conditions typically found in intellectual property license agreements.  

  

Annual Stockholder’s Meeting 

 

The Company held its 2014 annual stockholder meeting on June 23, 2014.  The following matters were each submitted to a vote of stockholders through the solicitation of proxies or otherwise:

 

 (1) A proposal to elect the following seven individuals to our Board of Directors: Dennis P. Calvert, Kenneth R. Code, Gary A. Cox, Dennis E. Marshall, Joseph L. Provenzano, Kent C. Roberts II, and John S. Runyan.

  

 (2) Advisory approval of the Company’s executive compensation.

  

 (3) A proposal to ratify the appointment of Haskell & White LLP as our independent registered public accounting firm for the year ending December 31, 2014.

   

The voting results from the 2014 Annual Stockholders Meetingare as follows:

 

Item

Nominee:

 

Votes For

 

Votes

Against

 

Votes

Withheld

 

Abstentions

 

Broker Non

Vote

Election of Directors

                   
 

Dennis P. Calvert

 

36,118,389

 

-

 

129,460

 

-

 

10,561,245

 

Kenneth R. Code

 

36,118,389

 

-

 

129,460

 

-

 

10,561,245

 

Gary A. Cox

 

35,724,874

 

-

 

522,975

 

-

 

10,561,245

 

Dennis E. Marshall

 

36,146,069

 

-

 

101,780

 

-

 

10,561,245

 

Joseph L. Provenzano

 

36,118,389

 

-

 

129,460

 

-

 

10,561,245

 

Kent C. Roberts II

 

36,146,069

 

-

 

101,780

 

-

 

10,561,245

 

John S. Runyan

 

36,146,069

 

-

 

101,780

 

-

 

10,561,245

Advisory Vote – Exec Comp.

 

33,950,336

 

2,120,882

 

-

 

176,631

 

10,561,245

Ratification of Accounting Firm

 

44,948,131

 

200

 

-

 

1,860,763

 

-

  

There were no director nominees other than as set forth above.

  

 

 

Item 6.

Exhibits

 

The exhibits listed below are attached hereto:

 

Exhibit No.

Description of Exhibit

   
4.1 Option of purchase common stock issued to Charles K. Dargan dated June 23, 2104 (1)
   
4.2* Form of Warrant to Purchase Common stock isssued to investors in Summer 2014 Private Securities Offering
   

10.01†

Engagement Extension Agreement dated as of June 23, 2014 between BioLargo, Inc. and Charles K. Dargan, II (1)

   
10.2* License Agreement dated August 8, 2014
   

Exhibit 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

   

Exhibit 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

   

Exhibit 32*

Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350.

   

101.INS**

XBRL Instance

   

101.SCH**

XBRL Taxonomy Extension Schema

   

101.CAL**

XBRL Taxonomy Extension Calculation

   

101.DEF**

XBRL Taxonomy Extension Definition

   

101.LAB**

XBRL Taxonomy Extension Labels

   

101.PRE**

XBRL Taxonomy Extension Presentation

 

Management contract or compensatory plan, contract or arrangement

* Filed herewith

** Furnished herewith

(1) Incorporated herein by reference from the Form 8-K filed by the Company on June 23, 2014.

 

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

 

 

Date: August 15, 2014

 

BIOLARGO, INC.

 

 

By: /s/ DENNIS P. CALVERT

   

Dennis P. Calvert

Chief Executive Officer

     
     

Date: August 15, 2014

 

By: /s/ CHARLES K. DARGAN, II

   

CHARLES K. DARGAN, II

Chief Financial Officer

  

  

EXHIBIT INDEX

Exhibit No.

Description of Exhibit

   
4.1 Option to purchase common stock issued to Charles K. Dargan dated June 23, 2014 (1)
   
4.2* Form of Warrant to Purchase Common stock issued to investors in Summer 2014 Private Securities Offering
   

10.01†

Engagement Extension Agreement dated as of July 17, 2013 between BioLargo, Inc. and Charles K. Dargan, II. (1)

   
10.2* License Agreement dated August 8, 2014
   

Exhibit 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

   

Exhibit 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

   

Exhibit 32*

Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350.

   

101.INS**

XBRL Instance

   

101.SCH**

XBRL Taxonomy Extension Schema

   

101.CAL**

XBRL Taxonomy Extension Calculation

   

101.DEF**

XBRL Taxonomy Extension Definition

   

101.LAB**

XBRL Taxonomy Extension Labels

   

101.PRE**

XBRL Taxonomy Extension Presentation

   

 

Management contract or compensatory plan, contract or arrangement

* Filed herewith

** Furnished herewith

(1) Incorporated herein by reference from the Form 8-K filed by the Company on June 23, 2014.

 

 

27

Exhibit 4.2

 

 

BIOLARGO, INC.

 

[FORM OF] WARRANT TO PURCHASE COMMON STOCK

 

WITH CALL PROVISION

 

 

WARRANT NO. XXX

ISSUED: XXXX, 2014

 

 

THIS CERTIFIES THAT, for value received, ___________________________ (the “Holder”), is entitled upon the terms and subject to the limitations on exercise and the conditions hereinafter set forth, at any time on or after the date issued set forth above (the “Initial Exercise Date”) and on or prior to the close of business on July 31, 2019 (the “Termination Date”) but not thereafter, to subscribe for and purchase from BioLargo, Inc., a Delaware corporation (the “Company”), up to ________ shares (the “Warrant Shares”) of common stock, par value, $0.00067, of the Company (the “Common Stock”).

 

This Warrant is issued in connection with and as consideration for the initial Holder’s investment in the Company’s private securities offering dated June 25, 2014, in which the initial Holder received restricted Common Stock (“Restricted Stock”) and this Warrant certificate.

 

1.     Method of Exercise; Payment; Issuance of New Warrant.

 

(a)     Exercise of Warrant.  Exercise of the purchase rights represented by this Warrant may be made, in whole or in part, at any time or times on or after the Initial Exercise Date and on or before the Termination Date by delivery to the Company (or such other office or agency of the Company as it may designate by notice in writing to the registered Holder at the address of the Holder appearing on the books of the Company) of a duly executed facsimile copy of the Notice of Exercise Form annexed hereto; and, within three (3) Trading Days (for purposes herein, “Trading Day” means a day on which any of the following markets or exchanges on which the Common Stock is listed or quoted is open for trading on the date in question (“Trading Market”): the NYSE AMEX, the Nasdaq Capital Market, the Nasdaq Global Market, the Nasdaq Global Select Market, the New York Stock Exchange or the OTC Bulletin Board (or any successors to any of the foregoing)), of the date said Notice of Exercise is delivered to the Company, the Company shall have received payment of the aggregate Exercise Price of the shares thereby purchased by wire transfer or cashier’s check drawn on a United States bank. Notwithstanding anything herein to the contrary, the Holder shall not be required to physically surrender this Warrant to the Company until the Holder has purchased all of the Warrant Shares available hereunder and the Warrant has been exercised in full, in which case, the Holder shall surrender this Warrant to the Company for cancellation within three (3) Trading Days of the date the final Notice of Exercise is delivered to the Company.  Partial exercises of this Warrant resulting in purchases of a portion of the total number of Warrant Shares available hereunder shall have the effect of lowering the outstanding number of Warrant Shares purchasable hereunder in an amount equal to the applicable number of Warrant Shares purchased. The Holder and the Company shall maintain records showing the number of Warrant Shares purchased and the date of such purchases. The Company shall deliver any objection to any Notice of Exercise Form within one Business Day of receipt of such notice.  In the event of any dispute or discrepancy, the records of the Holder shall be controlling and determinative in the absence of manifest error. The Holder and any assignee, by acceptance of this Warrant, acknowledge and agree that, by reason of the provisions of this paragraph, following the purchase of a portion of the Warrant Shares hereunder, the number of Warrant Shares available for purchase hereunder at any given time may be less than the amount stated on the face hereof.

 

(b)     Exercise Price.  The exercise price per share of the Common Stock under this Warrant shall be $0.75 subject to adjustment hereunder (the “Exercise Price”).

 

 
-1-

 

 

(c)     Mechanics of Exercise.

 

(i)        Delivery of Certificates Upon Exercise.  Certificates for shares purchased hereunder shall be transmitted by the Transfer Agent (“Transfer Agent” means American Stock Transfer & Trust Company, the current transfer agent of the Company, with a mailing address of 6201-15th Avenue, Brooklyn, New York 11219 and a facsimile number of 718-236-2641, and any successor transfer agent of the Company) to the Holder by crediting the account of the Holder’s prime broker with the Depository Trust Company through its Deposit Withdrawal Agent Commission (“DWAC”) system if the Company is then a participant in such system and there is an effective Registration Statement permitting the issuance of the Warrant Shares to or resale of the Warrant Shares by Holder, and otherwise by physical delivery of a certificate for such shares to the address specified by the Holder in the Notice of Exercise by the date that is three (3) Trading Days after the latest of (A) the delivery to the Company of the Notice of Exercise Form, (B) surrender of this Warrant (if required) and (C) payment of the aggregate Exercise Price as set forth above (including by cashless exercise, if permitted) (such date, the “Warrant Share Delivery Date”). This Warrant shall be deemed to have been exercised on the first date on which all of the foregoing have been delivered to the Company. The Warrant Shares shall be deemed to have been issued, and Holder or any other person so designated to be named therein shall be deemed to have become a holder of record of such shares for all purposes, as of the date the Warrant has been exercised, with payment to the Company of the Exercise Price (or by cashless exercise, if permitted) and all taxes required to be paid by the Holder, if any, pursuant to Section 1(c)(vi) prior to the issuance of such shares, having been paid.  If the Company fails for any reason to deliver to the Holder certificates evidencing the Warrant Shares subject to a Notice of Exercise by the Warrant Share Delivery Date, the Company shall pay to the Holder, in cash, as liquidated damages and not as a penalty, for each $1,000 of Warrant Shares subject to such exercise (based on the VWAP of the Common Stock on the date of the applicable Notice of Exercise), $5 per Trading Day (increasing to $10 per Trading Day on the fifth Trading Day after such liquidated damages begin to accrue) for each Trading Day after such Warrant Share Delivery Date until such certificates are delivered or Holder rescinds such exercise.

 

(ii)       Delivery of New Warrants Upon Exercise.  If this Warrant shall have been exercised in part, the Company shall, at the request of a Holder and upon surrender of this Warrant certificate, at the time of delivery of the certificate or certificates representing Warrant Shares, deliver to Holder a new Warrant evidencing the rights of Holder to purchase the unpurchased Warrant Shares called for by this Warrant, which new Warrant shall in all other respects be identical with this Warrant.

 

(iii)      Rescission Rights.  If the Company fails to cause the Transfer Agent to transmit to the Holder a certificate or the certificates representing the Warrant Shares pursuant to Section 2(d)(i) by the Warrant Share Delivery Date, then, the Holder will have the right to rescind such exercise.

 

(iv)      Compensation for Buy-In on Failure to Timely Deliver Certificates Upon Exercise.  In addition to any other rights available to the Holder, if the Company fails to cause the Transfer Agent to transmit to the Holder a certificate or the certificates representing the Warrant Shares pursuant to an exercise on or before the Warrant Share Delivery Date, and if after such date the Holder is required by its broker to purchase (in an open market transaction or otherwise) or the Holder’s brokerage firm otherwise purchases, shares of Common Stock to deliver in satisfaction of a sale by the Holder of the Warrant Shares which the Holder anticipated receiving upon such exercise (a “Buy-In”), then the Company shall (A) pay in cash to the Holder the amount, if any, by which (x) the Holder’s total purchase price (including brokerage commissions, if any) for the shares of Common Stock so purchased exceeds (y) the amount obtained by multiplying (1) the number of Warrant Shares that the Company was required to deliver to the Holder in connection with the exercise at issue times (2) the price at which the sell order giving rise to such purchase obligation was executed, and (B) at the option of the Holder, either reinstate the portion of the Warrant and equivalent number of Warrant Shares for which such exercise was not honored (in which case such exercise shall be deemed rescinded) or deliver to the Holder the number of shares of Common Stock that would have been issued had the Company timely complied with its exercise and delivery obligations hereunder.  For example, if the Holder purchases Common Stock having a total purchase price of $11,000 to cover a Buy-In with respect to an attempted exercise of shares of Common Stock with an aggregate sale price giving rise to such purchase obligation of $10,000, under clause (A) of the immediately preceding sentence the Company shall be required to pay the Holder $1,000. The Holder shall provide the Company written notice indicating the amounts payable to the Holder in respect of the Buy-In and, upon request of the Company, evidence of the amount of such loss.  Nothing herein shall limit a Holder’s right to pursue any other remedies available to it hereunder, at law or in equity including, without limitation, a decree of specific performance and/or injunctive relief with respect to the Company’s failure to timely deliver certificates representing shares of Common Stock upon exercise of the Warrant as required pursuant to the terms hereof.

 

 
-2-

 

 

(v)       No Fractional Shares or Scrip.  No fractional shares or scrip representing fractional shares shall be issued upon the exercise of this Warrant.  As to any fraction of a share which the Holder would otherwise be entitled to purchase upon such exercise, the Company shall, at its election, either pay a cash adjustment in respect of such final fraction in an amount equal to such fraction multiplied by the Exercise Price or round up to the next whole share.

 

(vi)      Charges, Taxes and Expenses.  Issuance of certificates for Warrant Shares shall be made without charge to the Holder for any issue or transfer tax or other incidental expense in respect of the issuance of such certificate, all of which taxes and expenses shall be paid by the Company, and such certificates shall be issued in the name of the Holder or in such name or names as may be directed by the Holder; provided, however, that in the event certificates for Warrant Shares are to be issued in a name other than the name of the Holder, this Warrant when surrendered for exercise shall be accompanied by the Assignment Form attached hereto duly executed by the Holder and the Company may require, as a condition thereto, the payment of a sum sufficient to reimburse it for any transfer tax incidental thereto.

 

(vii)     Closing of Books.  The Company will not close its stockholder books or records in any manner which prevents the timely exercise of this Warrant, pursuant to the terms hereof.

 

(viii)    VWAP” means, for any date, the price determined by the first of the following clauses that applies: (a) if the Common Stock is then listed or quoted on a Trading Market, the daily volume weighted average price of the Common Stock for such date (or the nearest preceding date) on the Trading Market on which the Common Stock is then listed or quoted as reported by Bloomberg L.P. (based on a Trading Day from 9:30 a.m. (New York City time) to 4:02 p.m. (New York City time), (b)  if the OTC Bulletin Board is not a Trading Market, the volume weighted average price of the Common Stock for such date (or the nearest preceding date) on the OTC Bulletin Board, (c) if the Common Stock is not then listed or quoted for trading on the OTC Bulletin Board and if prices for the Common Stock are then reported in the “Pink Sheets” published by Pink OTC Markets, Inc. (or a similar organization or agency succeeding to its functions of reporting prices), the most recent bid price per share of the Common Stock so reported, or (d) in all other cases, the fair market value of a share of Common Stock as determined by an independent appraiser selected in good faith by the Company and reasonably acceptable to a majority in interest of the Securities then outstanding, the fees and expenses of which shall be paid by the Company.

 

2.     Call Provision. In the event that all three of the following conditions are met (the “Call Conditions”), the Company may “call” this Warrant requiring the Holder purchase all or a portion of the Warrant Shares pursuant to the provisions of this Paragraph: (i) the closing price of the Common Stock for each of twenty (20) consecutive business days, exceeds $1.50 per share (subject to adjustment for forward and reverse stock splits, recapitalizations, stock dividends and the like after the date of issuance of this Warrant), (ii) the Restricted Stock is subject to resale pursuant to 17 C.F.R. 230.144 (“Rule 144”) or pursuant to any other exemption from registration under to the Securities Act of 1933, as amended and (iii) the Shares underlying the Warrant are registered with the SEC. If the Call Conditions are satisfied concurrently, the Company may, within thirty (30) calendar days of such day, call for cancellation of all or any portion of the remaining Warrant Shares for which a Notice of Exercise Form has not yet been delivered (such right, a “Call”). To exercise this right, the Company must deliver to the registered Holder a written notice (a “Call Notice”), indicating therein the unexercised portion of this Warrant to which such notice applies. In the event a Notice of Exercise Form for any portion of this Warrant subject to such Call Notice shall not have been received by the Company within thirty (30) calendar days after the date of the Call Notice, then such portion shall be forfeited in its entirety without payment or consideration to the registered Holder.  

 

 
-3-

 

 

3.     Stock Fully Paid; Reservation of Shares. All Shares that may be issued upon the exercise of the rights represented by this Warrant will, upon issuance, be fully paid and nonassessable, and free from all preemptive rights, taxes, liens and charges with respect to the issue thereof; provided, however, that the Company shall not be required to pay any transfer taxes with respect to the issue of shares in any name other than that of the registered holder hereof. During the period within which the rights represented by this Warrant may be exercised, the Company will at all times have authorized, and reserved for the purpose of the issue upon exercise of the purchase rights evidenced by this Warrant, a sufficient number of shares of Common Stock to provide for the exercise of the rights represented by this Warrant. The Company shall at all times take all such action and obtain all such permits or orders as may be necessary to enable the Company lawfully to issue such Common Stock as duly and validly issued, fully paid and nonassessable shares upon exercise in full of this Warrant.

 

4.     Adjustment. This Warrant shall be subject to adjustment from time to time upon the occurrence of certain events, as follows:

 

(a)     Adjustment for Stock Splits and Combinations. If the Company shall at any time or from time to time after the date hereof effect a subdivision of the outstanding Common Stock, the Exercise Price then in effect immediately before that subdivision shall be proportionately decreased. If the Company shall at any time or from time to time after the date hereof combine the outstanding Common Stock, the Exercise Price then in effect immediately before the combination shall be proportionately increased. Any adjustment under this subsection shall become effective at the close of business on the date the subdivision or combination becomes effective.

 

(b)     Adjustment for Certain Dividends and Distributions. In the event the Company at any time or from time to time after the date hereof shall make or issue a dividend or other distribution payable in additional shares of Common Stock, then and in each such event the Exercise Price shall be decreased as of the time of such issuance, by multiplying the Exercise Price by a fraction:

 

 

(x)

the numerator of which shall be the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance; and

 

 

(y)

the denominator of which shall be the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance plus the number of shares of Common Stock issuable in payment of such dividend or distribution.

 

(c)     Adjustment of Number of Shares. Upon each adjustment of the Exercise Price pursuant to either Section 4(a) or 4(b) of this Warrant, the number of shares of Common Stock purchasable upon exercise of this Warrant shall be adjusted to the number of shares of Common Stock, calculated to the nearest one hundredth of a share, obtained by multiplying the number of shares of Common Stock purchasable immediately prior to such adjustment upon the exercise of the Warrant by the Exercise Price in effect prior to such adjustment and dividing the product so obtained by the new Exercise Price.

 

 
-4-

 

 

(d)     Adjustment for Reclassification, Exchange and Substitution. If the Common Stock issuable upon the exercise of this Warrant are changed into the same or different number of shares of any class or classes of stock, whether by recapitalization, reclassification or otherwise (other than a subdivision or combination provided for in Section 4(a) above, a dividend or distribution provided for in Section 4(b) above, or a reorganization, merger, consolidation or sale of assets, provided for in Section 4(e) below), then and in any such event the Holder shall have the right thereafter to exercise this Warrant into the kind and amount of stock and other securities receivable upon such recapitalization, reclassification or other change, by holders of the number of shares of Common Stock for which this Warrant might have been exercised immediately prior to such recapitalization, reclassification or change.

 

(e)     Reorganization, Mergers, Consolidations or Sales of Assets. If at any time or from time to time there is a capital reorganization of the Common Stock (other than a subdivision or combination provided for in Section 4(a) above, a dividend or distribution provided for in Section 4(b) above, or a reclassification or exchange of shares provided for in Section 4(d) above) or a merger or consolidation of the Company with or into another entity, or a sale of all or substantially all of the Company’s properties and assets to any other person or entity, then, as a part of such reorganization, merger, consolidation or sale, provision shall be made so that the Holder shall thereafter be entitled to receive upon exercise of this Warrant the number of shares of stock or other securities, money or property of the Company, or of the successor entity resulting from such merger or consolidation or sale, to which a holder of Common Stock deliverable upon conversion would have been entitled on such capital reorganization, merger, consolidation, or sale. The Company shall not effect any reorganization, merger, consolidation or sale unless prior to the consummation thereof each entity or person (other than the Company) that may be required to deliver any cash, securities or other property upon the exercise of this Warrant shall assume, by written instrument delivered to the Holder, the obligation to deliver to the Holder such cash, securities or other property as in accordance with the foregoing provisions the Holder may be entitled to receive. The foregoing provisions of this Section 4(e) shall similarly apply to successive reorganizations, mergers, consolidations and sales.

 

(f)     No Impairment. The Company will not, by amendment of its Articles of Incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Company but will at all times in good faith assist in the carrying out of all the provisions of this Section and in the taking of all such action as may be necessary or appropriate in order to protect the conversion rights of the Holder against dilution or other impairment. Without limiting the generality of the foregoing, the Company will not issue any capital stock of any class which is preferred as to dividends or as to the distribution of assets upon the voluntary or involuntary dissolution, liquidation or winding up of the Company.

 

(g)     Notice of Adjustments. Whenever this Warrant shall be adjusted pursuant to this Section 4, the Company shall make a certificate signed by an officer of the Company setting forth, in reasonable detail, the event requiring the adjustment, the amount of the adjustment, the method by which such adjustment was calculated, and the new Exercise Price and the type or the number of Shares purchasable after giving effect to such adjustment, and shall cause copies of such certificate to be mailed (by first class mail, postage prepaid) to the Holder.

 

 
-5-

 

 

5.     Notice of Record Date. In the event:

 

 

(1)

that the Company declares a dividend (or any other distribution) on any of its capital stock (including without limitation, its Common Stock);

 

 

(2)

that the Company repurchases or redeems any of its capital stock (including without limitation, its Common Stock) or any rights to acquire such capital stock;

 

 

(3)

that the Company subdivides or combines its outstanding shares of Common Stock;

 

 

(4)

of any reclassification of the Common Stock, or of any consolidation, merger or share exchange of the Company into or with another entity, or of the sale of all or substantially all of the assets of the Company;

 

 

(5)

of the involuntary or voluntary dissolution, liquidation or winding up of the Company; or

 

 

(6)

of any offer of its Common Stock or any rights to acquire such Common Stock for consideration paid per share of Common Stock less than the Exercise Price then in effect.

 

then the Company shall notify the Holder at least 30 days prior to the date specified in (A), (B) or (C) below, in writing stating:

 

(A)    the record date of such dividend, distribution, repurchase, redemption, subdivision or combination, or, if a record is not to be taken, the date as to which the holders of Common Stock of record to be entitled to such dividend, distribution, repurchase, redemption, subdivision or combination are to be determined;

 

(B)     the date on which such reclassification, consolidation, merger, share exchange, sale, dissolution, liquidation or winding up is expected to become effective, and the date as of which it is expected that holders of Common Stock of record shall be entitled to exchange their shares of Common Stock for securities or other property deliverable upon such reclassification, consolidation, merger, sale, dissolution or winding up; or

 

(C)     the date on which such offering of its Common Stock or any rights to acquire such Common Stock for consideration paid per share of Common Stock less than the Exercise Price is expected to become consummated.

 

6.     Transfer of Warrant.

 

(a)     Transferability. This Warrant and all rights hereunder (including, without limitation, any registration rights) are transferable, in whole or in part, upon surrender of this Warrant at the principal office of the Company or its designated agent, together with a written assignment of this Warrant substantially in the form attached hereto duly executed by the Holder or its agent or attorney and funds sufficient to pay any transfer taxes payable upon the making of such transfer.  Upon such surrender and, if required, such payment, the Company shall execute and deliver a new Warrant or Warrants in the name of the assignee or assignees, as applicable, and in the denomination or denominations specified in such instrument of assignment, and shall issue to the assignor a new Warrant evidencing the portion of this Warrant not so assigned, and this Warrant shall promptly be cancelled.  The Warrant, if properly assigned in accordance herewith, may be exercised by a new holder for the purchase of Warrant Shares without having a new Warrant issued.

 

 
-6-

 

 

(b)     New Warrants. This Warrant may be divided or combined with other Warrants upon presentation hereof at the aforesaid office of the Company, together with a written notice specifying the names and denominations in which new Warrants are to be issued, signed by the Holder or its agent or attorney. Subject to compliance with Section 6(a), as to any transfer which may be involved in such division or combination, the Company shall execute and deliver a new Warrant or Warrants in exchange for the Warrant or Warrants to be divided or combined in accordance with such notice. All Warrants issued on transfers or exchanges shall be dated the initial issuance date set forth on the first page of this Warrant and shall be identical with this Warrant except as to the number of Warrant Shares issuable pursuant thereto.

 

(c)     Warrant Register. The Company shall register this Warrant, upon records to be maintained by the Company for that purpose (the “Warrant Register”), in the name of the record Holder hereof from time to time. The Company may deem and treat the registered Holder of this Warrant as the absolute owner hereof for the purpose of any exercise hereof or any distribution to the Holder, and for all other purposes, absent actual notice to the contrary.

 

(d)     Understandings or Arrangements. Such Holder is acquiring this Warrant as principal for its own account and has no direct or indirect arrangement or understandings with any other persons to distribute or regarding the distribution of such Warrant (this representation and warranty not limiting such Holder’s right to sell the Warrant pursuant to the Registration Statement or otherwise in compliance with applicable federal and state securities laws.) Such Holder is acquiring this Warrant hereunder in the ordinary course of its business.

 

7.     Miscellaneous.

 

(a)     No Rights as Stockholder Until Exercise.  This Warrant does not entitle the Holder to any voting rights, dividends or other rights as a stockholder of the Company prior to the exercise hereof as set forth in Section 1(d)(i).

 

(b)     Loss, Theft, Destruction or Mutilation of Warrant. The Company covenants that upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Warrant or any stock certificate relating to the Warrant Shares, and in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to it (which, in the case of the Warrant, shall not include the posting of any bond), and upon surrender and cancellation of such Warrant or stock certificate, if mutilated, the Company will make and deliver a new Warrant or stock certificate of like tenor and dated as of such cancellation, in lieu of such Warrant or stock certificate.

 

(c)     Saturdays, Sundays, Holidays, etc.  If the last or appointed day for the taking of any action or the expiration of any right required or granted herein shall not be a business day, then, such action may be taken or such right may be exercised on the next succeeding business day.

 

(d)     Authorized Shares.

 

(i)        The Company covenants that, during the period the Warrant is outstanding, it will reserve from its authorized and unissued Common Stock a sufficient number of shares to provide for the issuance of the Warrant Shares upon the exercise of any purchase rights under this Warrant. The Company further covenants that its issuance of this Warrant shall constitute full authority to its officers who are charged with the duty of executing stock certificates to execute and issue the necessary certificates for the Warrant Shares upon the exercise of the purchase rights under this Warrant. The Company will take all such reasonable action as may be necessary to assure that such Warrant Shares may be issued as provided herein without violation of any applicable law or regulation, or of any requirements of the Trading Market upon which the Common Stock may be listed. The Company covenants that all Warrant Shares which may be issued upon the exercise of the purchase rights represented by this Warrant will, upon exercise of the purchase rights represented by this Warrant and payment for such Warrant Shares in accordance herewith, be duly authorized, validly issued, fully paid and nonassessable and free from all taxes, liens and charges created by the Company in respect of the issue thereof (other than taxes in respect of any transfer occurring contemporaneously with such issue).

 

 
-7-

 

 

(ii)       Except and to the extent as waived or consented to by the Holder, the Company shall not by any action, including, without limitation, amending its certificate of incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such actions as may be necessary or appropriate to protect the rights of Holder as set forth in this Warrant against impairment.  Without limiting the generality of the foregoing, the Company will (i) not increase the par value of any Warrant Shares above the amount payable therefor upon such exercise immediately prior to such increase in par value, (ii) take all such action as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and nonassessable Warrant Shares upon the exercise of this Warrant and (iii) use commercially reasonable efforts to obtain all such authorizations, exemptions or consents from any public regulatory body having jurisdiction thereof, as may be, necessary to enable the Company to perform its obligations under this Warrant.

 

(iii)      Before taking any action which would result in an adjustment in the number of Warrant Shares for which this Warrant is exercisable or in the Exercise Price, the Company shall obtain all such authorizations or exemptions thereof, or consents thereto, as may be necessary from any public regulatory body or bodies having jurisdiction thereof.

 

(e)     Jurisdiction. All questions concerning the construction, validity, enforcement and interpretation of this Warrant shall be determined in accordance with the provisions of Delaware law.

 

(f)     Restrictions. The Holder acknowledges that the Warrant Shares acquired upon the exercise of this Warrant, if not registered, will have restrictions upon resale imposed by state and federal securities laws.

 

(g)    Nonwaiver and Expenses. No course of dealing or any delay or failure to exercise any right hereunder on the part of Holder shall operate as a waiver of such right or otherwise prejudice Holder’s rights, powers or remedies.  Without limiting any other provision of this Warrant, if the Company willfully and knowingly fails to comply with any provision of this Warrant, which results in any material damages to the Holder, the Company shall pay to Holder such amounts as shall be sufficient to cover any costs and expenses including, but not limited to, reasonable attorneys’ fees, including those of appellate proceedings, incurred by Holder in collecting any amounts due pursuant hereto or in otherwise enforcing any of its rights, powers or remedies hereunder.

 

(h)    Notices. Except as otherwise expressly provided herein, all notices and other communications provided for hereunder shall be in writing (including telegraphic, telex, telecopier or cable communication) and mailed, telegraphed, telexed, telecopied, cabled or delivered to the applicable party at its address specified opposite its signature below, or at such other address as shall be designated by such party in a written notice to the other. All such notices and communications shall, when mailed, telegraphed, telexed, telecopied or cabled or sent by overnight courier, be effective when deposited in the mails, delivered to the telegraph company, cable company or overnight courier, as the case may be, or sent by telex or telecopier.

 

(i)     Limitation of Liability. No provision hereof, in the absence of any affirmative action by Holder to exercise this Warrant to purchase Warrant Shares, and no enumeration herein of the rights or privileges of Holder, shall give rise to any liability of Holder for the purchase price of any Common Stock or as a stockholder of the Company, whether such liability is asserted by the Company or by creditors of the Company.

 

(j)     Remedies. The Holder, in addition to being entitled to exercise all rights granted by law, including recovery of damages, will be entitled to specific performance of its rights under this Warrant.  The Company agrees that monetary damages would not be adequate compensation for any loss incurred by reason of a breach by it of the provisions of this Warrant and hereby agrees to waive and not to assert the defense in any action for specific performance that a remedy at law would be adequate.

 

 
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(k)    Successors and Assigns. Subject to applicable securities laws, this Warrant and the rights and obligations evidenced hereby shall inure to the benefit of and be binding upon the successors and permitted assigns of the Company and the successors and permitted assigns of Holder. The provisions of this Warrant are intended to be for the benefit of any Holder from time to time of this Warrant and shall be enforceable by the Holder or holder of Warrant Shares.

 

(l)     Amendment. This Warrant may be modified or amended or the provisions hereof waived with the written consent of the Company and the Holders holding Warrants at least equal to a majority of the Warrant Shares issuable upon exercise of all then outstanding Warrants.

 

(m)   Severability. Wherever possible, each provision of this Warrant shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Warrant shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provisions or the remaining provisions of this Warrant.

 

(n)    Headings. The headings used in this Warrant are for the convenience of reference only and shall not, for any purpose, be deemed a part of this Warrant.

 

IN WITNESS WHEREOF, the Company has caused this Warrant to be executed and delivered by its duly authorized officer on the day and year first above written.

 

 

BIOLARGO, INC.

 

     
     

 

By: ________________________

 

 

Name: Dennis P. Calvert, President

 

     
  Address: 3500 W. Garry Avenue  
                  Santa Ana, California 92704  

 

 
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EXHIBIT A

 

NOTICE OF EXERCISE

 

 

TO:     BIOLARGO, INC.

 

(1)   The undersigned hereby elects to purchase _____________ Warrant Shares of the Company pursuant to the terms of the attached Warrant (only if exercised in full), and tenders herewith payment of the exercise price in full, together with all applicable transfer taxes, if any.

 

(2)   Unless said Warrant Shares will be delivered electronically via DWAC, please issue the Warrant Shares in the name of the undersigned or in such other name as is specified below in “book entry” form at the Company’s transfer agent.

 

If the Warrant Shares will be delivered electronically via DWAC, please issue them to the following account:

 

Name of DTC Participant (broker-dealer at which the account of Holder to be

credited with the Warrant Shares is maintained): ________________________________________________________________________________

 

DTC Participant Number: _______________________________________

 

Name of Account at DTC Participant to be credited with the Shares: _________________________________________________________________

_____________________________________________________________________________________________________________________

 

Account Number at DTC Participant to be credited with the Shares: _________________________________________________________________

 

[SIGNATURE OF HOLDER]

 

Name of Investing Entity: _______________________________________________________________________________________________________

 

Signature of Authorized Signatory of Investing Entity: _________________________________________________________________________________

Name of Authorized Signatory: ___________________________________________________________________________________________________

Title of Authorized Signatory: ____________________________________________________________________________________________________

Date: _____________________________________________________________________

 

 

 

 

EXHIBIT B

 

NOTICE OF TRANSFER

 

(To be signed only upon transfer of Warrant and subject to other conditions of this Warrant)

 

FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers unto ____________________________________________ the right represented by the attached Warrant to purchase __________ shares of the Common Stock of BIOLARGO, INC., to which the attached Warrant relates, and appoints _____________________ as Attorney-in-fact to transfer such right on the books of BIOLARGO, INC., with full power of substitution in the premises.

 

The undersigned understands that any transfer of the attached Warrant is subject to full compliance with Federal and applicable state securities laws and other requirements, which requirements shall be determined and which issues shall be decided by BIOLARGO, INC., in its sole and absolute discretion, prior to consenting to and recognizing such transfer.

 

Dated:                                       

 

 

 

 

(Signature must conform in all respects to the name of the Holder as specified on the face of the Warrant)

   
   
   
   
 

(Address)

   

 

Signed in the presence of:                                                                                                  

Exhibit 10.2

 

LICENSE AGREEMENT

 

This License Agreement (the “Agreement”) is made this 8th day of August, 2014 (the “Execution Date”) but is effective as of February 1, 2014, 2014 (the “Effective Date”), by and between Peter Holdings Pty Ltd, an Australian corporation (“Peter Holdings”), BioLargo, Inc., a Delaware corporation, having a principal place of business at 3500 W. Garry Ave., Santa Ana, California, (“BioLargo”), and InsulTech Manufacturing, LLC, an Arizona limited liability company d/b/a Clarion Water, having a principal place of business at 3530 W. Garry Ave., Santa Ana, California (“Licensee”). BioLargo and Peter Holdings are referred to herein collectively as “Licensor”, and Licensee and Licensor are referred to herein individually as a “Party” and collectively as the “Parties”.

 

RECITALS

 

WHEREAS, Licensor owns certain intellectual property comprising the “ISAN System”, including patents, trades secrets, trademarks, trade names, know-how, as well as working systems (as more particularly defined below as “Intellectual Property”), which Licensee desires to commercialize; and

 

WHEREAS, Licensor is willing to grant an exclusive license of such Intellectual Property, subject to the terms, conditions, limitations, and restrictions set forth in this Agreement.

 

NOW, THEREFORE, incorporating the foregoing recitals, for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, and for the mutual covenants contained in this Agreement, the Parties hereby agree as follows:

 

 

1.

Definitions.

 

a.     Audit Period means the period up to and including 90 days after the end of each calendar year.

 

b.     Bankruptcy Act means Title 11 of the United States Code, as now or hereafter in effect or any successor statute.

 

c.     Effective Date means the date this Agreement became effective.

 

d.     Execution Date means the date this Agreement was entered into.

 

e.     Field of Use means any and all fields of commercial and non-commercial endeavor.

 

f.     Intellectual Property means the intellectual property related to the Isan System, including without limitation the Patents, and the Proprietary Property (as defined herein).

 

g.     Isan System means the automated iodine delivery system developed by Ioteq IP Pty Ltd of Australia, as may be improved or modified during the Term of this Agreement.

 

 
 

 

 

 

h.     License means the licensing of the rights to the Intellectual Property granted by Licensor to Licensee.

 

i.     Licensed Processes means any method, process, modality, procedure, practice, or course of action (i) covered by a claim of the Patents, or (ii) having technical content based upon, or otherwise derived from, the Intellectual Property.

 

j.     Licensed Products means any article, kit, equipment, system, method, apparatus or unit (i) covered by a claim of the Patents, or (ii) having technical content based upon, or otherwise derived from, the Intellectual Property.

 

k.     Net Sales Revenue means gross sales revenue received by Licensee from the sale, lease, or rental of Licensed Products and Licensed Processes, less any taxes, returns, allowances, discounts, freight and packaging costs, costs of consumables (such as iodine) and insurance when the same are actually paid or allowed. Net Sales Revenue does not include revenue generated pursuant to sublicense agreements or for any items, services, revenue sharing or other payments as related to the Isan System that are sold at or below their actual cost.

 

l.     Patents means those patents referenced on Exhibit A, “Schedule of Patents/Patent Application, Ioteq IP Pty Ltd February 2014”, as may be extended or modified from time-to-time during the term hereof, together with any additional patents that may be added to Exhibit A in accordance with the Agreement.

 

m.     Proprietary Property means the following property related to the Isan System, as provided by Licensor to Licensee, and the Patents:

 

i.     All proprietary knowledge, marketing and sales materials and information, potential customer lists and contact information, technical information, data, trade secrets, Confidential Information, computer software and licenses, formulae, designs and drawings (paper and CAD/CAM), quality control data, know-how, processes and instructions (whether secret or not), methods, inventions and other similar know-how or rights relating to or arising out of the Isan System or the Patents.

 

n.     Territory means world wide.

 

 

2.

Grant of License.

 

a.     In consideration of the license fee and royalties to be paid by Licensee hereunder, and subject to the other terms and conditions set forth in this Agreement, Licensor hereby grants to Licensee as of the Effective Date the exclusive and non-terminable (except as otherwise expressly provided herein) license in the Field of Use in the Territory to use, exploit, develop and commercialize each and every element of the Intellectual Property, including without limitation (i) to make, have made, use, sell, offer for sale, license, and sublicense Licensed Products, (ii) to import and export Licensed Products, (iii) to practice Licensed Processes, (iv) to derive all economic benefit from all activities undertaken by Licensee with respect to the Intellectual Property, subject to the payments to Licensor specified herein, and (v) to conduct research, develop and make modifications and enhancements to the Intellectual Property, and to improve the Intellectual Property (provided, however, that Licensor may conduct research, develop and make modifications and enhancements to the Intellectual Property to improve the Intellectual Property in accordance with Section 2(d) below).

 

 
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b.     Limitations. This grant of license rights is subject to the following limitations:

 

i.     The rights granted herein are granted only with respect to the Territory, in the Field of Use, and so long as this Agreement is in force and effect;

 

ii.     Subject to Section 10(a), no right or license is granted or implied to the Licensee or any person claiming through the Licensee under any patent or patent application other than those specifically identified as the Patents, as may be extended or modified from time-to-time during the term hereof;

 

iii.     Licensor reserves to itself all other intellectual property rights owned by it that are not expressly granted to Licensee by this Agreement; and

 

iv.     Except as provided in this Agreement, nothing herein will be construed to grant the Licensee the right to register or claim any trademark or trade name confusingly similar in sound, appearance or meaning to those registered by Licensor that are expressly disclosed in this Agreement.

 

c.     Isan Name. During the term of this Agreement, Licensor expressly grants the exclusive license to Licensee to use the words “Isan,” “Isan USA” and “Ioteq” in (i) its corporate name and in the name of any affiliated entities that Licensee may elect to form in connection with this License, (ii) the branding, marketing, sale and sublicensing of the Licensed Processes and/or Licensed Products, and (iii) in all other uses and applications as Licensee may deem to be appropriate in connection with this License. Unless otherwise agreed to by the Parties in writing, Licensor agrees not to use such words in any of its business operations during the term of this Agreement; provided, however, that Licensor may describe the Isan System and its technology (excluding any confidential information of Licensee) so long as the facts of this Agreement are clearly indicated. Licensee agrees to remove the word “Isan” and “Ioteq” from its corporate name upon the termination of this Agreement (if applicable), and assign any registered trademarks with the “Isan” or “Ioteq” name to Licensor.

 

d.     Research and Development. During the Term, Licensee shall have the exclusive right (but not the obligation) to conduct research and development activities, and pursue regulatory approval, clinical trials, and all other work necessary to develop, improve, enhance and commercialize the Licensed Products and Licensed Processes within the Field of Use in the Territory. In connection with such potential efforts by Licensee after the transition of Section 3 is complete, Licensee may consult with Licensor, and Licensor shall make appropriate personnel available for reasonable telephone and other informal consultations, but shall not, among other things, obligate Licensor personnel to travel, spend a minimum number of hours or engage technical personnel in research or clinical projects, all of which services (“Additional Services”) may be requested by Licensee and shall be subject of further negotiation by the Parties including provisions for appropriate consideration therefor at the hourly rate of US$95.00/hour and with reimbursement at cost of any direct expense incurred by Licensor at Licensee’s request. Licensee shall keep Licensor reasonably informed as to any research and development activities, regulatory approvals, clinical trials, and other work undertaken by Licensee or any other party authorized by Licensee to develop, improve and/or enhance the Licensed Products and Licensed Processes. Upon Licensor’s request, Licensee may permit Licensor to conduct research and development activities, regulatory approvals, clinical trials, and other work to develop, improve and/or enhance the Intellectual Property, Licensed Products and Licensed Processes, and Licensor shall keep Licensee reasonably informed as to any of such activities. Subject to Section 10(a), in the event that either Licensee or Licensor, or the two of them jointly, or any other party, improves or enhances the Licensed Products and/or Licensed Processes in any way, such improvements and enhancements shall be deemed to be part of the Intellectual Property that is licensed to Licensee hereunder, and Licensee shall have the right to utilize, market, sell and otherwise benefit from such improvements and enhancements on the terms set forth herein as if such improvements and enhancements were part of the Intellectual Property on the Effective Date.

 

 
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e.     No Contrary Licenses. During the Term of this Agreement Licensor shall not enter into any licenses, sublicenses or other agreements or arrangements of any kind with any party which allow for, permits or facilitates the commercial or non-commercial use of the Intellectual Property, the Proprietary Property, the Licensed Processes and/or the Licensed Products, or any of them, or any variations thereof, in the Fields of Use in any portion of the Territory, nor shall Licensor directly or indirectly do any of the foregoing on its own behalf. The covenants of Licensor hereunder are material consideration to Licensee in entering into this Agreement and Licensee would not have agreed to the terms hereof in the absence of these promises. Without limiting any other rights and remedies available to Licensee for Licensor’s breach of this Agreement, Licensee shall have the right to obtain injunctive relief as appropriate to enforce this provision, without the posting of a bond or other security therefor.

 

 

3.

Licensor Obligations. Licensor shall promptly:

 

 

a.

Provide to Licensee three assembled and operating Isan units, plus any spare parts that may be in current inventory, Licensee to pay any shipping and import fees, if required. The Parties acknowledge that this was accomplished between the Effective Date and the Execution Date of this Agreement.

 

 

b.

Upon request of Licensee, consult with Licensee to the best of Licensor’s ability (including providing information and engineering support) regarding the technical, regulatory, marketing, and engineering aspects of the Isan System, Proprietary Property and Intellectual Property, sufficient to transfer existing knowledge to Licensee.

 

 

c.

Provide to Licensee copies of all CAD/CAM files, drawings, bills of materials, instructions, manufacturer specs, design notes, and any other information necessary to build, quote parts and design elements, and deliver working Isan units into the field.

 

 

d.

Provide to Licensee copies of all Patents, Patent applications, Proprietary Property and the Intellectual Property.

 

 

 
-4-

 

 

 

 

e.

Provide to Licensee copies of all documentation related to regulatory applications and approvals in Australia and New Zealand, including supporting science.

 

 

f.

Provide to Licensee copies of all customer history files, case studies, notes, recommendations, and similar materials that will assist Licensee in better understanding of Isan System set-up and implementation for specific applications (both non-custom and custom).

 

 

g.

Provide to Licensee all other advice, information, or materials, available to Licensor, that will assist Licensee in its efforts to commercialize the Isan System.

 

 4.           Royalty and Payments. In consideration of the License granted to Licensee, and subject to the other terms and conditions set forth in this Agreement, Licensee shall pay to Licensor each of the following royalties and payments:

 

a.     Initial License Fee. After the Effective Date but prior to the Execution Date, Licensee has paid in full to Licensor a onetime fee (the “Initial License Fee”) of $100,000, in good and immediately collectable funds. The Initial License Fee is fully earned by Licensor upon the Execution Date, and is non-refundable after such time. The Initial License Fee shall be credited to Royalties, Sublicense Fees, or any other fees due pursuant to this Agreement from the inception of the Agreement through June 30, 2016. After June 30, 2016, the Initial License Fee, or any portion thereof, shall not be credited to Royalty, Minimum Payments, Sublicense Fees, or any other fees due hereunder.

 

b.     Royalty. Commencing upon the Execution Date and during the Term of this Agreement, Licensee shall pay to Licensor ten percent (10%) of Licensee’s Net Sales Revenue as an ongoing royalty fee (the “Royalty”). Each Royalty shall be paid in good and immediately collectible funds, and paid quarterly in arrears within thirty (30) days after the end of each calendar quarter.

 

 

5.

Sublicensing.

 

a.     Right to Sublicense. Subject to the conditions and payment of fees set forth in this Agreement, Licensee may enter into commercially reasonable agreements with third parties granting said third parties any of the rights granted to Licensee pursuant to this Agreement within the Territory and Field of Use, including without limitation pre-license or product development agreements, or agreements to sublicense the Patents within the Territory or Field of Use (each, a “Sublicense Agreement”). For each such Sublicense Agreement, Licensee shall pay to Licensor a portion of the income generated from such agreement, as set forth in Section 5(b) below.

 

b.     Sublicensing Fees. If Licensee enters into a Sublicense Agreement pursuant to this Section, Licensee shall pay to Licensor a sublicense fee (each, a “Sublicensing Fee”) equal to forty percent (40%) of any net sublicense fees, royalties and other payments, less all direct expenses related to the sublicense of the Isan System or Patents, received by Licensee, or any affiliate of Licensee, from any party, under such Sublicense Agreement. No Royalty Fee shall be due from Licensee or any third party for which a Sublicensing Fee is due. Each Sublicensing Fee shall be paid in good and immediately collectible funds, and paid quarterly in arrears within thirty (30) days after the end of each calendar quarter.

 

 
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6.            [Intentionally Left Blank]

 

7.            Minimum Payments. For so long during the Term that Licensee’s License is “exclusive,” Licensee shall pay to Licensor a minimum amount (each, a “Minimum Payment”) of: zero due through June 30, 2016; from July 1, 2016, through June 30, 2017, $50,000 per quarter; from July 1, 2017, through June 30, 2018, 75,000 per quarter; from July 1, 2018, and each quarter thereafter, $100,000 per quarter. Each such Minimum Payment shall be paid within thirty (30) days after the last day of each calendar quarter, in arrears, beginning the quarter ending September 30, 2016, and shall be offset by any Royalty fees and Sublicensing Fees paid to Licensor for such quarter.

 

a.     Licensee’s failure to pay within thirty (30) days of receipt of written notice from Licensor of Licensee’s failure to timely pay the Minimum Payment due for any four (4) consecutive quarters (a “Minimum Payment Default”) shall automatically modify, without further notice or action on the part of Licensor, the terms of the License such that the License shall no longer provide Licensee the “exclusive” rights granted hereunder. Any such Minimum Payment Default shall not relieve Licensee of its obligation to pay in full the Minimum Payment or any other fees or royalties created herein, which shall remain due and payable to Licensor.

 

8.            License Term; Options to Extend Term; Early Termination. Subject to early termination, including Licensee’s right to terminate the Agreement set forth below, the term of this Agreement (the “Term”) shall expire on the later to occur of (i) the tenth (10th) anniversary of the Execution Date or (ii) when the last Patent hereunder is invalidated, terminates or expires; provided that the Agreement shall automatically renew for additional ten year periods, unless either Party gives one year notice prior to the expiration of any Term. Notwithstanding anything to the contrary contained elsewhere in this Agreement, if at any time during the Term Licensee determines that it does not wish to continue the License, (e.g., if Licensee determines that continuation of this License will not be, or is no longer, economically viable), Licensee shall have the right to terminate this Agreement upon not less than ninety (90) days advance written notice to Licensor, in which case Licensee shall be responsible for the Royalty fee, Sublicense Fee, or Minimum Payment, as applicable, otherwise due hereunder through the termination of the Agreement, with such amounts being prorated as appropriate for any partial quarter during which the Agreement ends, and Licensee shall have no further obligation hereunder. Further, and notwithstanding anything to the contrary contained elsewhere in this Agreement, upon termination of this Agreement the Parties shall remain entitled to receive their respective compensation due hereunder through the date of such termination, whether or not such payments have yet been made or received, as applicable, and this Agreement shall remain in effect and be enforceable following such termination as necessary to ensure that any such unpaid compensation is received and paid as required hereunder.

 

 
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9.            Reporting.

 

a.     Books and Records. Licensee shall keep full and accurate books of account using generally accepted accounting principles (GAAP) showing the amount of Net Sales Revenue and resulting Royalties and Sublicense Fees due pursuant to this Agreement. These books of account shall be kept at Licensee’s place of business and shall be subject to audit in accordance with Section 9(d).

 

b.     Royalty Report. Not later than thirty (30) days after the end of each calendar quarter of each year (each calendar quarter is a “Reporting Period”), Licensee shall deliver to Licensor a true and accurate report (a “Royalty Report”), giving particulars of the business conducted by Licensee during the preceding Reporting Period as are relevant to an accounting for Royalties and Sublicense Fees due under this Agreement. The Royalty Report shall include the following at a minimum: (i) the quantity of Licensed Products sold by Licensee; (ii) the revenues arising from sales of Licensed Products; (iii) the calculated Royalty due to Licensor; and (iv) revenues generated by any Sublicense Agreements, identifying the sublicensee, the amount, and the basis of the calculations. Simultaneously with the delivery of each Royalty Report, Licensee shall pay to Licensor the applicable Royalty and Sublicense Fees due, and any Minimum Payment due after crediting such Royalty and Sublicense Fees, as set forth in Paragraphs 4(b), 5(b) and 7 above.

 

c.     Licensor’s Audit Rights. Not more than once per calendar year, Licensor shall be entitled, upon not less than ten (10) business days written notice to Licensee, and during business hours at Licensee’s office or such other place as Licensee shall designate within the state of California, to inspect and examine those books and records of Licensee relating to the determination of Royalty or Sublicense Fees set forth in any Royalty Report(s) delivered within the prior calendar year (the “Audit Period”). The inspection of Licensee’s records shall be performed by a licensed public accounting firm acceptable to Licensee (a “Qualified Firm”). The examination must be conducted within thirty (30) days of such books and records being made available to Licensor (“Examination Period”). The Qualified Firm shall prepare a report indicating the results of the review (the “Audit Report”) and the Qualified Firm shall provide the Audit Report to both Licensor and Licensee. If the Audit Report discloses that the amount of Royalties or Sublicense Fees reported to Licensor was less than the actual Royalties or Sublicense Fees owed, Licensee shall pay to Licensor the deficiency, unless Licensee disputes the Report within thirty (30) days after the receipt of the Report. Conversely, if the Audit Report discloses that the amount of Royalties or Sublicense Fees reported and paid to Licensor was greater than the actual Royalty fees owed, Licensor shall refund to Licensee the overpayment (and Licensee shall be entitled to offset such overpayment against the next Royalty fees due), unless Licensor disputes the Report within thirty (30) days after the receipt of the Report. If either Party disputes the Report within this thirty (30) day period, Licensee and Licensor shall agree upon another accounting firm to review and verify the Royalties and Sublicense Fees, and provide the results thereof to Licensee and Licensor (the “Reconciliation Audit”) and the determination as set forth in the Reconciliation Audit shall be binding upon Licensee and Licensor. All costs and expenses of the auditor generating the Audit Report shall be paid by Licensor unless the audit shows that Licensee understated Royalties and Sublicense Fees in the Royalty Report by more than five percent (5%), in which case Licensee shall pay the costs and expenses of such audit. Notwithstanding the foregoing, in the event the Reconciliation Audit is performed, Licensee and Licensor shall each pay one-half (1/2) of the cost of the Reconciliation Audit. The exercise by Licensor of its audit rights hereunder shall not relieve Licensee of its obligations to pay prior to the request for and inspection and examination of Licensee’s books and records or permit Licensor the right to audit any other sums with the exception of the amounts set forth in the Royalty Report. If Licensor does not elect to exercise its rights to audit during the Audit Period, and/or does not elect to examine the books and records during the Examination Period, then Licensee’s Royalty Report shall conclusively be deemed to be correct and Licensor shall be bound by Licensee's determination. Additionally, Licensor agrees and acknowledges that the audit right as set forth herein and the review of books and records shall be confidential and, with the exception of Licensor’s auditors, Licensor may not disclose or discuss the audit or the results of the audit to any other parties.

 

 
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10.           Intellectual Property Ownership; Related Actions.

 

a.     Improvements. Ownership of all inventions and discoveries by Licensor or Licensee or jointly, relating to, deriving from, or enhancing or improving upon any technology or claims embodied in any of the Patents, the Proprietary Property, the Licensed Products or the Licensed Processes, whether discovered or developed in connection with any of the research and development activities conducted hereunder, or otherwise (each, a “New Invention”), shall become (i) the sole property of Licensor if developed solely by Licensor, (ii) the joint property of Licensor and Licensee if developed jointly by Licensor and Licensee, or (iii) the sole property of Licensee if developed solely by Licensee, with New Inventions under clauses (i) and (ii) and patents related thereto subject to the rights granted to Licensee by the License. Any such New Invention and resulting patents under clauses (i) and (ii) above shall automatically become part of this License, resulting in no additional payments or change in the terms of the License, but shall not absolve Licensee of any duty or obligation to pay Royalties to Licensor for the original license of Proprietary Property. Licensee shall cause each and every one of its officers and employees having access to, contact with, or otherwise employed in any manner with the Intellectual Property, to keep such information confidential and to refrain from disclosing same except as is necessary or appropriate in connection with Licensee’s business activities contemplated by this Agreement. Each Party shall assist the other Party in obtaining and perfecting any new intellectual property rights in any such New Invention in accordance with this Section by causing its employees and officers to sign and execute such legal documents as the owning Party determines is necessary for protection of any such New Inventions. Any costs to obtain patent protection agreed to by Licensee for a New Invention shall be borne solely by Licensee for so long as Licensee’s License hereunder is “exclusive” to Licensee.

 

b.     Defense of Intellectual Property. For so long as Licensee’s License hereunder is “exclusive” to Licensee, Licensee shall have the right to defend or settle any actions or claims brought by third parties challenging the Intellectual Property; provided that if Licensor reasonably believes that such defense or settlement will reduce the value or strength of Licensor's Intellectual Property, then Licensor shall notify Licensee in writing of same and if the Parties do not agree on the defense or settlement strategy taken by Licensee, then Licensor shall assume the defense and settlement of such actions or claims, with any defense or settlement to be approved by Licensee. The defending Party shall have the sole discretion and control with respect to any settlement or defense against any litigation against the validity of the Patents and shall pay all expenses of all actions that it takes pursuant to this Section, including without limitation attorneys’ fees. The Parties shall reasonably cooperate with one another (including executing reasonably necessary documentation) in order to assist the defending Party in such efforts. The non-defending Party shall have the right to be kept informed of the status and progress of all such actions.

 

 
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c.     Third Party Infringement. Licensee shall have the exclusive right, sole discretion and absolute authority to assert Patent and Intellectual Property rights against any third party (each, a “Third Party Infringement Action”), which Licensee shall have no obligation to do, and the sole and exclusive right to select counsel and control and direct the assertion of all rights and the prosecution of all such actions brought by Licensee. In any such action initiated by Licensee, (i) Licensee shall pay all the expenses of such actions including without limitation attorneys’ fees, (ii) Licensor shall reasonably cooperate with Licensee (including executing reasonably necessary documentation) in order to assist Licensee in such efforts so that Licensee can enjoy the benefits of this Agreement, and (iii) if a party to such action challenges the validity of the Patents or Intellectual Property rights, Licensee shall have the right to control and direct the assertion of such defense of the Intellectual Property, including the selection of counsel; provided that if Licensor reasonably believes that such defense or settlement will reduce the value or strength of Licensor's Intellectual Property, then Licensor shall notify Licensee in writing of same and if the Parties do not agree on the defense or settlement strategy taken by Licensee, then Licensor shall assume the defense and settlement of such actions or claims, with any defense or settlement to be approved by Licensee.

 

d.     If Licensee takes or defends any legal action to protect or preserve the Intellectual Property, then, in addition to all other remedies available to Licensee as a result thereof, Licensee shall be permitted to offset against the next sums due to Licensor from Licensee hereunder the actual costs incurred by Licensee in the taking of such legal action, including, without limitation, actual attorneys fees, court and litigation costs, expert witness fees and costs of appeal, if any, up to a maximum of 50% of any next sums due to Licensor, subject to the following condition precedent to such obligation: the amounts due to Licensor for the calendar quarter from Royalties and Sublicensing Fees equal or exceed $125,000. Licensor shall have the right to be kept informed of the status and progress of all such actions by Licensee pursuant to this Section.

 

e.     Any recoveries or settlement fees received from suits or settlements involving an action initiated or defended pursuant to this section or agreed to shall be paid: (i) first, to Party(ies) that incurred the cost of such action (including to Licensor to the extent Royalties and Sublicensing Fees were offset pursuant to Section 10(d)) as reimbursement for the expenses of such action, including without limitation attorneys’ fees,; and (ii) the balance (if any) to the Parties , for each Party’s own use and benefit, in the absence of an allocation agreed to by the Parties or determined by a court or arbiter, to be allocated between the Parties on an equitable basis as appropriate in order to compensate each of them for their respective and proportionate loss.

 

11.          Marking of Patents. All Licensed Products, including those produced pursuant to the rights granted in any Sublicense Agreement, shall have appropriate patent marking, such as “Patent Pending” or reference to specific issued patents covering the Licensed Products, pursuant to and in conformance with the guidelines issued from time to time by Licensor and provided to Licensee within a reasonable time before any changed guidelines take effect. Licensee shall consult with and obtain the written approval of Licensor with respect to any such patent marking. The Parties shall impose the patent marking obligations of this Section on all Sublicense Agreements.

 

 
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12.          Insurance Requirements. Licensee shall maintain, at Licensee’s expense, during the period that any Licensed Product is made, used, sold or otherwise made available by Licensee to others pursuant to this Agreement, Comprehensive Liability Insurance, including Product Liability Insurance, with a reputable and financially secure insurance carrier(s) to cover the activities of Licensee contemplated by this Agreement for minimum limits of one million dollars ($1,000,000.00) per occurrence. Such insurance shall name Licensor as an additional insured. Licensee shall furnish a Certificate of Insurance, upon request, evidencing such coverage with thirty (30) days of written notice of cancellation or material change to Licensor. Licensee shall at all times comply, through insurance or self-insurance, with all statutory workers’ compensation and employers’ liability requirements covering any and all employees with respect to activities performed under this Agreement. All such liability insurance policies shall be written as primary policies not contributing with and not in excess of coverage which Licensor may carry.

 

13.          Events of Default and Termination.

 

a.     This Agreement shall terminate automatically upon the earliest to occur of the following:

 

i.     Licensee voluntarily files a petition, or has an involuntary petition filed against it, under the Bankruptcy Act; or enters into any voluntary assignment for the benefit of its creditors; or appoints, or has appointed on its behalf, a receiver, liquidator or trustee of or with respect to substantially all of its property or assets, which petition, assignment or appointment is not dismissed, terminated or resolved within ninety (90) days following the commencement thereof;

 

ii.     The expiration of the Term (as may be extended from time-to-time); or

 

iii.     The termination of this Agreement due to an Event of Default in accordance with the following.

 

b.     The following shall be considered an “Event of Default” by Licensee:

 

i.     Licensee’s fourth (4th) failure to pay the Minimum Payment (to the extent applicable) due within 30 days after receipt of written notice of failure to timely pay by of the due date;

 

ii.     Without regard to the Minimum Payment due for a particular Reporting Period, Licensee’s failure to pay to Licensor during a particular Reporting Period an amount equal to at least the sum of the Royalty fees due for such Reporting Period within thirty (30) days of the due date;

 

 
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iii.     Licensee’s failure to deliver to Licensor the Royalty Report due for a Reporting Period within 30 days of the due date;

 

iv.     Licensee’s assignment of this Agreement in violation of the terms set forth;

 

v.     Licensee’s failure to maintain appropriate insurance pursuant to the terms set forth; and,

 

vi.     Licensee’s material breach of any other provision of this Agreement.

 

c.     The following shall be considered an “Event of Default” by Licensor:

 

i.     Licensor’s grant of a license of the Intellectual Property to a third party in the Field of Use in the Territory during the Term;

 

ii.     Licensor’s loss of any Patent rights;

 

iii.     Licensor’s failure to pay any necessary fees for the continuation of the Patents;

 

iv.     Licensor voluntarily files a petition, or has an involuntary petition filed against it, under the Bankruptcy Act; or enters into any voluntary assignment for the benefit of its creditors; or appoints, or has appointed on its behalf, a receiver, liquidator or trustee of or with respect to substantially all of its property or assets, which petition, assignment or appointment is not dismissed, terminated or resolved within ninety (90) days following the commencement thereof; and

 

v.     Licensor’s material breach of any other provision of this Agreement.

 

d.     Upon an Event of Default by either Party, the non-breaching Party may, at its sole option, provide written notice to the breaching Party of such Event of Default (a “Default Notice”), which Default Notice shall specify in reasonable detail the nature of the alleged Event of Default and the actions that must be reasonably taken by the breaching Party to cure same. The breaching Party shall have a period of thirty (30) days’ following receipt of the Default Notice (the “Grace Period”) to cure such Event of Default, and no actions shall be taken, or remedies sought or obtained, by the non-breaching Party as a result of such Event of Default unless the Grace Period has expired without such Event of Default having been cured. Notwithstanding the foregoing, if the Event of Default is of a nature that cannot be reasonably cured within thirty (30) days, then provided the defaulting Party commences such cure within said thirty (30) day period and thereafter diligently pursues such cure, the Grace Period shall be extended as reasonably necessary to allow such cure.

 

e.     In the case of an Event of Default by Licensee which is not cured within the applicable Grace Period, Licensor shall have the right, as its sole recourse and remedy against Licensee (but without limiting the indemnity provisions), to terminate this Agreement by written notice to Licensee and to recover all Royalty fees and Sublicensing Fees (including the Minimum Payments, if applicable) due through the termination hereof, and Licensor shall be entitled to enforce the termination provisions.

 

 
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f.     In the case of an Event of Default by Licensor which is not cured within the applicable Grace Period, Licensee shall have the right, as its sole recourse and remedies against Licensor (but without limiting the indemnity provisions), to (i) terminate this Agreement by written notice to Licensor and to recover all damages incurred by Licensee as a result thereof, or (ii) keep this Agreement in effect in accordance with its terms, recover damages incurred by Licensee as a result of Licensor’s default, and seek and obtain injunctive and other equitable relief (including specific performance) as appropriate in order for Licensee to receive the benefits of this Agreement. The foregoing remedies shall, as applicable and appropriate, be cumulative and not exclusive.

 

14.          Obligations and Rights Upon Termination.

 

a.     Upon termination of this Agreement for any reason, Licensee shall:

 

i.     Use commercially reasonable efforts to promptly return to Licensor all technical writings, business writings, materials, samples, data, drafts, proposals, sales information, business information and all other materials transferred and created during the Term of this Agreement, retaining a confidential copy of this Agreement (and such materials shall be returned on an “AS-IS” basis without any representation or warranty as to the accuracy or usefulness thereof);

 

ii.     Immediately stop all business, sales, marketing, publication, public disclosure, research and development on technology within the claims of the then-valid Patents;     

 

iii.     Notwithstanding anything to the contrary contained elsewhere in this Agreement, have the right to continue any then-current customer agreements and Sublicense Agreements associated with the Intellectual Property for the remaining terms of such agreements in accordance with the terms of this Agreement as if this Agreement had not been terminated, with all proceeds thereof being deemed either Net Sales Revenue and with Licensor being entitled to a Royalty fee therein or Sublicensing Fees, as applicable, in accordance with the terms of this Agreement; and,

 

iv.     Notwithstanding anything to the contrary contained elsewhere in this Agreement, have the right during the ninety (90) day period following termination of this Agreement to enter into customer agreements or Sublicense Agreements for all remaining inventory owned or controlled by Licensee associated with the Intellectual Property in accordance with the terms of this Agreement as if this Agreement had not been terminated, with all proceeds thereof being deemed either Net Sales Revenue and with Licensor being entitled to a Royalty fee therein or Sublicensing Fees, as applicable, in accordance with the terms of this Agreement.

 

b.     Upon termination of this Agreement, Licensor shall have no obligation to refund any payment or fee made to it or received by it under any provision of this Agreement, regardless of purpose unless there is a bona fide dispute between with the Parties with respect to such payments or fees.

 

 
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15.           Representations, Warranties and Covenants of Licensor. Each member of Licensor represents, warrants and covenants to Licensee as follows as of the Execution Date, the Effective Date and, if applicable, during the Term:

 

a.     Licensor is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization, is qualified to do business in all jurisdictions to which this License applies, and has all requisite power and authority to own, lease and operate its property and to carry on its business as now being conducted.

 

b.     Licensor has full power and authority to enter into, execute and deliver this Agreement and perform its obligations hereunder. This Agreement has been duly authorized by all necessary corporate action of Licensor. This Agreement has been duly executed and delivered by Licensor and, assuming this Agreement is duly executed and delivered by Licensee, constitutes a valid and legally binding obligation of Licensor enforceable against Licensor in accordance with its terms, subject to the effect of bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance and other similar laws relating to or affecting creditors’ rights generally, or the availability of equitable remedies.

 

c.     The execution and delivery by Licensor of this Agreement do not, and compliance by Licensor with the provisions of this Agreement will not, conflict with or result in a breach or default under any of the terms, conditions or provisions of any contract, agreement, arrangement or order of court to which it is a party or otherwise bound or violate any provision of law to which Licensor is subject.

 

d.     Licensor has obtained all authorizations, registrations, approvals and permits required by any governmental body or under any governmental legislation in connection with Licensor's entry into, and performance of, this Agreement.

 

e.     The Patents are properly filed with the appropriate Patent Office and are valid and enforceable, as indicated on the attached schedule. The Patents indicated on the attached schedule constitute all of the patent applications and patents relating to the Isan System (including, without limitation, all provisional applications, divisional applications, continuation applications and modifications). Licensor has the exclusive good, valid and marketable title to the Patents, Proprietary Property and Intellectual Property sufficient to convey and grant the License hereunder and to convey the rights and benefits of the Patents, Proprietary Property and Intellectual Property to Licensee on the terms contained herein without the need for further consent or approval of any party.

 

f.     There are no actual, outstanding or threatened claims against, claims of infringement with respect to, or challenges to, the Patents, Proprietary Property or Intellectual Property or the right of Licensor to use or to license the Patents, Proprietary Property or Intellectual Property to Licensee by any third parties, and to the best knowledge of Licensor there are no facts or circumstances existing as of the Effective Date or the Execution Date that would give rise to any such claim or challenge in the future.

 

g.     The exercise by Licensee of the rights granted hereunder will not infringe upon any intellectual property rights of any person, including, without limitation, patent rights, trademarks or service marks, nor give rise to the obligation of Licensee to pay any sums to any third party.

 

 
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h.     There is no pending or, to the best knowledge of Licensor, threatened action (or basis for any action) to which Licensor is a party or involving any of the Patents, Proprietary Property or Intellectual Property or which could materially affect Licensor's ability to execute and deliver this Agreement, to perform its obligations contemplated hereby, or which would have a material effect upon Licensee's ability to enjoy and retain the benefits of this Agreement during the Term.

 

i.     Licensor shall immediately notify Licensee in writing as to any circumstance that could result in the impairment, invalidation or termination of any of the Patents, Proprietary Property or Intellectual Property or the ability of Licensee to utilize the Patents, Proprietary Property or Intellectual Property as contemplated in this Agreement, including, without limitation, any claims that the Patents, Proprietary Property or Intellectual Property or any use thereof infringes upon the intellectual property rights of others. Licensor shall not voluntary undertake, consent to, or permit any actions or course of conduct by any party that would result in the impairment, invalidation or termination of the Patents, Proprietary Property or Intellectual Property rights licensed to Licensee hereunder.

 

j.     EXCEPT AS OTHERWISE EXPRESSLY SET FORTH IN THIS AGREEMENT, LICENSOR, ITS DIRECTORS, OFFICERS, EMPLOYEES, ATTORNEYS, AGENTS, CONSULTANTS AND AFFILIATES MAKE NO REPRESENTATIONS AND EXTEND NO WARRANTIES OF ANY KIND, EITHER EXPRESS OR IMPLIED, INCLUDING BUT NOT LIMITED TO WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, AND VALIDITY OF THE CLAIMS OF ANY PATENTS ON THE TECHNOLOGY ISSUED OR PENDING, OR FREEDOM OF A PRODUCT THAT EMBODIES TECHNOLOGY FROM INFRINGEMENT OF THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS, THE ABSENCE OF LATENT OR OTHER DEFECTS, WHETHER OR NOT DISCOVERABLE. IN NO EVENT SHALL LICENSOR, ITS TRUSTEES, DIRECTORS, OFFICERS, EMPLOYEES, AND AFFILIATES BE LIABLE FOR INCIDENTAL OR CONSEQUENTIAL DAMAGES OF ANY KIND, INCLUDING BUT NOT LIMITED TO ECONOMIC DAMAGE OR INJURY TO PROPERTY AND LOST PROFITS, WHETHER LICENSOR SHALL BE ADVISED, SHALL HAVE OTHER REASON TO KNOW, OR IN FACT SHALL KNOW OF THE POSSIBILITY OF THE FOREGOING. LICENSOR REPRESENTS AND WARRANTS IN RESPECT TO THE PATENTS, PROPRIETARY PROPERTY AND INTELLECTUAL PROPERTY THAT IT HAS LEGAL RIGHT TO EXTEND THE RIGHTS TO LICENSEE, AND THAT IT HAS NOT MADE AND WILL NOT MAKE ANY COMMITMENTS TO OTHERS INCONSISTENT WITH OR IN DEROGATION OF SUCH RIGHTS.

 

16.           Representations and Warranties of Licensee. Licensee represents and warrants to Licensor as follows:

 

a.     Licensee is a corporation or a limited liability company duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization and has all requisite power and authority to own, lease and operate its property and to carry on its business as now being conducted.

 

 
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b.     Licensee has full power and authority to enter into, execute and deliver this Agreement and perform its obligations hereunder. This Agreement has been duly authorized by all necessary corporate action of Licensee. This Agreement has been duly executed and delivered by Licensee and, assuming this Agreement is duly executed and delivered by Licensor, constitutes a valid and legally binding obligation of Licensee enforceable against Licensee in accordance with its terms, subject to the effect of bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance and other similar laws relating to or affecting creditors’ rights generally, or the availability of equitable remedies.

 

c.     The execution and delivery by Licensee of this Agreement do not, and compliance by Licensee with the provisions of this Agreement will not, conflict with or result in a breach or default under any of the terms, conditions or provisions of any contract, agreement, arrangement or order of court to which Licensee is a party or otherwise bound.

 

d.     EXCEPT AS OTHERWISE EXPRESSLY SET FORTH IN THIS AGREEMENT, LICENSEE, ITS DIRECTORS, OFFICERS, EMPLOYEES, ATTORNEYS, AGENTS, CONSULTANTS AND AFFILIATES MAKE NO REPRESENTATIONS AND EXTEND NO WARRANTIES OF ANY KIND, EITHER EXPRESS OR IMPLIED, INCLUDING BUT NOT LIMITED TO WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, AND VALIDITY OF THE CLAIMS OF ANY PATENTS ON THE TECHNOLOGY ISSUED OR PENDING, OR FREEDOM OF A PRODUCT THAT EMBODIES TECHNOLOGY FROM INFRINGEMENT OF THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS, THE ABSENCE OF LATENT OR OTHER DEFECTS, WHETHER OR NOT DISCOVERABLE. IN NO EVENT SHALL LICENSEE, ITS TRUSTEES, DIRECTORS, OFFICERS, EMPLOYEES, AND AFFILIATES BE LIABLE FOR INCIDENTAL OR CONSEQUENTIAL DAMAGES OF ANY KIND, INCLUDING BUT NOT LIMITED TO ECONOMIC DAMAGE OR INJURY TO PROPERTY AND LOST PROFITS, WHETHER LICENSEE SHALL BE ADVISED, SHALL HAVE OTHER REASON TO KNOW, OR IN FACT SHALL KNOW OF THE POSSIBILITY OF THE FOREGOING.

 

17.          Confidentiality. From time to time, so long as this Agreement should be in force or effect, Licensor and Licensee shall execute such non-disclosure agreements as the other Party may reasonably request from time-to-time in a form and substance reasonably agreed to by the Parties and in all cases on terms consistent with this Agreement. Notwithstanding anything contained in this Agreement to the contrary, Licensee shall not be liable for, and shall not be required to sign a non-disclosure agreement that prohibits or restricts, a disclosure of proprietary information of Licensor if the information so disclosed: (i) was in the public domain at the time of disclosure without breach of this Agreement; (ii) was known to or contained in the records of Licensee from a source other than Licensor at the time of disclosure by Licensor to Licensee and can be so demonstrated; (iii) was independently developed and is so demonstrated promptly upon receipt of the documentation and technology by Licensee; (iv) becomes known to Licensee from a source other than Licensor without breach of this Agreement by Licensee and can be so demonstrated; (v) must be disclosed pursuant to a contract or subcontract with a governmental agency in order to obtain/retain a procurement contract; (vi) was disclosed pursuant to court order, subpoena or as otherwise compelled by law; or (vii) was otherwise necessary or appropriate in connection with the furthering of Licensee’s business activities permitted by this License.

 

 
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18.           Indemnification.

 

a.     Licensor Indemnification. Licensor shall defend (with counsel reasonably acceptable to Licensee), indemnify and hold harmless Licensee and each of its officers, directors, employees, agents and affiliates, and each of their successors and assigns (collectively, the “Licensee Indemnified Parties”) from and against any damages, claims, lawsuits, causes of action, liabilities, costs, obligations and expenses (including reasonable attorneys’ fees and court costs) arising out of any breach of its representations or warranties or any claim or allegation (whether or not proven) by any third party that the Patents, Proprietary Property or Intellectual Property or Licensee’s use of the Patents, Proprietary Property or Intellectual Property pursuant to this Agreement, including, without limitation, the marketing, sale and/or distribution of the Licensed Products and the Licensed Processes in any Field of Use in the Territory, infringes upon or violates an intellectual property right or represents a misappropriation of a trade secret of a third party; provided, however, that: (i) Licensee shall have promptly provided Licensor with written notice thereof and reasonable cooperation, information, and assistance in connection therewith; (ii) Licensor shall have sole control and authority with respect to the defense, settlement, or compromise thereof (provided in all cases Licensor shall act reasonably in good faith and in the best interests of Licensee, and Licensor shall not take any actions or enter into any settlements or other arrangements that impose any obligations or liabilities, financial or otherwise, upon Licensee without Licensee's prior written consent); (iii) this indemnity shall not apply to the extent such damage, liability, cost or expense results solely from, or is caused solely by, an intentional tortuous act or the gross negligence of Licensee; and (iv) this indemnity shall not apply to the extent such damage, liability, cost or expense results solely from any modifications to the Intellectual Property, Licensed Products, and/or Licensed Processes made solely by Licensee, unless such modifications have received written approval by Licensor. Licensee shall have the right to be kept informed of the status and progress of all such actions undertaken by Licensor pursuant to this Section and to participate in any such actions.

 

b.     Licensee Indemnification. Licensee shall defend (with counsel reasonably acceptable to Licensor), indemnify and hold harmless Licensor and each of its officers, directors, employees, agents and affiliates, and each of their successors and assigns (collectively, the “Licensor Indemnified Parties”) from and against any damages, claims, lawsuits, causes of action, liabilities, costs, obligations and expenses (including reasonable attorneys’ fees and court costs) arising out of any breach of its representations or warranties or any claim or allegation by any third party relating to the commercial sale and/or use, clinical or otherwise, of the Licensed Products or Licensed Processes by Licensee, its sublicensees, or any customers of any of them in any manner whatsoever; provided, however, that: (i) Licensor shall have promptly provided Licensee with written notice thereof and reasonable cooperation, information, and assistance in connection therewith; (ii) Licensee shall have sole control and authority with respect to the defense, settlement, or compromise thereof (provided in all cases Licensee shall act reasonably in good faith and in the best interests of Licensor, and Licensee shall not take any actions or enter into any settlements or other arrangements that impose any obligations or liabilities, financial or otherwise, upon Licensor without Licensor's prior written consent); (iii) this indemnity shall not apply to the extent such damage, liability, cost or expense results solely from, or is caused solely by, an intentional tortuous act or the gross negligence of Licensor; and (iv) this indemnity shall not apply with respect to items covered by Licensor’s indemnity obligations to Licensee. Licensor shall have the right to be kept informed of the status and progress of all such actions undertaken by Licensee pursuant to this Section and to participate in any such actions.

 

 
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19.          Right of First Refusal. Each Party hereby grants the other Party first right of refusal to match any offer to purchase that Party’s right in the Intellectual Property. If a Party (the selling Party) receives an offer for the acquisition of that Party’s right in the Intellectual Property from a third party, it shall notify the other Party (the non-selling Party) of such third party offer, and it shall offer the other Party the same terms and conditions for such acquisition. If the non-selling Party determines not to acquire such rights in the Intellectual Property, or if the Parties are unable to complete such acquisition in good faith within ten (10) business days of the selling Party’s delivery of the terms and conditions to the non-selling Party, then the selling Party may pursue the sale to the third party. If the third party does not complete the acquisition, then the provisions in this Section will continue to repeat.

 

20.          General Provisions.

 

a.     Notices. All Notices, requests and other communications that a Party is required or elects to deliver shall be in writing and shall be delivered personally, or by facsimile, or by a recognized overnight courier service, to the other Party at its address set forth below or to such other address as such Party may designate by notice given pursuant to this Section:

 

If to Licensor:       BioLargo, Inc.

3500 W. Garry Ave.

Santa Ana, CA 92704 

Facsimile: (949) 625-9819

 

If to Licensee:      Clarion Water

3530 W. Garry Ave.

Santa Ana, CA 92704 

Facsimile: (714) 352-2302

 

All such notices, requests and other communications will: (i) if delivered personally to the address as provided in this Section, be deemed given upon delivery; (ii) if delivered by facsimile transmission to the facsimile number as provided for in this Section, be deemed given upon facsimile confirmation; and (iii) if delivered by messenger or courier to the address as provided in this Section, be deemed given on the earlier of the first business day following the date sent by such messenger or courier or upon receipt. A Party from time to time may change its address, facsimile number or other information for the purpose of notices to that Party by giving notice specifying such change to the other Parties hereto.

 

b.     Publicity. Except as is otherwise necessary or appropriate in connection with the furthering of Licensee’s business activities permitted by this Agreement, neither Party shall issue any public announcement regarding this Agreement, or which contains the name of the other Party, without giving prior reasonable notice to the other Party, and receiving written approval thereon which shall not be unreasonably withheld or delayed; provided, however, that (i) a Party may withhold its approval in its sole and absolute discretion and (ii) written approval from a Party shall not be required for any disclosures that are required or which counsel advises are required by applicable law, including without limitation Federal securities laws, in which instance, the announcing Party shall so notify the other Party as reasonably promptly as commercially possible.

 

 
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c.     Entire Agreement. This Agreement contains the sole and entire agreement and understanding of the Parties with respect to the entire subject matter of this Agreement, and any and all prior discussions, negotiations, commitments and understandings, whether oral or otherwise, related to the subject matter of this Agreement are hereby merged herein and shall be of no further force or effect.

 

d.     Waiver and Amendment. No provision of this Agreement may be waived unless in writing signed by all the Parties to this Agreement, and waiver of any one provision of this Agreement shall not be deemed to be a waiver of any other provision. This Agreement may be amended only by a written agreement executed by all the Parties to this Agreement.

 

e.     Severability. Whenever possible each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement shall be or become prohibited or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity without invalidating the remainder of such provision or the remaining provisions of this Agreement.

 

f.     Captions. The various captions of this Agreement are for reference only and shall not be considered or referred to in resolving questions of interpretation of this Agreement.

 

g.     Costs and Attorneys Fees. If any action, suit, arbitration or other proceeding is instituted to remedy, prevent or obtain relief from a default or breach by any Party under this Agreement, the prevailing Party shall be entitled to recover all of such Party’s reasonable attorneys’ fees incurred in each and every such action, suit, arbitration or other proceeding, including any and all appeals or petitions therefrom. 

 

h.     Rights Cumulative. Except as expressly provided to the contrary elsewhere in this Agreement, no right granted to the Parties under this Agreement on default or breach is intended to be in full or complete satisfaction of any damages arising out of such default or breach, and each and every right under this Agreement, or under any other document or instrument delivered hereunder, or allowed by law or equity, shall be cumulative and may be exercised from time to time.

 

i.     Judicial Interpretation. Should any provision of this Agreement require judicial interpretation, it is agreed that a court interpreting or construing the same shall not apply a presumption that the terms hereof shall be more strictly construed against any person by reason of the rule of construction that a document is to be construed more strictly against the person who itself or through its agent prepared the same, it being agreed that all Parties have participated in the preparation of this Agreement.

 

 
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j.     Force Majeure. If any Party to this Agreement is delayed in the performance of any of its obligations under this Agreement or is prevented from performing any such obligations due to causes or events beyond its control (financial inability excepted), including, without limitation, acts of God, fire, flood, war, terrorism, earthquake, strike or other labor problem, injunction or other legal restraint, present or future law, governmental order, rule or regulation, then such delay or nonperformance shall be excused and the time for performance thereof shall be extended to include the period of such delay or nonperformance.

 

k.     Assignment and Transfers. Neither Party may assign or delegate either this Agreement or any of its rights, interests, or obligations hereunder without the prior written approval of the other Party, except in the event of a merger, reorganization or sale of all or substantially all of a Party’s business, assets or equity. Subject to the foregoing, this Agreement shall be binding upon and shall inure to the benefit of the Parties hereto and their respective successors and permitted assigns.

 

l.     Counterparts. This Agreement may be executed in one or more counterparts, all of which shall be considered one and the same agreement and shall become effective when one or more counterparts have been signed by each of the Parties and delivered to the other Party, it being understood that all Parties need not sign the same counterpart.

 

m.     Qualification; Authority. Each individual executing this Agreement on behalf of a partnership, corporation, limited liability company or as trustee of a trust represents and warrants that he or she is duly authorized to execute and deliver this Agreement on behalf of such entity (and that no additional signatures on behalf of such entity are required in order for this Agreement to be binding). Upon request of either Party, the other Party agrees to deliver such documents reasonably necessary to evidence the foregoing.

 

n.     No Partnership. Nothing contained herein shall create or be deemed to have created a partnership or joint venture of any kind between the Parties, or the relationship of principal and agent between the Parties.

 

o.     Further Assurances. The Parties shall undertake such additional and further actions, and execute such additional documents and instruments, as may be reasonably necessary or appropriate to provide each Party with the intended benefits of this Agreement.