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, 2017.

 

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.)

 

14921 Chestnut St.

Westminster, CA 92683

(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, a smaller reporting company, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer     ☐                              Accelerated filer ☐

 

Non-accelerated filer       ☐                              Smaller reporting company ☒                              Emerging growth company 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

 

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 11, 2017 was 100,585,385 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 

21
       

Item 4

 

Controls and Procedures

32

PART II

 

Item 2

 

Unregistered Sales of Equity Securities and Use of Proceeds

33
       

Item 5

 

Other Information

34
       

Item 6

 

Exhibits

34
       
   

Signatures

 35
       
Exhibit Index   

 

 
i. 

Table of Contents
 

 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

BIOLARGO, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

AS OF DECEMBER 31, 2016 AND JUNE 30, 2017

 


   

DECEMBER

31, 2016

   

JUNE

30, 2017

(Unaudited)

 

Assets

 

Current assets:

               

Cash and cash equivalents

  $ 1,910,153     $ 433,539  

Accounts receivable

    67,994       78,105  

Inventories

    34,446       36,907  

Prepaid expenses and other current assets

    4,089       12,795  

Total current assets

    2,016,682       561,346  
                 

Equipment, net of depreciation

    59,315       50,336  

Other non-current assets, net of amortization

    36,729       31,269  

Total assets

  $ 2,112,726     $ 642,951  

Liabilities and stockholders’ deficit

 

Current liabilities:

               

Accounts payable and accrued expenses

  $ 200,103     $ 344,438  

Accrued officer bonus

    80,000        

Convertible notes payable

    560,000       4,830,097  

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

    (398,910 )     (2,108,435 )

Derivative warrant liability

    663,560       570,595  

Line of credit

    50,000       50,000  

Deposit

          50,000  

Total current liabilities

    1,154,753       3,736,695  

Long-term liabilities:

               

Convertible notes payable

    5,250,668       675,571  

Line of credit

          250,000  

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

    (3,522,497 )     (543,483 )

Total liabilities

    2,882,924       4,118,783  
                 

COMMITMENTS, CONTINGENCIES (Notes 8 and 9)

               
                 

STOCKHOLDERS’ DEFICIT:

               

Convertible Preferred Series A, $.00067 Par Value, 50,000,000 Shares Authorized, -0- Shares Issued and Outstanding, at December 31, 2016 and June 30, 2017.

           

Common stock, $.00067 Par Value, 200,000,000 Shares Authorized, 92,975,970 and 99,898,718 Shares Issued, at December 31, 2016 and June 30, 2017, respectively.

    62,179       66,885  

Additional paid-in capital

    90,609,774       92,533,290  

Accumulated deficit

    (91,915,426 )     (96,256,129 )

Accumulated other comprehensive loss

    (81,694 )     (97,680 )
                 

Total Biolargo stockholders’ deficit

    (1,325,167 )     (3,753,634 )

Non-controlling interest (Note 6)

    554,969       277,802  

Total stockholders’ deficit

    (770,198 )     (3,475,832 )

Total liabilities and stockholders’ deficit

  $ 2,112,726     $ 642,951  


See accompanying notes to unaudited consolidated financial statements.

 

 

BIOLARGO, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2016 AND 2017

(UNAUDITED)

 


   

THREE-MONTHS

   

SIX-MONTHS

 
   

JUNE

30, 2016

   

JUNE

30, 2017

   

JUNE

30, 2016

   

JUNE

30, 2017

 
                                 

Revenues

  $ 38,986     $ 99,978     $ 52,928     $ 145,995  

Cost of revenues

    (15,757 )     (73,399 )     (21,838 )     (95,929 )

Gross profit:

    23,229       26,579       31,090       50,066  
                                 

Selling, general and administrative expenses

    923,564       1,162,018       1,854,471       2,217,073  

Research and development

    329,968       324,280       681,018       715,616  

Amortization and depreciation

    2,845       6,515       5,575       14,439  

Total operating expenses:

    1,256,377       1,492,813       2,541,064       2,947,128  
                                 

Operating loss:

    (1,233,148 )     (1,466,234 )     (2,509,974 )     (2,897,062 )
                                 

Other (expense) income:

                               

Interest expense

    (478,525 )     (1,119,273 )     (884,850 )     (2,072,829 )

Change in fair value of derivative warrant liability

          56,352             321,872  

Grant income

    43,338       11,361       82,096       70,149  

Total other expense:

    (435,187 )     (1,051,560 )     (802,754 )     (1,680,808 )
                                 

Net loss

    (1,668,335 )     (2,517,794 )     (3,312,728 )     (4,577,870 )
                                 

Net loss attributable to noncontrolling interest

    (54,859 )     (173,911 )     (121,831 )     (237,167 )
                                 

Net loss attributable to common shareholders

  $ (1,613,476 )   $ (2,343,883 )   $ (3,190,897 )   $ (4,340,703 )
                                 

Net loss per share attributable to common shareholders:

                               

Loss per share attributable to shareholders – basic and diluted

  $ (0.02 )   $ (0.03 )   $ (0.04 )   $ (0.05 )

Weighted average number of common shares outstanding:

    86,419,573       97,770,161       86,133,395       94,718,273  
                                 

Comprehensive loss:

                               

Net loss

  $ (1,668,335 )   $ (2,517,794 )   $ (3,312,728 )   $ (4,577,870 )

Foreign currency translation

    (606 )     32,150       (9,924 )     (15,986 )

Comprehensive loss

    (1,668,941 )     (2,485,644 )     (3,322,652 )     (4,593,856 )
                                 

Comprehensive loss attributable to noncontrolling interest

    (54,859 )     (173,911 )     (121,831 )     (237,167 )

Comprehensive loss attributable to common stockholders

  $ (1,614,082 )   $ (2,311,733 )   $ (3,200,821 )   $ (4,356,689 )

 See accompanying notes to unaudited consolidated financial statements.

 

 

BIOLARGO, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (DEFICIT)
FOR THE SIX MONTHS ENDED JUNE 30, 2017

(UNAUDITED)

 


 

 

See accompanying notes to unaudited consolidated financial statements.


   

Common stock

   

Additional

paid-in

   

Accumulated

   

Accumulated

other comprehensive

   

Non-

controlling

         
   

Shares

   

Amount

   

capital

   

deficit

   

loss

   

interest

   

Total

 

Balance, December 31, 2016

    92,975,970     $ 62,179     $ 90,609,774     $ (91,915,426 )   $ (81,694 )   $ 554,969     $ (770,198 )
                                                         

Vendors and interest

    2,491,704       1,734       502,259                         504,263  

Conversion of notes

    1,419,107       952       529,048                         530,000  

Exercise of warrants

    510,000       343       152,657                         153,000  

Exercise of stock options

    2,501,937       1,677       (1,677 )                        

Stock option compensation expense

                515,959                         515,959  

Fair value of warrants and conversion feature issued as discount on convertible notes payable

                225,000                         225,000  

Purchase of Clyra shares

                                  (40,000 )     (40,000 )

Net loss

                      (4,340,703 )           (237,167 )     (4,577,870 )

Foreign currency translation

                            (15,986 )           (15,986 )
                                                         

Balance, June 30, 2017

    99,898,718     $ 66,885     $ 92,533,290     $ (96,256,129 )   $ (97,680 )   $ 277,802     $ (3,475,832 )

 

 

BIOLARGO, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR
THE SIX MONTHS ENDED JUNE 30, 2016 AND 2017

(UNAUDITED)

 


   

JUNE

30, 2016

   

JUNE

30, 2017

 

Cash flows from operating activities

               

Net loss

  $ (3,312,728 )   $ (4,577,870 )

Adjustments to reconcile net loss to net cash used in operating activities:

               

Stock option compensation expense

    491,440       515,959  

Common stock issued for interest and in lieu of salary to officers and fees for services from consultants

    489,107       504,263  

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

    668,257       1,723,396  

Change in derivative liability

          (321,872 )

Amortization and depreciation expense

    5,575       14,439  

Bad debt expense

          15,000  

Changes in assets and liabilities:

               

Accounts receivable

    (5,275 )     (25,111 )

Inventories

    13,555       (2,461 )

Prepaid expenses and other current assets

    5,247       (8,706 )

Accounts payable and accrued expenses

    (13,839 )     144,335  

Officer bonus

          (80,000 )

Deposits

    (35,000 )     50,000  

Net cash used in operating activities

    (1,693,661 )     (2,048,628 )

Cash flows from investing activities

               

Equipment purchase

    (5,500 )      

Net cash used in investing activities

    (5,500 )      

Cash flows from financing activities

               

Proceeds from convertible notes

    535,000       225,000  

Proceeds from line of credit

    300,000       250,000  

Purchase of Clyra Shares

          (40,000 )

Proceeds from exercise of warrants

          153,000  

Net cash provided by financing activities

    835,000       588,000  
                 

Effect of foreign currency translation

    (9,924 )     (15,986 )

Net change in cash and cash equivalents

    (874,085 )     (1,476,614 )
                 

Cash and cash equivalents at beginning of period

    1,763,114       1,910,153  

Cash and equivalents at end of period

  $ 889,029     $ 433,539  

Supplemental disclosures of cash flow information

               

Cash paid during the year for:

               

Interest

  $     $ 4,487  

Income taxes

  $ 4,000     $ 5,350  
                 

Non-cash investing and financing activities

               

Conversion of accounts payable into stock options

  $ 183,159     $ 243,824  

Fair value of warrants issued in conjunction with convertible notes payable

  $ 772,405     $ 225,000  

Settlement of accounts payable and interest into shares of common stock

  $ 489,107     $ 504,263  

Convertible notes into shares of common stock

  $     $ 530,000  

See accompanying notes to unaudited consolidated financial statements

 

 

BIOLARGO, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

 

Note 1. Business and Organization

 

Outlook

 

The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of our business. As reflected in the accompanying financial statements, for the six months ended June 30, 2017 we had a net loss of $4,577,870, and used $2,048,628 cash in operations, and at June 30, 2017, had negative working capital of $3,175,349, current assets of $561,346, and an accumulated stockholders’ deficit of $96,256,129. The foregoing factors raise substantial doubt about our ability to continue as a going concern. Ultimately, our ability to continue as a going concern is dependent upon our ability to attract significant new sources of capital, attain a reasonable threshold of operating efficiencies and achieve profitable operations by licensing or otherwise commercializing products incorporating our technologies. The 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 balance was $433,539 at June 30, 2017. Our cash decreased over $1,400,000 from December 31, 2016 to June 30, 2017. Although our revenues in the six months ended June 30, 2017 increased almost three-fold from the same period in 2016, they are not sufficient to fund our operations and our sales must increase substantially before they will be. At times in the past we 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 continue 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. We continue to raise money through private securities offerings for the foreseeable future. Subsequent to June 30, 2017, we have received over $800,000 of investments (see Note 9.)

 

As of June 30, 2017, we had $5,805,668 in principal amounts due on various debt obligations (see Note 3). Of that amount, $4,830,097 are convertible at our option into common stock at maturity. Additionally, as of June 30, 2017, we had $344,438 of accounts payable and accrued expenses (see Note 6).

 

The unaudited consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and pursuant to Rule 8-03 of Regulation S-X under the Securities Act of 1933, as amended. 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. For some of our activities, we are still operating in the early stages of the sales and distribution process, and therefore our operating results for the six months ended June 30, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017, or for any other period. These unaudited 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, 2016 filed with the Securities and Exchange Commission (the “SEC”) on March 30, 2017.

 

We operate six wholly-owned subsidiaries: BioLargo Life Technologies, Inc., organized under the laws of the State of California in 2006, Odor-No-More, Inc., organized under the laws of the State of California in 2009, BioLargo Water USA, Inc., organized under the laws of the State of California in 2013, BioLargo Water, Inc., organized under the laws of Canada in 2014, BioLargo Maritime Solutions, Inc. organized under the laws of the State of California in 2016, and BioLargo Development Corp., organized under the laws of the State of California in 2016. Additionally, we own a controlling ownership interest in Clyra Medical Technologies, Inc., organized under the laws of the State of California in 2012.

 

 

BIOLARGO, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Note 2. Summary of Significant Accounting Policies

 

Principles of Consolidation

 

The consolidated financial statements include the accounts of the Company and its majority owned subsidiaries. All intercompany accounts and transactions have been eliminated.

 

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 compensation and financing transactions, uncollectible accounts receivable, asset impairment and amortization, and taxes, among others.

 

The methods, estimates and judgments we use in applying these most critical accounting policies have a significant impact on the results of our financial statements.  

 

Share-based 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 fully vested 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. The issuance of stock warrants or options to non-employees that vest over time are revalued each reporting period until vested to determine the amount to be recorded as an expense in the respective period. As the warrants or options vest, they are valued on each vesting date and an adjustment is recorded for the difference between the value already recorded and the then current value on the date of vesting.

 

Warrants

 

The Unit Offerings of our convertible promissory note and a Series A stock purchase warrant are accounted for under the fair value and relative fair value method.

 

The warrant is first analyzed per its terms as to whether it has derivative features or not. If the warrant is determined to be a derivative, then it is measured at fair value using the Black Scholes Option Model, and recorded as a liability on the balance sheet. The warrant is measured again at its then current fair value at each subsequent reporting dates (it is “marked-to-market”).

 

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

 

The convertible note is recorded at its fair value, limited to a relative fair value based upon the percentage of its fair value to the total fair value including the fair value of the warrant. Further, the convertible promissory note is examined for any intrinsic beneficial conversion feature (“BCF”) which the effective convertible price of the note is less than the closing stock price on date of issuance. The adjusted BCF value is accounted for as equity.

 

The warrant and BCF fair values are also recorded as a discount to the convertible promissory notes. The equity features of the convertible promissory notes resulted in a discount to the convertible notes that is equal to the proceeds received.

 

 

BIOLARGO, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

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.

 

Foreign Currency

 

The Company has designated the functional currency of Biolargo Water, Inc., our Canadian subsidiary, to be the Canadian dollar. Therefore, translation gains and losses resulting from differences in exchange rates are recorded in accumulated other comprehensive income.

 

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.

 

Government Grants

 

We have been awarded grants from the Canadian National Research Institute – Industrial Research Assistance Program (NRC-IRAP) and the National Science and Engineering Research Council of Canada (NSERC). The government grants received are considered other income and are included in our consolidated statements of operations. We received our first grant in 2015 and have been awarded over thirty grants totaling approximately $1,100,000. Some of the funds from these grants are given directly to third parties (such as the University of Alberta) to support research on our technology. The grants have terms generally ranging between six and eighteen months and support a majority, but not all, of the related research budget costs. This cooperative research allows us to utilize (i) a depth of resources and talent to accomplish highly skilled work, (ii) financial aid to support research and development costs, (iii) independent and credible validation of our technical claims.

  

The grants provide for (i) recurring monthly amounts and (ii) reimbursement of costs for research talent for which we invoice to request payment and (iii) ancillary cost reimbursement for research talent travel related costs. All awarded grants have specific requirements on how the money is spent, typically to employ researchers. None of the funds may be used for general administrative expenses or overhead in the United States. These grants have substantially increased our level of research and development activities in Canada and the development of our AOS filter. We continue to apply for Canadian government and agency grants to fund research and development activities. Not all of our grant applications have been awarded, and no assurance can be made that any pending grant application, or any future grant applications, will be awarded.

 

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 three and six months ended June 30, 2016 and 2017, 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.

 

 

BIOLARGO, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Concentrations of Credit Risk

 

All highly liquid investments with original maturities of three months or less or money market accounts held at financial institutions are considered to be cash. Substantially all of the cash is placed with one financial institution. At June 30, 2017 and December 31, 2016, the year the cash accounts are exposed to credit loss for amounts in excess of insured limits of $250,000 in the event of non-performance by the institution, however, it is not anticipated that there will be non-performance. At June 30, 2017 and December 31, 2016, the Company had cash balances in excess of federally insured limits in the amount of approximately $183,539 and $1,660,153, respectively.

 

Allowance for uncollectible receivables

 

Management evaluates credit quality by evaluating the exposure to individual counterparties, and, where warranted, management also considers the credit rating or financial position, operating results and/or payment history of the counterparty. Management establishes an allowance for amounts for which collection is considered doubtful. Adjustments to previous assessments are recognized in income in the period in which they are determined. At June 30, 2017, the allowance for uncollected receivables was $15,000.

 

Recent Accounting Pronouncements

 

In April 2016, the FASB issued ASU 2016-10, “Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing”. The amendments in this Update affect the guidance in Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606), which we are required to apply for annual periods beginning after December 15, 2017. Although management is still evaluating the potential impact of the adoption of this standard, its preliminary analysis is that the new guidelines currently will not substantially impact our revenue presentation.

 

In March 2016, the FASB issued Accounting Standards Update (ASU) No. 2016-09, Improvements to Employee Share-Based Payment Accounting, which simplifies several aspects of the accounting for share-based award transactions and adds two practical expedients for nonpublic entities. The new standards are effective for annual periods beginning after December 15, 2017. An entity that elects early adoption must adopt all the amendments in the same period. The Company is currently evaluating the impact of the pending adoption of the ASU on our consolidated financial statements.

 

In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases. The new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. Although management is still evaluating the potential impact of the adoption of this standard, its preliminary analysis is that the new guidelines currently will not materially impact our balance sheet presentation.

 

 

BIOLARGO, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

  

Note 3. Convertible Notes Payable and Lines of Credit


   

DECEMBER

31, 2016

   

JUNE

30, 2017

 
                 

Current liabilities:

               

Line of credit, matures December 1, 2017

  $ 50,000     $ 50,000  
                 

Convertible notes payable

               

One-Year Convertible notes, mature July 8, 2017

  $ 280,000     $  

One-Year Convertible notes, mature December 30, 2017

    280,000       280,000  

Convertible notes, mature June 1, 2018*

          4,550,097  

Total convertible notes payable

  $ 560,000     $ 4,830,097  
                 

Long-term liabilities:

               

Clyra Line of credit, matures March 31, 2019

  $     $ 250,000  
                 

Convertible notes payable, net of current portion

               

Convertible notes, mature June 1, 2018*

  $ 4,800,097     $  

Convertible notes, mature September 17, 2019

    283,571       283,571  

Convertible notes, mature December 31, 2019

    167,000       292,000  

Convertible notes, mature June 20, 2020

          100,000  

Total convertible notes payable , net of current portion

  $ 5,250,668     $ 675,571  
                 

Total

  $ 5,860,668     $ 5,805,668  

 

 * The convertible notes that mature June 1, 2018, were considered “long-term” liabilities as of December 31, 2016, and “current” liabilities (due within one year) as of June 30, 2017. As such, those same liabilities are in both the “long-term” and “current” liabilities section in the above table.

 

For the three and six months ended June 30, 2016, we recorded $478,525 and $884,850 and for the three and six months ended June 30, 2017, we recorded $1,119,273 and $2,072,829 of interest expense related to the amortization of our discount on our convertible notes payable and interest from our convertible notes and lines of credit.

 

Line of Credit, matures December 1, 2017

 

On June 6, 2016, we received $300,000 pursuant to a line of credit, accruing interest at a rate of 18% per annum, for which we have pledged our inventory and accounts receivable as collateral. The line of credit may be repaid following nine-months from the date of issuance or at the maturity date December 1, 2017.

 

Each investor, for no additional consideration, received a warrant to purchase our common stock. (See Note 5.) The warrant allows for the purchase of the number of common shares equal to the investment amount (e.g., one warrant share for each dollar invested).

 

On September 17, 2016, investors holding $250,000 of the line of credit converted their line of credit into convertible promissory notes and stock purchase warrants on the same terms and notes issued in the 2015 Unit Offering.

 

As of December 31, 2016, and June 30, 2017, $50,000 remains outstanding on this line of credit.

 

 

BIOLARGO, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

One-Year Convertible Notes, mature July 8, 2017

 

On July 8, 2016, we received $250,000 and issued convertible promissory notes (convertible at $0.45 per share) with a maturity date of July 8, 2017 to two accredited investors’ in the aggregate principal amount of $280,000. Interest is charged upon issuance at 3% per annum. We issued these investors stock purchase warrants to purchase an aggregate 400,000 shares of our common stock exercisable at $0.65 per share, which expire five years from the date of grant. (See Note 5.)

 

On January 13, 2017, the holders of these notes exercised their right to convert their notes in aggregate principal amount of $280,000 into 640,889 shares of our common stock.

 

One-Year Convertible Notes, mature December 30, 2017

 

On December 30, 2016, we received $250,000 and issued convertible promissory notes (convertible at $0.57 per share) with a maturity date of December 30, 2017 to two accredited investors, in the aggregate principal amount of $280,000. Interest is charged upon issuance at 3% per annum. We also issued these investors stock purchase warrants to purchase an aggregate 400,000 shares of our common stock exercisable at $0.75 per share, which expire five years from the date of grant. (See Note 5.)

 

Subsequent to June 30, 2017, the conversion price of these notes were reduced, and the holders exercised their right to convert the notes. (See Note 9.)

 

Convertible Notes, mature June 1, 2018 (2015 Unit Offering)

 

On January 15, 2015, we commenced a private securities offering of “units”, each Unit consisting of a convertible promissory note and Series A stock purchase warrant (“2015 Unit Offering”), which was closed on September 16, 2016. The price and availability of the Units were set forth in five “Pricing Supplements” issued from time-to-time. Each note issued is convertible into the Company’s common stock at the Unit price set forth in the particular pricing supplement, and matures June 1, 2018.

 

Interest due may be paid quarterly in cash or shares of common stock; all interest due thus far has been paid in shares of common stock. If paid by the issuance of common stock, interest is paid at a conversion price equal to the average closing price of the Company’s common stock over the 20 trading days prior to the interest payment due date. The principal amount of the note may be paid by the issuance of shares of common stock, or cash, upon maturity at the Company’s election. When paid in shares, the number of shares to be issued shall be calculated by dividing the principal amount invested by the Unit price, as it is established at the time of the original investment by the applicable Pricing Supplement. The notes may be converted at any time by the investor, at maturity by the Company, or by the Company prior to maturity, so long as all of the following conditions are met: (i) the shares issued as payment are registered with the SEC, (ii) the Company’s common stock closes for ten consecutive trading days at or above three times the Unit price. On June 15, 2017, a registration statement registering the shares issuable upon conversion was deemed effective by the SEC.

 

Each investor, for no additional consideration, received a Series A stock purchase warrant. (See Note 5).

 

As of June 30, 2017, the outstanding balance for notes issued in the 2015 Unit Offering, maturing June 1, 2018 is as follows:

 

Unit/Conversion

Price

   

Warrant

Exercise Price

   

Aggregate

 
$ 0.25     $ 0.40     $ 1,652,384  
$ 0.35     $ 0.45       1,751,046  
$ 0.55     $ 0.70       1,146,667  
                $ 4,550,097  

 

 

BIOLARGO, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

  

During the six months ended June 30, 2017, investors elected to convert an aggregate $250,000 principal amount promissory notes issued in our 2015 Unit Offering and accrued interest into 406,789 shares of our common stock.

 

During the six months ended June 30, 2016, we received $535,000, and issued unsecured convertible promissory notes with maturity dates of June 1, 2018, which accrue interest at the rate of 12% per annum.

 

Clyra Line of Credit, matures March 31, 2019

 

On March 31, 2017, our subsidiary Clyra Medical Technologies, Inc., of which we hold 54% of the outstanding stock, obtained a $250,000 line of credit from Sanatio Capital LLC, accruing interest at a rate of 10% per annum and a 5% original issue discount. The line of credit may be repaid at the maturity date March 31, 2019. Clyra received $175,000 of the line of credit in the three months ended March 31, 2017. Subsequent to March 31, 2017, Clyra received the remaining $75,000. Subsequent to June 30, 2017, Sanatio and Clyra agreed to convert the line of credit to equity at the same price as offered to Clyra investors. (See Note 9).

 

Convertible Notes, mature September 17, 2019

 

On September 17, 2016, investors in the line of credit (see “Line of Credit, matures December 1, 2017,” above), converted an aggregate principal amount of $250,000 plus accrued interest of $33,571 promissory notes convertible at 55 cents per share. Other than the maturity date of September 17, 2019, these notes contain the same terms as the notes issued in the 2015 Unit Offering. Our common stock closed at $0.70 on September 17, 2016. In addition to the convertible promissory note, the investors received a Series A stock purchase warrant to purchase an aggregate 515,583 shares of our common stock at an exercise price of $0.70 per share. (See Note 5.)

 

Convertible Notes, mature December 31, 2019 (Winter 2016 Unit Offering)

 

On December 27, 2016, we commenced a private securities offering (titled the “Winter 2016 Unit Offering”) which offered the sale of $600,000 of “Units,” each Unit consisting of a convertible promissory note and stock purchase warrant. The promissory notes issued to investors were convertible at $0.57 cents per share, a discount to the market price of our stock on that date of $0.86, mature December 31, 2019, and bear interest at the rate of 12% per annum on the amount invested. Any interest due will be paid quarterly in arrears in cash or shares of common stock. If paid by the issuance of common stock, interest is paid at a conversion price equal to the average closing price of the Company’s common stock over the 20 trading days prior to the interest payment due date. The principal amount of the note may be paid by the issuance of shares of common stock, or cash, upon maturity at the Company’s election.

 

When paid in shares, the number of shares to be issued shall be calculated by dividing the principal amount invested by the $0.57 conversion price. Promissory notes may be converted at any time by the investor, at maturity by the Company, or by the Company prior to maturity, so long as the following conditions are met: (i) the Shares issued as payment are registered with the SEC; and (ii) the Company’s common stock closes for ten consecutive trading days at or above three times the Unit price. In addition to the convertible promissory note, each investor received a warrant allowing for the purchase of the number of shares of BioLargo common stock equal to the investment amount divided by $0.57 (e.g., one warrant share for each share of common stock which the investor is eligible to receive through conversion of his original convertible note). The exercise price of the warrant is $0.70 per share of common stock and expire on December 31, 2021 (see Note 5). The Company may “call” the warrants, requiring the investor to exercise their warrants within 30 days or forever lose the rights to do so, only if the following conditions have been met: (i) the underlying Shares are registered with the SEC and (ii) the Company’s common stock closes for 10 consecutive trading days at or above two times the exercise price. The shares underlying the warrants contain “piggy back” registration rights for any registrations subsequent to the Form S-1 filed January 24, 2017.

 

Subsequent to December 31, 2016, and prior to the offering’s termination on January 13, 2017, we received $125,000 in investments from three accredited investors, and issued warrants to purchase 219,298 shares of our common stock. From inception of the offering through its termination, we received $292,000 from six investors, issued convertible notes in the aggregate of $292,000, and issued warrants to purchase 512,281 shares of our common stock.

 

 

BIOLARGO, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Convertible Notes, mature June 20, 2020 (Summer 2017 Unit Offering)

 

On May 24, 2017, we commenced a private securities offering (titled the “Summer 2017 Unit Offering”) which offered the sale of $1,500,000 of “Units,” each Unit consisting of a convertible promissory note and stock purchase warrant. The promissory notes issued to investors are convertible at $0.42 cents per share, mature June 20, 2020, and bear interest at the rate of 12% per annum on the amount invested. Any interest due will be paid quarterly in arrears in cash or shares of common stock. If paid by the issuance of common stock, interest is paid at a conversion price equal to the average closing price of the Company’s common stock over the 20 trading days prior to the interest payment due date. The principal amount of the note may be paid by the issuance of shares of common stock, or cash, upon maturity at the Company’s election.

 

When paid in shares, the number of shares to be issued shall be calculated by dividing the principal amount invested by the $0.42 conversion price. Promissory notes may be converted at any time by the investor, at maturity by the Company, or by the Company prior to maturity, so long as the following conditions are met: (i) the Shares issued as payment are registered with the SEC; and (ii) the Company’s common stock closes for ten consecutive trading days at or above three times the Unit price. In addition to the convertible promissory note, each investor received a warrant allowing for the purchase of the number of shares of BioLargo common stock equal to the investment amount divided by $0.42 (e.g., one warrant share for each share of common stock which the investor is eligible to receive through conversion of his original convertible note). The exercise price of the warrant is $0.65 per share of common stock and expire on June 20, 2022 (see Note 5). The Company may “call” the warrants, requiring the investor to exercise their warrants within 30 days or forever lose the rights to do so, only if the following conditions have been met: (i) the underlying Shares are registered with the SEC and (ii) the Company’s common stock closes for 10 consecutive trading days at or above two times the exercise price.

 

Note 4. Share-Based Compensation

 

Common Stock

 

On May 2, 2017, pursuant to an employment agreement with the Company’s president, Dennis Calvert (see Note 9, “Calvert Employment Agreement”), we issued Mr. Calvert 1,500,000 shares of common stock. The shares are subject to a “lock-up agreement” whereby the shares remain unvested unless and until the earlier of (i) a sale of the Company, (ii) the successful commercialization of the Company’s products or technologies as demonstrated by its receipt of at least $3,000,000 in cash, or the recognition of $3,000,000 in revenue, over a 12-month period from the sale of products and/or the license of technology, and (iii) the Company’s breach of the employment agreement resulting in his termination. The Company will expense the fair value of the stock if and when it is probable that any of the conditions above are met.

 

Stock options

 

During the three and six months ended June 30, 2016, we recorded an aggregate $189,601 and $491,440, and during the three and six months ended June 30, 2017, we recorded an aggregate $235,671 and $515,959, in selling, general and administrative expense related to the issuance of stock options. We issued options through our 2007 Equity Incentive Plan and outside of our 2007 Equity Incentive Plan.

 

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 Board’s 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 CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

On June 19, 2017, the date of our annual stockholders’ meeting, we recorded the issuance of options to purchase an aggregate 40,000 shares of our common stock to the non-employee members of our Board of Directors, pursuant to the terms of the 2007 Equity Plan which calls for an annual automatic issuance. The exercise price of $0.43 equals the price of our common stock on the grant date. The fair value of these options totaled $15,600 and was recorded as selling, general and administrative expense.

 

On February 10, 2017, we extended our engagement agreement with our Chief Financial Officer. The sole consideration for the one-year extension was the issuance of an option to purchase 300,000 shares of our common stock, at an exercise price of $0.69 per share which was equal to the closing price of our common stock on the date of grant. The option expires February 10, 2027, and vests over the term of the engagement with 125,000 shares having vested as of February 10, 2017, and the remaining shares to vest 25,000 shares monthly beginning March 1, 2017, and each month thereafter, so long as his agreement is in full force and effect. The fair value of the option totaled $207,000, and during the three and six months ended June 30, 2017, we recorded $51,750 and $155,250 of selling, general and administrative expense on our statement of operations. The balance will vest monthly through September 30, 2017.

 

On June 20, 2016, we recorded the issuance of options to purchase an aggregate 40,000 shares of our common stock to the non-employee members of our Board of Directors, pursuant to the terms of the 2007 Equity Plan which calls for an annual automatic issuance. The exercise price of $0.45 equals the price of our common stock on the grant date. The fair value of these options totaled $18,000 and was recorded as selling, general and administrative expense.

 

On March 21, 2016, our Board of Directors extended by five years the expiration of options to purchase 307,777 shares of our common stock issued to our Board of Directors and vendors in March 2011. The options were originally issued in exchange for unpaid obligations and now expire on March 21, 2021. The weighted-average fair value of the options resulted in additional $119,971 of selling, general and administrative expenses.

 

Activity for our stock options under the 2007 Plan for the six-months ended June 30, 2016 and 2017 is as follows:

 

                             

Weighted

 

Balance, June 30, 2016:

                           

Average

 
   

Options

   

Shares

   

Exercise

   

Price per

 
   

Outstanding

   

Available

   

Price per share

   

share

 

Balances as of December 31, 2015

    10,241,086       1,758,914     $0.23 1.89     $ 0.44  

Granted

    40,000       (40,000

)

    0.45         0.45  

Expired

                         

Balance, June 30, 2016

    10,281,086       1,718,914     $0.23 1.89     $ 0.44  

 

                             

Weighted

 
                             

Average

 

Balance, June 30, 2017:

 

Options

   

Shares

   

Exercise

   

Price per

 
   

Outstanding

   

Available

   

Price per share

   

share

 

Balances as of December 31, 2016

    9,916,586       1,981,414     $0.23 1.89     $ 0.44  

Granted

    340,000       (340,000

)

   0.39 0.69       0.65  

Exercised

                         

Balance, June 30, 2017

    10,256,586       1,641,414     $0.23 1.89     $ 0.44  

 

 

BIOLARGO, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED) 

 

Options issued Outside of the 2007 Equity Incentive Plan

 

During the three and six-months ended June 30, 2017, we issued options to purchase 237,353 and 820,879 shares of our common stock at exercise prices ranging between $0.43 – $0.67 per share to vendors and to members of our board of directors. The fair value of the options issued during the three and six months ended June 30, 2017, totaled $120,311 and $277,074 and is recorded as selling, general and administrative expenses.

 

On May 2, 2017, pursuant to his employment agreement, we granted to Mr. Calvert, an option (the “Option”) to purchase 3,731,322 shares of the Company’s common stock. The Option shall be a non-qualified stock option, exercisable at $0.45 per share, which represents the market price of the Company’s common stock as of the date of the agreement, exercisable for ten years from the date of grant and vesting in equal increments on the anniversary of the agreement for five years. Notwithstanding the foregoing, any portion of the Option which has not yet vested shall be immediately vested in the event of, and prior to, a change of control, as defined in the Calvert Employment Agreement. The Option contains the other terms standard in option agreements issued by the Company, including provisions for a cashless exercise. The fair value of this option totaled $1,679,095 and will be amortized monthly through May 2, 2022. During the three months ended June 30, 2017, we recorded $27,985 of selling, general and administrative expense.

 

During the three and six months ended June 30, 2016, we issued options to purchase 220,554 and 484,077 shares of our common stock at exercise prices ranging between $0.33 – $0.45 per share to vendors and to members of our board of directors. During the three and six months ended June 30, 2016, the fair value of these options totaled $96,196 and $183,159 and is recorded as selling, general and administrative expenses.

 

The fair value of the options issued prior to 2016 that vested during the three and six-months ended June 30, 2016, was $75,405 and $170,310, and during the three and six months ended June 30, 2017, was $20,025 and $40,050.

 

Exercise of Stock Option 

 

On April 30, 2017, the Company’s president, Dennis Calvert, delivered a notice of exercise of 3,866,630 shares pursuant to his stock option agreement dated April 30, 2007. The exercise price was $0.18 per share, and the Company issued 2,501,937 shares, calculated by multiplying the difference between the market price of $0.51 and the exercise price of $0.18 with the number of shares exercised, and dividing that amount by the market price. No cash consideration was tendered with respect to the exercise. The remaining 3,866,629 shares available for purchase under the option agreement expired unexercised.

  

Pursuant to a “lock-up agreement” dated April 30, 2017, Mr. Calvert agreed to restrict the sales of the shares received until the earlier of (i) the consummation of a sale (in a single transaction or in a series of related transactions) of the Company by means of a sale of (a) a majority of the then outstanding common stock (whether by merger, consolidation, sale or transfer of common stock, reorganization, recapitalization or otherwise) or (b) all or substantially all of its assets; and (ii) the successful commercialization of the Company’s products or technologies as demonstrated by its receipt of at least $3,000,000 in cash, or the recognition of $3,000,000 in revenue, over a 12-month period from the sale of products and/or the license of technology; and (iii) the Company’s breach of the employment agreement between the Company and Calvert dated May 2, 2017 and resulting in Calvert’s termination.

 

Activity of our stock options issued outside of the 2007 Plan for the six-months ended June 30, 2016 and 2017 is as follows:

 

                     

Weighted

 

Balance, June 30, 2016:

                   

Average

 
   

Options

   

Exercise

   

Price per

 
   

Outstanding

   

Price per share

   

share

 

Balance, December 31, 2015

    19,394,975     $0.18 1.00     $ 0.40  

Granted

    484,077      0.33 0.45       0.38  

Exercised

    (60,000

)

    0.25         0.25  

Balance, June 30, 2016

    19,819,052     $0.18 1.00     $ 0.41  

 

 

BIOLARGO, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

                     

Weighted

 
                     

Average

 

Balance, June 30, 2017:

 

Options

   

Exercise

   

Price per

 
   

Outstanding

   

Price per share

   

share

 

Balance, December 31, 2016

    20,148,766     $0.18 1.00     $ 0.43  

Granted

    4,552,201      0.43 0.67     $ 0.47  

Expired

    (3,866,629

)

    0.18         0.18  

Exercised

    (3,866,630

)

    0.18         0.18  

Balance, June 30, 2017

    16,967,708     $0.18 1.00     $ 0.41  

 

 

We recognize employee 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-months ended June 30:

 

   

2016

   

2017

 
   

 

Non Plan

   

2007 Plan

   

Non Plan

   

2007 Plan

 

Risk free interest rate

   1.77 1.91%

 

   1.26 1.36%

 

   2.29 2.40%

 

   2.31 2.40%

 

Expected volatility

   641 645%

 

   311 315%

 

   578 601%

 

   578 601%

 

Expected dividend yield

                               

Forfeiture rate

                               

Expected life in years

    7         5         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 5. Warrants

 

We recorded $668,257 and $1,723,396 of interest expense related to the amortization of the discount on convertible notes, line of credit, deferred financing fees and for the extension of warrants set to expire during the six-months ended June 30, 2016 and 2017, respectively.

 

 

Warrants Issued Concurrently with the Summer 2017 Unit Offering

 

During the three months ended June 30, 2017, pursuant to the terms of our Summer 2017 Unit Offering (see Note 3), we issued warrants to purchase up to an aggregate 238,096 shares of our common stock at an exercise price of $0.65 per share. These warrants expire June 20, 2022. The relative fair value of these warrants resulted in $125,000 recorded as a discount on our convertible notes.

 

Warrants Issued Concurrently with the Winter 2016 Unit Offering

 

During the three months ended March 31, 2017, pursuant to the terms of our Winter 2016 Unit Offering (see Note 3), we issued warrants to purchase up to an aggregate 219,298 shares of our common stock at an exercise price of $0.70 per share. These warrants expire December 31, 2021. The relative fair value of these warrants resulted in $125,000 recorded as a discount on our convertible notes.

 

The Winter 2016 Unit Offering closed January 13, 2017, and in total we issued warrants to purchase up to an aggregate 512,281 shares of our common stock at an exercise price of $0.70 per share. 

 

 

BIOLARGO, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Warrants Issued Concurrently with One-Year Convertible Notes

 

On July 8, 2016, we issued warrants to purchase an aggregate 400,000 shares of our common stock. These warrants are initially exercisable at $0.65 per share and expire July 8, 2021. The fair value of warrants issued resulted in $160,000 discount on the one-year convertible note. The exercise price of the stock purchase warrant may be adjusted downward in the event we sell our common stock or issue warrants at a lower price, other than through our 2015 Unit Offering. On May 24, 2017, we initiated the Summer 2017 Unit Offering offering promissory notes convertible at $0.42 per share (see Note 3). Since these securities were sold at less than the exercise price of the July 8, 2016 warrants, the exercise price of the warrants were decreased from 65 to 42 cents per share, and the number of shares issuable under the warrant increased by 219,048 shares to a total of 619,048 shares. The warrants do not qualify for equity classification, therefore we recognize the warrants as a derivative liability. As a result, we are required to calculate the fair value at each reporting period and record the change.

 

On December 30, 2016 we issued warrants to purchase an aggregate 400,000 shares of our common stock. These warrants are initially exercisable at $0.75 per share and expire December 30, 2021. The stock price on the date of grant was $0.83. The fair value of warrants issued resulted in $280,000 discount on the one-year convertible note. The exercise price of the stock purchase warrant may be adjusted downward in the event we sell our common stock or issue warrants at a lower price, other than through our 2015 Unit Offering. On May 24, 2017, we initiated the Summer 2017 Unit Offering offering promissory notes convertible at $0.42 per share (see Note 3). Since these securities were sold at less than the exercise price of the December 30, 2016 warrants, the exercise price of the warrants were decreased from 75 to 42 cents per share, and the number of shares issuable under the warrant increased by 314,285 shares to a total of 714,285 shares. The warrants do not qualify for equity classification, therefore we recognize the warrants as a derivative liability. As a result, we are required to calculate the fair value at each reporting period and record the change.

 

The fair value of these warrants on June 30, 2017, totaled $570,595 and is recorded as a derivative liability on our balance sheet. The change in fair value for the three and six months ended June 30, 2017, resulted in other income of $56,352 and $321,872, respectively, recorded on our statement of operations. For the additional warrants issued when the exercise price decreased, we recognized $228,000 of additional interest expense.

  

2015 Unit Offering Warrants

 

During the six-months ended June 30, 2016, pursuant to the terms of our 2015 Unit Offering (see Note 3), we issued warrants to purchase up to an aggregate 1,528,571 shares of our common stock at an exercise price of $0.45 per share. These warrants were issued to investors and as commissions, and are set to expire June 1, 2020.

 

During the six-months ended June 30, 2016, the intrinsic and relative fair value of these warrants resulted in $535,000, respectively, recorded as a discount on our convertible notes on our consolidated balance sheets.

 

Warrants Issued Concurrently with Line of Credit

 

During the six-months ended June 30, 2016 we issued warrants to purchase an aggregate 300,000 shares of our common stock. These warrants are exercisable at $0.35 per share and expire June 2021. The relative fair value of warrants issued resulted in $237,405 discount on the line of credit.

 

Exercise of Warrants

 

During the six months ended June 30, 2017, we issued 510,000 shares of our common stock and in exchange we received proceeds totaling $153,000 from the exercise of our outstanding stock purchase warrants. Of the warrants exercised, 370,000 shares were exercised at $0.30 per share and 140,000 shares were exercised at $0.25 per share. No warrants were exercised in the six months ended June 30, 2016.

 

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

 

Balance, June 30, 2016

 

Number of

           
   

Shares

   

Price Range

 

Outstanding as of December 31, 2015

    13,779,438     $0.125 1.00  

Issued

    1,828,571       0.45    

Expired

    (183,545 )     0.55    

Outstanding as of June 30, 2016

    15,424,464     $0.125 1.00  

 

Balance, June 30, 2017

 

Number of

           
   

Shares

   

Price Range

 

Outstanding as of December 31, 2016

    20,035,114     $0.125 1.00  

Issued

    990,727     0.42 0.70  

Exercised

    (510,000 )    0.25 0.30  

Expired

             

Outstanding as of June 30, 2017

    20,515,841     $0.125 1.00  

 

  

BIOLARGO, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

The fair value of each award grant is estimated on the date of grant using the Black-Scholes option-pricing model. 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 for the six-months ended June 30:

 

   

2016

   

2017

 

Risk free interest rate

   1.26 1.36%

 

   1.83 1.93%

 

Expected volatility

   311 315%

 

   293 297%

 

Expected dividend yield

               

Forfeiture rate

               

Expected life in years

    5         5    

 

The risk-free interest rate is based on U.S Treasury yields in effect at the time of grant. Expected volatilities are based on historical volatility of our common stock.

 

Note 6. Accounts Payable and Accrued Expenses

 

Accounts payable and accrued expenses included the following:

 

   

December 31,

   

June 30,

 
   

2016

   

2017

 

Accounts payable and accrued expenses

  $ 22,231     $ 158,690  

Payroll tax liability

    137,500       137,500  

Accrued officer bonus

    80,000        

Accrued interest

    40,372       48,248  

Total accounts payable and accrued expenses

  $ 280,103     $ 344,438  

 

The payroll tax liability is the Company’s estimate of payroll taxes due on the past services of independent contractors. The Company is currently attempting to reduce the liability to approximately $5,000 through the IRS Voluntary Classification Settlement Program. 

 

On September 27, 2016, the board approved a $60,000 bonus for each of our Chief Executive and Chief Science Officers, $20,000 of which was paid to each in 2016. Each were paid the remaining $40,000 in January 2017.

 

During the six months ended June 30, 2016 and 2017, we issued 746,943 and 1,807,829 shares of common stock in lieu of fees for services provided by vendors, consultants and an officer, resulting in a grant date fair value of $275,232 and $168,022, respectively, and recorded in selling, general and administrative expense.

  

During the six months ended June 30, 2016 and 2017 we issued 546,157 and 683,875 shares of common stock resulting in a grant date fair value of $213,875 and $337,246, respectively. The shares were issued to settle our accrued interest liability, which is recorded as interest expense in our consolidated statements of operations. 

 

 

BIOLARGO, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Note 7. Noncontrolling 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 issued 1,500 shares of Clyra common stock to a three-member management team, 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.

 

On December 30, 2015, Clyra sold 9,830 shares of its Series A Preferred Stock (“Preferred Shares”) to Sanatio Capital, LLC (“Sanatio”) for $750,000. This sale was made in reliance on the exemption from registration contained in Section 4(2) of the Securities Exchange Act and Regulation D promulgated thereunder as not involving a public offering of securities. As a result of the sale, Sanatio owned 40% of Clyra’s issued and outstanding shares, BioLargo owned 54%, and the remainder is owned by management. Concurrent with the sale of the Preferred Shares, the shareholders entered into a shareholders’ agreement that provides for a three member board of directors, consisting of the company’s president, a person appointed by BioLargo, and a person appointed by Sanatio.

 

As set forth in Clyra’s Amended and Restated Articles of Incorporation, Preferred Shares accrue an annual dividend of 8% for a period of five years. Although the dividends began to accrue immediately, Clyra has no obligation to declare a dividend until a product of the company has received a premarket approval by the United States Federal Drug Administration (“FDA”), or for which a premarket notification pursuant to form 510(k) has been submitted and for which the FDA has given written clearance to market the product in the United States (either, “FDA Approval”). After FDA Approval, annually on December 20, and unless prohibited by California law governing distributions to shareholders, Clyra is required to declare and pay any accruing dividends to holders of Preferred Shares then accrued but unpaid. Management classifies the Preferred Shares dividend as a medium probability of occurring and as of June 30, 2017 the Preferred Shares dividend has an accrued and undeclared balance of $90,000.

 

Holders of Preferred Shares are entitled to preferential payments in the event of a liquidation, dissolution or winding up of the company, in an amount equal to any accrued and unpaid dividends. After such preference, any remaining assets are distributed pro-rata between holders of Clyra common stock and Preferred Shares as if the Preferred Shares had converted to Clyra common stock. Holders of Preferred Shares may convert the shares to Clyra common stock initially on a one-to-one basis. The conversion formula is subject to change in the event Clyra sells stock at a lower price than the price paid by Sanatio.

 

In addition to the foregoing, Clyra entered into a consulting agreement with Beach House Consulting, LLC, through which Jack B. Strommen will be providing consulting services to the company. Mr. Strommen is the founder of Beach House Consulting, LLC. Mr. Strommen will be assisting the company in its sales and marketing activities once it has FDA Approval on a product, at which point the agreement provides that Mr. Strommen is to receive $23,438 per month for a period of four years. As of June 30, 2017, the Company has not presented any products to the FDA for FDA approval.

 

 

BIOLARGO, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

From inception, Clyra has generated no revenues and the financial impact of Clyra’s operations for the three and six months ended June 30, 2017, resulted in a net loss of $387,490 and $524,572.

 

Note 8. Commitments and Contingencies.

 

Calvert Employment Agreement

 

On May 2, 2017, BioLargo, Inc. (the “Company”) and its President and Chief Executive Officer Dennis P. Calvert entered into an employment agreement (the “Calvert Employment Agreement”), replacing in its entirety the previous employment agreement with Mr. Calvert dated April 30, 2007.

 

The Calvert Employment Agreement provides that Mr. Calvert will continue to serve as the President and Chief Executive Officer of the Company and receive base compensation equal to his current rate of pay of $288,603 annually. In addition to this base compensation, the agreement provides that he is eligible to participate in incentive plans, stock option plans, and similar arrangements as determined by the Company’s Board of Directors, health insurance premium payments for himself and his immediate family, a car allowance of $800 per month, paid vacation of four weeks per year, and bonuses in such amount as the Compensation Committee may determine from time to time.

 

The Calvert Employment Agreement provides that Mr. Calvert will be granted an option (the “Option”) to purchase 3,731,322 shares of the Company’s common stock. The Option shall be a non-qualified stock option, exercisable at $0.45 per share, which represents the market price of the Company’s common stock as of the date of the agreement, exercisable for ten years from the date of grant and vesting in equal increments over five years. Notwithstanding the foregoing, any portion of the Option which has not yet vested shall be immediately vested in the event of, and prior to, a change of control, as defined in the Calvert Employment Agreement. The agreement also provides for a grant of 1,500,000 shares of common stock, subject to the execution of a “lock-up agreement” whereby the shares remain unvested unless and until the earlier of (i) a sale of the Company, (ii) the successful commercialization of the Company’s products or technologies as demonstrated by its receipt of at least $3,000,000 in cash, or the recognition of $3,000,000 in revenue, over a 12-month period from the sale of products and/or the license of technology, and (iii) the Company’s breach of the employment agreement resulting in his termination. The Option contains the other terms standard in option agreements issued by the Company, including provisions for a cashless exercise.

 

The Calvert Employment Agreement has a term of five years, unless earlier terminated in accordance with its terms. The Calvert Employment Agreement provides that Mr. Calvert’s employment may be terminated by the Company due to his death or disability, for cause, or upon a merger, acquisition, bankruptcy or dissolution of the Company. “Disability” as used in the Calvert Employment Agreement means physical or mental incapacity or illness rendering Mr. Calvert unable to perform his duties on a long-term basis (i) as evidenced by his failure or inability to perform his duties for a total of 120 days in any 360-day period, or (ii) as determined by an independent and licensed physician whom Company selects, or (iii) as determined without recourse by the Company’s disability insurance carrier. “Cause” means that Mr. Calvert has (i) engaged in willful misconduct in connection with the Company’s business; or (ii) been convicted of, or plead guilty or nolo contendre in connection with, fraud or any crime that constitutes a felony or that involves moral turpitude or theft. If Mr. Calvert’s employment is terminated due to merger or acquisition, then he will be eligible to receive the greater of (i) one year’s compensation plus an additional one half year for each year of service since the effective date of the employment agreement or (ii) one year’s compensation plus an additional one half year for each year remaining in the term of the agreement. Otherwise, he is only entitled to receive compensation due through the date of termination.

  

The Calvert Employment Agreement requires Mr. Calvert to keep certain information confidential, not to solicit customers or employees of the Company or interfere with any business relationship of the Company, and to assign all inventions made or created during the term of the Calvert Employment Agreement as “work made for hire”.

 

 

BIOLARGO, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Note 9. Subsequent Events.

 

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

 

One-Year Convertible Notes, mature July 18, 2018

 

On July 18, 2017, we received $250,000 and issued convertible promissory notes (convertible at $0.42 per share) with a maturity date of July 18, 2018 to two accredited investors in the aggregate principal amount of $280,000. Interest is charged upon issuance at 3% per annum. We issued the investors stock purchase warrants to purchase an aggregate 400,000 shares exercisable at $0.65 per share, which expire July 18, 2023. The exercise price of the stock purchase warrant may be adjusted downward in the event we sell our common stock or issue warrants at a lower price, other than securities issued through out Summer 2017 Unit Offering, for the payment of interest on promissory notes, for convertible notes, and warrants issued to the two investors. In the event we register the shares underlying the notes, under certain conditions we may call the warrants and require they be exercised or forfeited.

 

One-Year Convertible Notes, mature December 30, 2017

 

The promissory notes issued on December 30, 2016 convertible at $0.57 per share contain a provision that allows the investor to convert its note to the terms of a note subsequently issued by the company under more favorable terms. On July 18, 2017, we issued notes under similar terms as the December 30, 2016 notes, convertible at $0.42 per share, and provided notice to the investors of the reduction in the conversion price of the two notes issued December 30, 2016, to $0.42 per share.

 

On July 20, 2017, the holders of these notes exercised their right to convert their notes in aggregate principal amount of $280,000 into 686,667 shares of our common stock.

 

Two-Year Convertible Note 

 

 On July 20, 2017, the company accepted $400,000 and issued a promissory note with a 10% original issue discount in the principal amount of $440,000, due in two years, that accrues interest at 12% paid quarterly. The note is convertible, at the holder’s option, into either BioLargo common shares at $0.42 per share, 2,000 shares of Clyra Medical Technologies common stock held by BioLargo, or any combination thereof. At maturity, the note automatically converts into shares of BioLargo common stock at $0.42 per share, unless otherwise instructed by the holder. Interest may be paid in cash, common stock, or options to purchase common stock, at the holder’s option.   

 

Clyra Medical Technologies, Inc.

 

On August 4, 2017, Clyra commenced a private securities offering of its common shares at a price of $160 per share, and accepted $1,000,000 in subscriptions. It issued 6,250 shares of its common stock to two investors. Of that amount, BioLargo invested $250,000 and was issued 1,562.5 shares.

 

On July 22, 2017, Sanatio Capital LLC and Clyra agreed to convert the $250,000 line of credit held by Sanatio to common shares at a price per share equal to that offered to investors in the Clyra offering. As of the date of conversion, the outstanding amount due on the line of credit was $270,400. Once the offering price was established, Sanatio was issued 1,690 shares of Clyra common stock at $160 per share.

 

Subsequent to the issuance of shares to investors in the offering and to Sanatio, BioLargo owns 15,298 shares of Clyra common stock. These shares comprise 46.33% of the voting stock at Clyra. Two members of BioLargo’s board of directors (Dennis P. Calvert and Jack B. Strommen) are two of the three members of Clyra’s board of directors.

 

Summer 2017 Unit Offering

 

Subsequent to June 30, 2017, we accepted investments for our Summer 2017 Unit Offering (see Note 3) in the aggregate amount of $182,200 from five accredited investors, and issued convertible promissory notes in the face amount of the investments that mature June 20, 2020. We also issued warrants to these investors to purchase an aggregate 433,810 shares.

 

 

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 technologies and products incorporating our technologies;

 

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

 

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 technologies in industries other than the animal health industry and to bring viable products to market in such industries;

 

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

 

the willingness of other companies to incorporate our technologies 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 technologies;

 

the continued success and viability of our licensees holding the exclusive right to exploit our technologies 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 technologies 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, 2016. Unless otherwise expressly stated herein, all statements, including forward-looking statements, set forth in this Form 10-Q are as of June 30, 2017, 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, Odor-No-More, Inc., a California corporation, BioLargo Water USA, Inc., a California corporation, BioLargo Development Corp., a California corporation, BioLargo Maritime Solutions, Inc., a California corporation, a Canadian subsidiary BioLargo Water, Inc.; and Clyra Medical Technologies, Inc. (“Clyra”), a subsidiary in which the Company owns a controlling ownership interest.  

 

 

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

 

Our Business

 

Our goal is to make life better by delivering sustainable technology-based products that help solve some of the most widespread problems threatening the world's supply of water, air, food, agriculture, healthcare and energy. We create and refine intellectual property that forms a foundation from which to build and create break-through products and technology for licensure to commercial partners. Our products harness the power of iodine – “Nature’s Best Solution” – to eliminate contaminants that threaten our water, our health and our quality of life.

 

We invent, patent, prove and partner – to create best-of-class products and technology for commercialization as we build value for our stockholders and deliver benefits to our world.

 

Invent – Three Platform Technologies

 

We feature three patent protected platform technologies with diverse product opportunities across multiple industries – the AOS (Advanced Oxidation System), CupriDyne, and Isan. Each features the use of the all-natural iodine molecule. While they all use iodine, they are quite different in terms of the methods by which they exploit the use of iodine, the form and composition of iodine used, and therefore their function and value proposition can be quite different for each commercial application.

 

AOS

 

The AOS is our invention that combines iodine, water filter materials and electricity within a water treatment device. Our AOS generates extremely high oxidation potential within the device to achieve extremely high rates of disinfection to eliminate infectious biological pathogens like Salmonella enterica, Listeria monocytogenes and Escherichia coli, as well as a model virus Bacteriophage T4. It is also able to oxidize and break-down, or otherwise eliminate, or remove, soluble organic contaminants like acids, solvents, sulfur compounds, oil and gas by-products, and pharmaceutical by-products commonly found in a wide variety of contaminated water sources. The AOS’ extremely high oxidation potential, generated using extremely low levels of energy, is the key.

 

The term “oxidation potential” refers to the measure of the performance by which an oxidant is able to “break down” a material through removing electrons, and sometimes by the addition of oxygen. Two commonly understood examples of oxidation are: the rusting of a shipyard anchor by salty air, and the breakdown and conversion of wood into ash by fire and oxygen. The key to our AOS is its ability to generate extremely high oxidation potential in a continuous flow device that attacks contaminants in water flowing through it. Aside from its measurably superior disinfection rates, the AOS also boasts substantially lower power consumption rates than competing advanced water treatment technologies such as UV, electro-chlorination, or ozonation. For some applications, it is this value proposition that sets the AOS technology above other water treatment options, as the AOS may allow safe and reliable water treatment for a fraction of the cost of its competitors, and may even enable advanced water treatment in applications where it would have otherwise been prohibitively costly. Our AOS embodies a break-through in science which led to BioLargo’s co-founding of multi-year research chair whose goal was to solve the contaminated water issues associated with the Canadian Oil Sands at the University of Alberta Department of Engineering in conjunction with the top five oil companies in Canada, the regional water district, and various environmental agencies of the Canadian government. This project concluded in 2016. We believe at such time as the industry moves forward to solve these issues, the opportunity for our participation will present itself. Our work is continually expanding into a number of commercial applications with a key focus on wastewater treatment, food processing, agriculture, and oil and gas. We are also at the early stages of evaluating opportunities in the maritime industry, storm drain recapture / recycling, and drinking water. Our AOS is an award-winning invention that is supported by science and engineering financial support and grants from various federal and provincial funding agencies in Canada. Our first grant in the United States was recently awarded by the Metropolitan Water District of Southern California through their Innovative Conservation Program. Financial support is expanding concurrently with ongoing work to commercially develop the latest AOS designs. We believe the AOS has an important and substantial commercial opportunity in every segment of the water treatment industry and we believe it should find early market adoption in helping manage wastewater.

 

 

Following extensive validation testing and refinement of the basic operating system, we have begun a commercial prototype development project that includes important third party commercial validation studies and the design of its computer automation system. These next steps lead us to a product ready for commercial markets. In August 2016, we introduced our first “Alpha” prototype at our annual technical symposium. The “alpha” project was executed in collaboration with technical personnel at the Northern Alberta Institute of Technology (“NAIT”)'s Center for Sensors and Systems Integration and with NAIT's Applied Bio/Nanotechnology Industrial Research Chair. Bolstered by financial support provided by the Alberta Innovates nanoPDP program, this project focused on the development of a first-generation prototype system that incorporates a sensor platform to monitor various water parameters through online real-time data acquisition. The Alpha AOS system enables further scale up and testing in industrial settings, and work has commenced to develop a “Beta” unit for first stage commercial trials. Although we expect work on the Beta unit to continue for some time, we are ready now to design and engineer a working prototype for a commercial client. Once this Beta prototype development phase is complete, we intend to focus on producing multiple commercial ready pilot units for testing with various interested industrial clients and on securing regulatory approvals where required. We are in the process of refining our strategic plan to more narrowly focus our efforts on markets where we believe we can make an important contribution, faster adoption rates, and meaningful economic inroads.

 

Our AOS is being developed as a flexible modular system to allow for a wide variety of sizes, configurations and functional uses to be deployed to meet a wide variety of unique and special requirements of customers across a wide range of industries.

 

In February 2017 Mark Lambert joined our team as a “strategic advisor” to help develop and refine our commercialization plan for AOS. Mr. Lambert has over 25 years of experience as a senior level executive with extensive experience in the water, renewable energy and environmental services industries.

 

In July of 2017 we hired Shan Yong, PhD as the Director of Business Development for the BioLargo AOS. Dr. Yong has more than 14 years of experience in international business development and technology consulting in the water and environmental sector.

 

We are currently engaged in three commercial bench-scale pilot studies to validate performance of the AOS with industry-provided water. Two of these studies are being supervised and audited by a commercial engineering firm. The outcome of the studies will evaluate disinfection, destruction and removal of soluble organics in a potential client’s actual waste stream.

 

 

CupriDyne® Technology

 

Our CupriDyne technology is used to efficiently deliver iodine in various products. It can be delivered in any physical form and can be combined with other ingredients, such as fragrances in our odor control products, and surfactants in our stain removal and odor control products. Additional ingredients can often be added without sacrificing its practical and safe functions as well its oxidation potential. Our product designs include liquids, sprays, gels, powders, coatings and absorbents.

 

Safety and efficacy are key for CupriDyne. Each of our product designs delivers iodine safely, and precisely, to achieve effective odor control, stain-removal, or surface washing, and in some applications at high doses, broad-spectrum disinfection. CupriDyne’s primary ingredients, as well as reaction by-products, are “generally recognized as safe” (“G.R.A.S”) by the U.S. Food and Drug Administration as food additives in their basic forms. CupriDyne’s commercial product opportunities are diverse and we have an extensive menu of product designs in various stages of commercialization and licensure development, discussed in detail below in the “Commercial, Household and Personal Care Products” and “CupriDyne Clean – Industrial Odor Control” sections.

 

We believe CupriDyne is unique. 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 CupriDyne technology, on the other hand, directly addresses many of these shortcomings – it delivers iodine’s oxidizing ingredient (“free iodine”) with precision, ranging from very small doses up to very large doses with more than 30 times the performance of chlorine. We can deliver iodine that is both non-toxic and non-staining, thus extending its usefulness well beyond historical product applications.

 

 

Our CupriDyne technology is flexible, allowing product designs to incorporate varying dosing levels. Some product designs focus on odor, and do not act as “disinfectants.” Some product designs do, and would require regulatory approval to make such claims.

 

Isan System

 

The Isan System is a reliable and efficient automated iodine dosing system. It is the winner of a Top 50 Water Technology Award by the Artemis Project and a Dupont Innovation Award. Its precise dosing combined with a straight-forward “set-it-and-forget-it” automated computer controlled system are the keys to its success. The system features controlled measuring, flow rate, dosing and iodine extraction/removal technology as well as an automatic tracking system that precisely delivers iodine in calibrated doses into a water steam or container of water. The Isan system has been proven to substantially reduce the incidence of fungal growth, spoilage, microorganisms and pathogens in water and on food. The system is capable of functioning at the high flow rates commensurate with industrial disinfection needs.

 

First developed in Australia, the Isan system was initially registered with the Australian Pesticides and Veterinary Medicines Authority (“APVMA”) and Food Standards Australia and New Zealand (“FSANZ”) in Australia and New Zealand. The system has meaningful applications and commercial value in any industry that can benefit from precise and effecting dosing of iodine in water, such as: agriculture, food production and processing, manufacturing, industrial water processes and irrigation supply. See “Clarion Water” below for information on our efforts of our licensee to commercialize the Isan system.

 

Patent - an Expanding Intellectual Property Estate

 

We have 16 patents issued and multiple pending. We believe these patents provide a foundation from which to continue building our patent portfolio and we have reasonable basis upon which to rely on our patent protections in the field of art in which we practice. We also rely on trade secrets and technical know-how to establish and maintain additional protection of our intellectual property. As our capital resources permit, we expect to expand our patent protection as we continue to refine our inventions as well as make new discoveries.

 

We recently filed two patent applications related to the medical products developed by our subsidiary Clyra. See “Advanced Wound Care – Clyra Medical Technologies Subsidiary” below.

 

Prove - a Continual Process

 

We have invested time and money in a wide array of third party testing, side-by-side comparisons and third party verifications to support our most important technical claims. The basic attributes of iodine are well understood by science and industry. We have evidence and experience to substantiate the following bold claims:

 

 

o

AOS- when we internally compared it to the best of class competition it appears that we are:

 

more effective

 

less costly

 

faster

 

o

CupriDyne

 

Oxidizes Volatile Organic Compounds like H2S, Sulfur Compounds, Ammonia, Fatty Acids, Mercaptans, Polyaromatic Compounds

 

Total odor elimination

 

Non-toxic and gentle

 

Generally Accepted As Safe (G.R.A.S.) – ingredients and by products are GRAS according to the FDA

 

Broad spectrum efficacy

 

Potent (less than 1/20th the dose of comparable disinfectant [like chlorine] to achieve similar results)

 

Increases holding power of absorbents by up to six times

 

Enhanced flocculation

 

Nutritive

 

 

Isan System

 

Precise iodine dosing

 

Anti-bacterial, anti-fungal, anti-viral

 

Effective against top five plant pathogens

 

Promotes extended shelf-life

 

Enhances root growth and foliage growth for healthier plants

 

Low corrosion

 

Partner – a Smart Strategic Decision

 

We seek to develop commercial partnerships with other companies who will partner with us and pay us for a negotiated contractual right to use our intellectual property (patents, formulas, designs, claims, know-how, secrets), in order to expand their business for their own commercial purposes. In those instances, we seek a reasonable deposit, a minimum commitment to volume, some territorial rights, and a percentage of sales for a mutually agreeable term and territory. We believe this licensing model will prove successful and meaningful for our company.

 

We choose to pursue a licensing strategy for its obvious and well-understood high margins, potential for explosive revenue potential and capital conserving features. While this business model can also be highly dependent upon macro-economic factors like the relative stability of the national and international economy as well as the cyclical nature of business, politics and climate for innovation and competing technical advances, we believe this is an appropriate strategy for our company.

 

We have a number of examples of strategic alliance or partnering initiatives whereby we are advancing both our science, our patents, our proof of claims, field trials and our commercial opportunities. There are a number of noteworthy examples:

 

The University of Alberta

 

We are engaged in a cooperative research relationship with the University of Alberta and its researchers in Edmonton, Canada. The offices and lab of our Canadian subsidiary, BioLargo Water, Inc., and our staff researchers, are located within the University of Alberta research center at Agri-Food Discovery Place. We are able to utilize the extensive resources of the University and its researchers on a contract for hire basis as needed. We work closely with the Department of Agricultural, Food and Nutritional Science at the University of Alberta and its Department of Engineering, and partner with University professors on government and industry sponsored financial awards and grants to support our ongoing research and development as we refine the AOS in preparation of commercial pilots and commercial designs. We have received over 30 grants thus far. Generally, the financial awards take on two common themes: first, science and engineering grants in which the University of Alberta is the primary recipient and contracting party with the grant agency to support work on and around our technology; and second, direct grants in which our Canadian subsidiary is the contracting party to support ongoing science and engineering to advance our AOS towards commercialization, sometimes supporting the work of PhD students at the University. In both cases, the financial awards support much, but not all, of the research budget and related costs. Our research arrangement with the University has three high value propositions for BioLargo: (i) a depth of resources and talent to accomplish highly skilled work, (ii) financial aid to support research and development costs and (iii) independent and credible validation of our technical claims.

 

Clarion Water

 

On August 18, 2014, we entered into a manufacturing and distribution license agreement for our Isan® system with Clarion Water, a new operating division of InsulTech Manufacturing, LLC (www.insultech.com), the latter of which has over 20 years of commercial success around the globe representing hundreds of millions in sales of technical products to Fortune 100 companies.

 

Co-owned with Peter Holdings, Ltd. through a joint venture agreement, the Isan system leverages the power of iodine to provide the world’s most effective disinfection dosing systems. It has been referred to as one of the most important technical advancements in food safety in the past 20 years. It won a ‘top 50 water company award’ by the Artemis Project in 2010 and a DuPont Innovation Award for its excellence in science and innovation in 2004.

 

 

Per the terms of our license agreement, Clarion is obligated to pay royalties on revenue equal to 10%. As we jointly own the Isan System with Peter Holdings, Ltd., all royalties are to be shared equally with Peter Holdings. 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.

 

Since licensing the technology, Clarion completed a comprehensive technical and engineering update to the Isan System, featuring a new automated touch screen user interface, enhanced security, enhanced control features for increased monitoring and sensing, and adding automated functionality providing users unmatched flexibility, reliability and control over this state-of-the-art disinfectant delivery system, and begun commercial trials. In 2016, it received approval from the U.S. Environmental Protection Agency for use of Isan generated iodine, “IoMax,” as it is delivered in poultry drinking water. Clarion recently received approval for expanded uses of its IoMax iodine, including for the sanitizing livestock drinking water, livestock barns and vehicles, milking and dairy related equipment, food grade egg shells, retort cooling water, HVAC units, and general farm premises. As of June 30, 2017, we have yet to receive royalties from Clarion on this license agreement.

 

Downeast Logistics

 

In late 2013, we entered into a cooperative selling and distribution agreement with Downeast Logistics, a certified “Service-Disabled Veteran-Owned Small Business” (SDVOSB), as our distribution partner to facilitate our first order to the US Government. Downeast has been instrumental in developing ongoing sales to the United States Military. We have six products with National Stocking Numbers.

 

In March 2016 two of our product lines (consisting of 9 SKUs) of Nature’s Best Science products were awarded a five-year U.S. General Services Administration (GSA) supply contract, under schedule 65IIA for medical equipment and supplies. The award opens up access to these products through “GSA Advantage”, the online shopping and ordering system that provides government agencies access to thousands of contractors and millions of supplies (products) and services. We intend to apply for inclusion of additional existing and future products into GSA Advantage, including our industrial odor control product, CupriDyne Clean. In December of 2016 these same product lines as well as our CupriDyne Clean Industrial Odor Eliminator were accepted to the DOD eMALL which is another purchasing portal for the Defense Department and other State and Federal agencies. As of this date our products are approved for sale and available to all branches of government at the federal, state and local levels through five different purchasing portals.

 

Downeast Logistics has operated for more than thirteen years, and will continue to offer our products through multiple channels of the US Government. Its designation as a SDVOSB places Downeast Logistics within a group of highly sought after vendors to the US government. Odor-No-More has registered itself as well as several products with several procurement agencies of the US Government. Downeast has purchased approximately $24,000 in product from us in the six months ended June 30, 2017.

 

Independent Sales Representatives

 

We are working with independent representatives developing selling channels for our odor control products. We are in customer trials for our smoke-odor eliminating products. The response from customers has been excellent and we have received the highest marks for performance that is superior to the competing products. We continue to support these selling efforts with samples, training, selling materials and competitive bulk pricing. While we cannot predict the timing or outcome of these efforts, we are confident in our products’ ability to outperform the competition. As our sales within the waste handling industry expand, we will narrow this activity to more carefully identify the high-volume producers and support their efforts to build sales. While we have not experienced meaningful results in this area, we do believe that our products are finding commercial traction and that this strategy will prove valuable.

 

 

Industrial Odor Control - CupriDyne Clean

 

Our CupriDyne Clean industrial products are designed to tackle tough odors in various industrial settings, such as waste processing and recycling operations, waste-water treatment facilities, waste to energy conversion operations, materials recovery facilities, food processing operations, and livestock production facilities with CupriDyne Clean. We have been told by prospective customers and experts from these markets that effective odor control for these prospective customer groups is in among the top on a list of priorities in their daily operations and their commitment to serve their local communities where they operate. We believe our product is unique and offers competitive advantages in many markets. At waste processing facilities, for example, many operators use fragrances to mask odors produced from processing and recycling waste. In contrast, our product eliminates odors on contact without fragrances, and at a lower price. Based on our test marketing and trials, we believe that many industries that must contend with odors that include, ammonia, fatty acids, sulfur, or mercaptans are dissatisfied with the current competing odor control products, place a high value on odor control solutions that actually work and are willing, with good evidence and testimonials to support our claims, to test and trial new products like our CupriDyne Clean as they search for a solution to these common and troublesome odor problems.

 

Our product web site can be seen at www.cupridyne.com. We have had some initial success selling CupriDyne Clean to solid waste and recycling companies and wastewater treatment companies that encourages us to continue our marketing and sales efforts in these areas. The operations of the companies in the waste handling industry segment often include transfer stations and landfill facilities. There are many large companies that dominate that marketplace. A leading information source for the waste handling industry named Waste 360 reports the revenues of the top 100 firms within the waste and recycling industry at roughly $46 billion in annual revenues based on 2015 figures. These companies often have layers of staff that participate in decision making related to using a new product like ours. They all deploy a menu of odor abatement strategies, systems, products and processes that are already in place. Often, as we present our new product and its claims, we are met with disbelief. So, while they all face an odor challenge by the very nature of their operations, they frequently are unable to believe that there is a product like ours that actually works and is safe and affordable. As a result, it has taken us more time, more work, and more money to assemble the track record, the data, and the third-party testimonials to begin breaking through to adoption in this industry. Recently, we broke through these barriers and signed “national purchasing agreements” with three top companies in the waste management industry. These agreements provide us “official” vendor status and authorize us to sell product to the customers’ local operations. Although there’s no obligation on the customer’s part to purchase a minimum amount or even any product, becoming an approved vendor is a major hurdle for a new vendor like us to overcome. We have sold product to facilities within these systems and we intend to focus our ongoing sales efforts to expand as rapidly as possible within these and other national accounts as they may develop. While the success of these efforts cannot be assured, we are confident and highly encouraged to focus and invest time, energy, staff and capital in this area as resources permit.

 

Multinationals and Mid-Level Industry Participants for our AOS

 

We believe there are a number of potential partners interested in working with us to exploit the commercial opportunities associated with the AOS technology. These opportunities are limited by common and obvious limitations, capital, the relative state of development and market readiness, and adoption rates in the marketplace. Given the significant value offerings, namely enhanced performance and lower cost, we believe we will be able to find industry partners to assist in commercialization of the AOS and are committed to pursue success in these markets. We are pursuing discussions with potential partners that can assist us in engineering the full-scale commercial model for the AOS as it would be deployed in a treatment train to decontaminate water in an industrial setting. To this end, we recently engaged a leading executive from the water industry, Mark Lambert, as well as a seasoned business development executive Shan Yong, PhD, to facilitate a refinement of our focus and assist in finding and engaging companies to partner with us.

 

Strategic Alliances and Engineering Support  

 

In October 2016 we engaged Chicago Bridge & Iron (CB&I) to support implementation of our AOS and provide independent performance verification. In February of 2017 CB&I announced that they would be selling the business unit with whom we are working to Veritas Capital. The company soon began a process of downsizing its engineering staff. This transition delayed our planned work. At this time we are unable to predict the outcome of our relationship with CB&I as we have worked diligently to secure alternative resources to fill that need.

 

 

We have initiated multiple conversations with engineering groups and are involved in negotiations now for the scale-up and commercialization of our AOS technology as well as distribution of our various products.

 

In late 2016 we established a relationship with Carollo Engineering, one of the largest engineering firms in the United States dedicated solely to water related engineering. We are working with Carollo to provide independent third party oversight of some initial demonstration testing of AOS for potential municipal and food industry clients.

 

Commercial, Household and Personal Care Products

 

CHAPP includes broad product categories and many opportunities for the application of our technologies. 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 infection 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. Our primary product offerings include an animal-bedding additive that controls odor and moisture. We also sell liquid odor control products to private label (aka ‘White Label’) customers who then in turn sell product to consumers and industrial clients.

 

We are continuing our efforts to generate additional “private label” clients. We have fulfilled some small orders for products that we produced under a third party’s private brand. We continue to meet with new potential customers for private label opportunities. We also have relationships and remain in discussions with potential strategic partners to provide large scale manufacturing and distribution should we secure orders for the private label business opportunities or experience a rapid increase in any product whereby we need to supplement manufacturing to meet client delivery needs. Success in these markets is highly dependent upon the willingness of the potential partners to invest in product support to continue marketing and expanding customer awareness.

 

Our sales in the CHAPP product category are nominal. Product development, sales and marketing require significant financial resources that we currently have elected to invest elsewhere while, also, limiting our risk in these highly competitive and commodity markets. As such, our progress in this area has been slower than we had hoped. As opportunities present themselves, we market our technology for licensure to established companies in this industry segment. We rely upon independent agents and key industry contacts for this activity and it is not a top priority. We continue to expand our proof of claims and product designs for various odor and moisture control applications. We believe this segment will enjoy commercial success only after we prove the market viability for our CupriDyne Clean product. Therefore, we are more narrowly focused on the business to business sales and marketing activity to help gain exposure and build credibility for our consumer product designs and technology.

 

BioLargo Maritime Solutions, Inc.

 

We formed BioLargo Maritime Solutions, Inc. to organize and evaluate business opportunities in and around the maritime industry for our technologies, including our AOS. This market segment is marked by delays in the adoption and enforcement of certain ballast water regulations that have been forcasted to spurn a major international market for on ship ballast water treatment systems. The market is delayed. While the trend and regulatory initiatives are continuing, the economics of current technical solutions and the business case has remained uncertain and fraught with what we believe to be high capital requirements and a less than optimal return on investment proposition. While we remain optimistic, we are hesitant to fully puruse this market segement until we are more confident in our fututure success. We will need to organize a strategy and additional resources, including capital and proper staffing, to pursue business opportunities. This subsidiary is not yet operational.

 

Advanced Wound Care – Clyra Medical Technologies Subsidiary

 

In 2012 we formed 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. Our products are highly differentiated by the gentle nature in which they can perform. We believe these benefits, along with its non-staining feature and reduced product costs as compared with other antimicrobials, give our products a competitive advantage in the marketplace.

 

 

With new funding in place, in 2016 Clyra re-initiated product development and testing with experts and well-established contract manufacturing companies from industry. It has concluded development on two products and has retained a leading company to prepare documentation for pre-market notification to the FDA under Section 510(k) of the Food, Drug and Cosmetic Act. This process is almost complete and application is imminent. Clyra hopes to have FDA clearance and product available for sale by year’s end. While no assurances can be made about the ultimate success any FDA applications once filed, 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. In the interim, Clyra is working with “key opinion leaders” and conducting clinical trials to further develop product claims, and their roll out, marketing, and distribution plans. Recently, Dr. Brock Liden, a renowned wound care expert, presented Clyra’s platform technology at the 15th annual Peter Sheehan Wound Healing: Science & Industry Conference in Puerto Rico, attended by leading wound care clinicians and researchers. Applications for U.S. patents were recently filed for these products under development and we intend to continue expanding patent coverage as we refine our products, as available. Clyra is also evaluating potential product designs where our current product designs can be used or slightly modified/enhanced to create new products for new medial related markets like dental, veterinary medicine, over the counter applications and the like.

 

As set forth in Part II, Item 5, Clyra recently conducted a private offering of its common stock. Subsequent to the offering, BioLargo owns 46% of Clyra’s issued and outstanding shares. Two of Clyra’s three board seats are filled by current members of BioLargo’s board of directors, and we continue to work closely with Clyra to advance the development of the platform technology and furtherance of its business plan. Our license agreement with Clyra remains in place, whereby Clyra is obligated to pay to BioLargo a royalty of 6% on sales.

 

 

 

Results of Operations—Comparison of the three and six months ended June 30, 2017 and 2016

 

Revenue

 

Our revenue from product sales are increasing, primarily due to an increase in the volume of sales of our CupriDyne Clean Industrial Odor Control products to landfills and waste processing operations. The volume of sales of our Specimen Transport Solidifier pouches to the U.S. military increased, although not to the extent as our CupriDyne Clean products. For the six months ended June 30, 2017, our total product sales increased by 176% over the comparable period in 2016. For the three months, it increased 156%.

 

With respect to our CupriDyne Clean Industrial Odor Control products, we do not have a long enough sales history to identify trends or uncertainties that would affect future sales. In the past few months, we have signed “national purchasing agreements” that authorize us to sell product to the operational facilities of three of the largest waste handling companies in the United States. None of those agreements require the company to purchase a minimum amount, or any, product. Our first such agreement was executed just prior to the beginning of our second fiscal quarter, and thus sales to companies for which we have national purchasing agreements increased significantly from the first quarter, and accounted for 44% of our total revenue in the three months ended June 30, 2017. With respect to sales of our odor control products to the waste handling industry in general, we are finding that in colder climates, odors are less noticeable at waste processing facilities, and thus there appears to be less of a demand for odor control products in winter months. Locations that are near populated areas are more likely to pursue the use of active odor control and abatement products like ours.

 

Other Income

 

Our wholly owned Canadian subsidiary has been awarded more than 30 research grants from various Canadian public and private agencies, including the Canadian National Research Institute – Industrial Research Assistance Program (NRC-IRAP) and the National Science and Engineering Research Council of Canada (NSERC). The grants received are considered reimbursement grants related to costs we incur and therefore are included as Other Income on our income statement. The majority of grant funds awarded are paid directly to third parties. Amounts paid directly to third parties are not included as other income in our financial statements. We also received a grant from the Metropolitan Water District of Southern California pursuant to its Innovative Conservation Program to test our AOS system with three wastewater matrices to determine its disinfection and decontamination capabilities.

 

Although we are continuing to apply for government and industry grants, and have been successful in so applying in the past, we cannot be certain of continuing those successes in the future.

 

 

Cost of Goods Sold

 

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 products, including commissions. Because we have not achieved a meaningful product 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

 

Our Selling, General and Administrative (“SG&A”) expenses include both cash and non-cash expenses. Our total SG&A increased $238,454 (26%) and $362,602 (20%) in the three and six months ended June 30, 2017 compared to the same period in 2016. The largest components of our selling, general and administrative expenses for the three and six months ended June 30, 2017 and 2016 included:

 

   

Three months ended

   

Six months ended

 
   

June 30, 2016

   

June 30, 2017

   

June 30, 2016

   

June 30, 2017

 

Salaries and payroll-related expenses

  $ 244,287       387,221     $ 462,045     $ 712,747  

Consulting expense

    241,579       236,925       513,880       474,255  

Professional fees

    134,547       125,601       278,800       312,644  

Investor relations

    31,863       65,402       68,600       105,488  

 

 

Our salaries and payroll related expenses increased in 2017 primarily due to the option issuance to our Chief Financial Officer, and generally to an increase in our operational activites.

 

With respect to our professional fees, this increase was a result of increased legal work for patent application and prosecutions and audit and legal work needed with respect to the Form S-1 filed on January 25, 2017.

 

Our investor relations fees increased due to our efforts and activities at various conferences and with consultants promoting the BioLargo brand.

 

Research and Development

 

Research and development expenses decreased $5,688 (2%) and increased $34,598 (5%) for the three and six-months ended June 30, 2017, as compared to the same periods in 2016. The level of activity in research and development expenses is consistent with the use of funds from the investment in Clyra, and increased activities at our research facility at the University of Alberta due in part to our grant funding.

 

Interest expense

 

Interest expense increased $640,748 and $1,187,979 for the three and six-months ended June 30, 2017, as compared to the same periods in 2016. Our interest expense increased significantly because of the increase in principal amount of outstanding convertible promissory notes and the amortization of the debt discount on the warrants issued in our 2015 Unit Offering and our Winter 2016 Unit Offering. From March 31, 2016, through June 30, 2017, we increased our debt balance by approximately $3,000,000. Our debt and now totals approximately $5,800,000 on which we are paying interest primarly through the issuance of common stock.

 

 
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Net Loss

 

Net loss for the three and six-months ended June 30, 2017 was $2,517,794 and $4,577,870, a loss of $0.03 and $0.05 per share, compared to a net loss for the three and six-months ended June 30, 2016 of $1,668,335 and $3,312,728, a loss of $0.02 and $0.04 per share. The net loss increased mainly due to the increased interest expense and to increased compensation expense offset somewhat by the gain from the change in the value of the derivative liability. The net loss per share did not change as the increase in net loss was offset by the increase in common shares outstanding. We do not expect to generate revenues in amount significant enough for us to generate a profit in the foreseeable future. (See Part I, Item II, “Our Business”, above.)

 

Liquidity and Capital Resources

 

We have been, and anticipate that we will continue to be, limited in terms of our capital resources. As reflected in the accompanying financial statements, we had a net loss of $4,577,870 for the six months ended June 30, 2017, and an accumulated stockholders’ deficit of $96,256,129 as of June 30, 2017. Our total cash balance was $433,539 at June 30, 2017, a decrease of $1,476,614 since December 31, 2016. Our working capital at June 30, 2017 was negative $3,175,349. The short-term demands on our liquidity consist of our obligations to pay our employees, multiple consultants, and for other ongoing operational obligations, including research and development activities in Canada and in our medical subsidiary. In the past, because we had limited capital available, we have paid only a portion of these obligations in cash, and the remainder by the issuance of common stock or options pursuant to the accounts payable conversion plan approved by our board of directors.

 

As of June 30, 2017, we had $5,805,668 in principal amounts due on various debt obligations (see Note 3). Of that amount, $4,830,097 are convertible at our option into common stock at maturity. Additionally, we had $344,438 of accounts payable and accrued expenses (see Note 6).

 

On June 15, 2017, our registration statement on Form S-1/A was deemed effective by the SEC. This registration statement registered the shares underlying the notes and warrants issued in our 2015 Unit Offering. The warrants contain a “call provision” that allows the company to require all or a portion of the warrant be exercised or forfeited if the closing price of the company’s common stock equals or exceeds two times the warrant exercise price for ten consecutive business days. The call provision is only available once the warrant shares are registered with the SEC. The warrants issued to investors in the 2015 Unit Offering have exercise prices that vary from 40 to 70 cents per share. Approximately $3.5 million of warrants are exercisable at 40 cents per share. Were the price of our common stock to increase to 80 cents per share such that we could “call” (all or a portion of) these warrants, there is no assurance that all of the investors would exercise their rights to purchase shares under the warrants, or that our stock price would remain at above 80 cents per share once we called the warrants.

 

We will be required to raise substantial additional capital to continue our current level of 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 have been, and will continue to be, required to financially support the operations of our subsidiaries, none of which are operating at a positive cash flow. Only one subsidiary, Clyra, has financing in place to fund operations for the remainder of the year.

  

The foregoing factors raise substantial doubt about our ability to continue as a going concern. The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of our business. Ultimately, our ability to continue as a going concern is dependent upon our ability to attract significant new sources of capital, attain a reasonable threshold of operating efficiencies and achieve profitable operations by licensing or otherwise commercializing products incorporating our technologies. The accompanying consolidated financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern.

 

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. We recently concluded a successful raise of $1,000,000 at our subsidiary Clyra. And, we are in discussions to secure an equity line of credit. However, there can be no assurance that we will be able to raise any additional capital.

 

 
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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 unaudited interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. Preparation of these statements requires management to make judgments and estimates. Some accounting policies have a significant impact on amounts reported in these consolidated financial statements. A summary of significant accounting policies and a description of accounting policies that are considered critical may be found in our Annual Report on Form 10-K for the year ended December 31, 2016, filed with the SEC on March 30, 2017, in the Notes to the Consolidated Financial Statements and the Critical Accounting Estimates sections. In addition, refer to Note 2 to the consolidated interim financial statements included in Part I, Item 1 of this report.

 

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 consolidated financial statements.

 

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

 

See Note 2, “Recent Accounting Pronouncements”, to the Consolidated Financial Statements.

 

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

 

Stock Issued for Services

 

During the three-months ended June 30, 2017, we issued 98,496 shares of common stock to two consultants. The common stock was issued for services provided by consultants and is recorded in selling general and administrative expense in our consolidated statement of operations.

 

Stock issued as payment for interest on convertible notes

 

On June 20, 2017, we issued 373,471 shares of common stock to holders of our convertible promissory notes. These shares were issued as payment of $158,267 in accrued interest at a price of $0.4235 per share, and is recorded as interest expense in our consolidated statement of operations.

 

Summer 2017 Private Securities Offering

 

On May 24, 2017, we commenced a private securities offering (titled the “Summer 2017 Unit Offering”) which offered the sale of $1,500,000 of “Units,” each Unit consisting of a convertible promissory note and stock purchase warrant. The promissory notes issued to investors thus far are convertible at $0.42 cents per share, mature June 20, 2020, and bear interest at the rate of 12% per annum on the amount invested. Any interest due will be paid quarterly in arrears in cash or shares of common stock. If paid by the issuance of common stock, interest is paid at a conversion price equal to the average closing price of the Company’s common stock over the 20 trading days prior to the interest payment due date. The principal amount of the note may be paid by the issuance of shares of common stock, or cash, upon maturity at the Company’s election.

 

When paid in shares, the number of shares to be issued shall be calculated by dividing the principal amount invested by the $0.42 conversion price. Promissory notes may be converted at any time by the investor, at maturity by the Company, or by the Company prior to maturity, so long as the following conditions are met: (i) the Shares issued as payment are registered with the SEC; and (ii) the Company’s common stock closes for ten consecutive trading days at or above three times the Unit price. In addition to the convertible promissory note, each investor received a warrant allowing for the purchase of the number of shares of BioLargo common stock equal to the investment amount divided by $0.42 (e.g., one warrant share for each share of common stock which the investor is eligible to receive through conversion of his original convertible note). The exercise price of the warrant is $0.65 per share of common stock and expire on June 20, 2022. The Company may “call” the warrants, requiring the investor to exercise their warrants within 30 days or forever lose the rights to do so, only if the following conditions have been met: (i) the underlying Shares are registered with the SEC and (ii) the Company’s common stock closes for 10 consecutive trading days at or above two times the exercise price.

 

During the three months ended June 30, 2017, we received an aggregate $100,000 from two investors and issued convertible promissory notes with a maturity date of June 20, 2020, convertible into our common stock at $0.42 per share. Each investor, for no additional consideration, received a stock purchase warrant exercisable at $0.65 per share, which right terminates June 20, 2022. We issued warrants to purchase an aggregate 238,096 shares to the two investors.

 

Issuance of Stock Options in exchange for payment of payables

 

On June 30, 2017, we issued options to purchase 237,353 shares of our common stock at an exercise price of $0.43 per share to our board of directors, in lieu of $62,500 in fees, and to vendors in lieu or accrued and unpaid fees $26,374.

 

 

Conversion of Notes

 

On June 6, 2017, an investor in our 2015 Unit Offering exercised the right to convert a promissory note in the principal amount of $130,000, plus $3,291 of interest, into 378,767 shares of our common stock.

 

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

 

On August 8, 2017, the Company’s partially owned subsidiary Clyra Medical Technologies, Inc., received funds for a subscription of $750,000 to its private offering of 6,250 shares of its common stock at a price of $160 per share. Clyra issued 4,687.5 shares to the investor. It also received a $250,000 investment from BioLargo, Inc., and issued 1,562.5 shares to BioLargo. In conjunction with this offering, Sanatio Capital, holder of a $250,000 line of credit, the owner of 8,847 preferred shares of Clyra, and owned by Jack B. Strommen, a member of both Clyra and BioLargo’s board of directors, agreed to convert the amounts due under its line of credit, including interest, into shares of Clyra common stock at the same price as investors in the offering. As of the date Sanatio and Clyra agreed to convert the line of credit, the amount due on the line of credit was $270,400, and Sanatio was issued 1,690 shares of Clyra common stock in full satisfaction thereof.

 

Item 6.

Exhibits

 

The exhibits listed below are attached hereto:

 

 

   

 

Incorporated by Reference Herein

Exhibit

Number

   

Exhibit Description

Form

File Date

3.1

   

Amended and Restated Certificate of Incorporation for BioLargo, Inc. filed March 16, 2007

Form 10-KSB

5/4/2007

3.3

   

Bylaws of BioLargo, Inc., as amended and restated

Form 10-KSB

5/23/2003

4.1

   

BioLargo, Inc. 2007 Equity Incentive Plan

Form 10-QSB

11/19/2007

4.2

   

Amendment No. 1 to BioLargo 2007 Equity Incentive Plan

Def 14C (Exhibit A)

5/2/2011

4.3

   

Form of Convertible Promissory Note issued in 2015 Unit Offering

Form 10-K

3/31/2015

4.4

   

Form of Series A Stock Purchase Warrant issued in 2015 Unit Offering

Form 10-K

3/31/2015

4.5

   

Form of Stock Options issued in exchange for reduction in accounts payable.

Form 10-K

3/31/2015

4.6

   

$300,000 Line of Credit issued June 2016

Form 10-K

3/30/2017

4.7

   

Stock purchase warrant issued with Line of Credit in June 2016

Form 10-Q

8/15/2016

4.8

   

Securities Purchase Agreement dated July 8, 2016

Form 10-Q

11/14/2016

4.9

   

Form of Note issued to One Year Note holder in July 2016

Form 10-Q

8/15/2016

4.10

   

Form of Warrant issued to One Year Note holder in July 2016

Form 10-Q

8/15/2016

 

 

4.11

   

Form of Note Issued in Winter 2016 Unit Offering

Form S-1

1/25/2017

4.12

   

Form of Warrant Issued in Winter 2016 Unit Offering

Form S-1

1/25/2017

4.13

   

Form of Note issued to One Year Note holder dated December 30, 2016

Form S-1

1/25/2017

4.14

   

Form of Warrant issued to One Year Note holder dated December 30, 2016

Form S-1

1/25/2017

4.15

   

Stock Option dated February 10, 2017 issued to Chief Financial Officer Charles K. Dargan II.

Form 8-K

2/14/2017

4.16

   

Option to purchase common stock issued to Dennis P. Calvert dated May 2, 2017

Form 8-K

5/4/2017

4.17*

   

Form of Note issued in Summer 2017 Offering

 

 

4.18*

   

Form of Warrant issued in Summer 2017 Offering

 

 

4.19*

   

Form of One-Year Note issued July 2017

 

 

4.20*

   

Form of Warrant issued to One-Year Noteholder July 2017

 

 

4.21*

   

Two-year Note in face amount of $440,000 issued July 2017

 

 

10.1†

   

Employment Agreement with Dennis P. Calvert dated May 2, 2017.

Form 8-K

5/4/2017

10.2†

   

February 10, 2017 extension to Engagement Extension Agreement with Charles K. Dargan, II.

Form 8-K

2/14/2017

10.3

   

License Agreement with Insultech Manufacturing LLC dba Clarion Water

Form 10-Q

8/15/2014

10.4

   

License Agreement between Clyra Medical Technologies, Inc., dated December 17, 2012

Form 8-K

1/6/2016

10.5

   

December 30, 2015 amendment to License Agreement with Clyra Medical Technologies, Inc.

Form 8-K

1/6/2016

10.6

   

Commercial Lease Agreement for 14921 Chestnut St., Westminster, CA 92683

Form 8-K

8/24/2016

10.7

   

Lock-Up Agreement with Dennis P. Calvert dated April 30, 2017

Form 8-K

5/4/2017

10.8

   

Lock-Up Agreement with Dennis P. Calvert dated May 2, 2017.

Form 8-K

5/4/2017

31.1*

   

Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 and Rules 13(a)-14 and 15(d)-14 under the Securities Exchange Act of 1934

   

31.2*

   

Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 and Rules 13(a)-14 and 15(d)-14 under the Securities Exchange Act of 1934

   

32*

   

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

   

101.INS**

   

XBRL Instance

 

 

101.SCH**

   

XBRL Taxonomy Extension Schema

 

 

101.CAL**

   

XBRL Taxonomy Extension Calculation

 

 

101.DEF**

   

XBRL Taxonomy Extension Definition

 

 

101.LAB**

   

XBRL Taxonomy Extension Labels

 

 

101.PRE**

   

XBRL Taxonomy Extension Presentation

 

 

 

* Filed herewith 

** Furnished herewith 

† Management contract or compensatory plan, contract or arrangement

 

 

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 14, 2017

 

BIOLARGO, INC.

 

 

By: /s/ DENNIS P. CALVERT

   

Dennis P. Calvert

Chief Executive Officer

     
     

Date: August 14, 2017

 

By: /s/ CHARLES K. DARGAN, II

   

Chief Financial Officer

 

 

36

Exhibit 4.17

 

[FORM OF] CONVERTIBLE PROMISSORY NOTE

 

THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”) OR APPLICABLE STATE SECURITIES LAWS, AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT FOR SUCH SECURITIES UNDER THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS OR PURSUANT TO AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE COMPANY THAT THERE IS AN AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT.

 

Amount: $________

Westminster, California

Instrument #: 

Issuance Date: _____

 

FOR VALUE RECEIVED, BIOLARGO, INC., a corporation organized under the laws of the state of Delaware (“Issuer”), promises to pay to the order of ______________________ (hereafter, together with any subsequent holder hereof, called “Holder”), at its office, at “Holder’s Address” (as that term is defined below), or at such other place as Holder may direct, the “Amount” noted above (the “Loan Amount”), payable on June 20, 2020 (the “Maturity Date”). This convertible note is duly authorized issue of the Issuer, purchased by the initial Holder in the Issuer’s Summer 2017 Unit Offering pursuant to the subscription agreement (“Subscription Agreement”) submitted by the original Holder and accepted by the Issuer on the “Issuance Date” noted above (the “Issuance Date”), and designated as its “Summer 2017 Unit Offering Convertible Note” (referred to herein as the “Note”). This Note is issued as part of a “Unit”, comprised of this Note and a stock purchase warrant, at a Unit Price of $____, issued to the original Holder in conjunction with the Company’s Summer 2017 Unit Offering. This principal amount of this Note is convertible, pursuant to the terms set forth herein, at $____ per share (“Conversion Price”).

 

The Issuer agrees to pay interest on the unpaid principal amount of the Loan Amount from time to time outstanding hereunder at the following rates per year, compounded annually: (i) before the Maturity Date, whether by acceleration or otherwise, at the rate per annum equal to twelve percent (12%); (ii) after the Maturity Date, until paid, at a rate per annum equal to fifteen percent (15%).

 

Payments of both principal and interest are to be made in immediately available funds in lawful money of the United States of America, or in Common Stock of the Issuer, at the Issuer’s option, as set forth below.

 

     The Note is subject to the following additional provisions:

 

1.     Interest. Accrual of interest shall commence as of the Issuance Date. Interest will be paid quarterly on March 20th, June 20th, September 20th, and December 20th (the first quarter pro-rated based on the actual number of days elapsed in said quarter), on the date of the conversion of the Note (mandatory or voluntary, as set forth below), and also on the Maturity Date, such interest to be paid, at the Company’s option, in cash or in that number of shares of Common Stock of the Issuer (the “Common Stock”) at a price per share equal to the average closing price of the Company’s common stock for the 20 trading days preceding a given interest due date (“Interest Conversion Price”). Unless otherwise agreed in writing by both parties hereto, the interest so payable will be paid to the person in whose name this Note (or one or more predecessor Notes) is registered on the records of the Issuer regarding registration and transfers of the Note (the “Note Register”), provided, however, that the Issuer’s obligation to a transferee of this Note arises only if such transfer, sale or other disposition is made in accordance with the terms and conditions contained in this Note and the Subscription Agreement that the original Holder executed at the time of making an investment in the Issuer.

 

 
-1-

 

 

2.     Withholdings. The Issuer shall be entitled to withhold from all payments of principal and/or interest of this Note any amounts required to be withheld under the applicable provisions of the Internal Revenue Code of 1986, as amended, or other applicable laws at the time of such payments.

 

3.     Transfer. This Note has been issued subject to investment representations of the original Holder hereof and may be transferred or exchanged only in compliance with the Securities Act and applicable state securities laws and in compliance with the restrictions on transfer provided in the Subscription Agreement. Prior to the due presentment for such transfer of this Note, the Issuer and any agent of the Issuer may treat the person in whose name this Note is duly registered in the Note Register as the owner hereof for the purpose of receiving payment as herein provided and all other purposes, whether or not this Note is overdue, and neither the Issuer nor any such agent shall be affected by notice to the contrary. The transferee shall be bound, as the original Holder by the same representations and terms described herein and under the Subscription Agreement.

 

4.     Conversion by Holder. The Holder may, at its option, at any time convert the principal amount of this Note or any portion thereof, into such number of shares of fully paid and non-assessable Common Stock of the Issuer (“Conversion Shares”) as is obtained by dividing the Loan Amount by the Conversion Price. The right to convert the Note may be exercised by the Holder by telecopying, emailing to ShareholderServices@BioLargo.com, mailing (via first class mail, postage prepaid) or personally delivering an executed and completed notice of conversion (the “Notice of Voluntary Conversion”) to the Issuer. The business day on which a Notice of Voluntary Conversion is delivered in accordance with the provisions hereof shall be deemed the “Voluntary Conversion Date”. The Holder must return to Issuer the original Note. The Issuer shall cause the issuance of the Conversion Shares to an account in Holder’s name at Issuer’s transfer agent, or, upon Holder’s request, issue and deliver a paper certificate representing the Conversion Shares, within ten business days after the later to occur of (i) the Voluntary Conversion Date or (ii) the business day on which the Issuer has received from the Holder the original Note being so converted. Accrued interest shall be due on the Voluntary Conversion Date and paid as set forth above in Paragraph 1.

 

5.     Conversion by Issuer – Prior to Maturity Date. If the following two conditions are met, the Issuer may, at its option, “call” the Note due and issue shares of its common stock in full payment thereof: (i) the “Conversion Shares” are subject to an effective registration statement filed with the Securities & Exchange Commission, and (ii) the Issuer’s common stock last trades for ten (10) consecutive trading days at a value of at least three times the Unit Price. The foregoing does not create an obligation by the Issuer to register the Conversion Shares. If such conditions are met, the Issuer may require the Holder to convert the principal amount of the Note or any portion thereof, into such number of Conversion Shares as is obtained by dividing the Loan Amount by the Conversion Price. The obligation of the Holder to convert the Note may be exercised by the Company by telecopying, emailing, mailing (via first class mail, postage prepaid) or personally delivering an executed and completed notice of conversion (the “Notice of Mandatory Conversion”) to the Holder’s Address maintained in the Note Register. The Holder cov