Note

Noncontrolling Interest – Clyra Medical

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

Acquisition of In-process Research and Development

September 26, 2018,

BioLargo and Clyra Medical entered into a transaction whereby BioLargo would acquire the intangible assets of Scion Solutions, LLC (“Scion”), and in particular its in-process research and development of the “SkinDisc,” a method for treating advanced hard-to-treat wounds including diabetic ulcers. In addition to a pending patent application, the assets include the technical know-how and data developed by the Scion team.

The consideration provided to Scion is subject to an escrow agreement dated

September 26, 2018 (

“Escrow Agreement”) and earn out provisions and includes: (i)

21,000

shares of the Clyra Medical common stock; (ii)

10,000

shares of Clyra Medical common stock redeemable for

7,142,858

BioLargo common shares (detailed below); and (iii) a promissory note in the principal amount of

$1,250,000

to be paid through new capital investments and revenue, as detailed below. This consideration was initially held in escrow pending Clyra Medical raising

million “base capital” to fund its business operations.

December 17, 2018,

the parties entered into a closing agreement (“Closing Agreement”) reflecting the satisfaction of the obligation to raise

million “base capital”; at that time,

one

-half of the shares of Clyra Medical common stock exchanged for the Scion assets were released to Scion. The remaining Clyra Medical common shares (a total of

15,500

shares) remain subject to the Escrow Agreement’s performance metrics, each vesting

one

fifth

of the remaining shares of common stock: (a) notification of FDA premarket clearance of certain orthopedics products, or recognition by Clyra Medical of

$100,000

gross revenue; (b) the recognition by Clyra Medical of

$100,000

in aggregate gross revenue; (c) the granting of all or any part of the patent application for the SkinDisc product, or recognition by Clyra Medical of

$500,000

in gross revenue; (d) recognition by Clyra Medical of

million in aggregate gross revenue; and (e) recognition by Clyra Medical of

million in gross revenue.

Immediately following Clyra Medical’s purchase of Scion’s intangible assets, Clyra Medical sold to BioLargo the assets, along with

12,755

Clyra Medical common shares. In exchange, BioLargo issued Clyra Medical

7,142,858

shares of BioLargo common stock. Concurrently, BioLargo licensed back to Clyra Medical the Scion assets. Scion

may

exchange its

10,000

Clyra Medical common shares for the

7,142,858

shares of BioLargo common stock issued to Clyra Medical, subject to the escrow and earn-out provisions described above. As of

December 31, 2018,

per the Closing Agreement,

one

-half of these shares have been earned and thus

may

be redeemed, and

one

-half remain subject to the earn-out provisions. The fair value of the

7,142,858

BioLargo shares is

$1,286,000,

and

one

-half of this value is included on our

December 31, 2018

and

2019

balance sheets as (i) “In-process research and development” asset, and (ii) a “Clyra Medical shareholder” liability.

Scion Solutions – Note Payable and Clyra Liability

The promissory note in the principal amount of

$1,250,000

issued by Clyra Medical to Scion on

September 26, 2018 (

“Clyra-Scion Note”) accrues interest at the rate of

5%.

Principal and interest due under the note are to be paid periodically at a rate of

25%

of investment proceeds received by Clyra Medical. If the note is

not

paid off within

months after the date of issuance, it is automatically extended for additional

-month periods until the note is repaid in full. Payments after the initial

-month maturity date are required to be made in annual installments in an amount equal to the greater of (i)

25%

of investment proceeds received during the

-month period, and (ii)

of Clyra Medical’s gross revenues. At

December 31, 2019,

the balance due on the Clyra-Scion Note equaled

$1,007,000.

Consulting Agreement

Clyra Medical entered into a consulting agreement with Beach House Consulting, LLC, through which Jack B. Strommen will be providing consulting services to Clyra related to its sales and marketing activities and in exchange receive

$23,000

per month for a period of

four

years. The agreement originally provided that Clyra’s obligation to pay fees under the agreement begin the month following Clyra reception of FDA pre-market clearance on its

first

product, which occurred in

September 2019.

December 2019,

the parties modified the agreement to delay the accrual of fees due under the agreement, such that fees are incurred only once Clyra generates

$250,000

in monthly revenue on average for

three

consecutive months. If that contingency is met, the total cash obligation related to the agreement would be approximately

$1.1

million.

Non-Controlling Interest

During the year ended

December 31, 2019,

Clyra sold

2,680

shares of its common stock for

$536,000

(

$200

per share).

The shares of BioLargo common stock held by Clyra for the benefit of Scion (the redemption shares) are recorded on our balance sheet as a liability to “Clyra Medical Shareholder”.

Conversion, Series A Preferred shares

Sanatio Capital purchased Clyra Series A Preferred shares in

2015.

Sanatio Capital is owned by Jack B. Strommen, who subsequently joined BioLargo’s board of directors. Clyra’s Preferred Shares accrue an annual dividend of

for a period of

five

years.

December 31, 2019,

Sanatio Capital agreed to convert the accrued dividend of

$270,000

into

3,544

shares of Clyra common stock. The dividend is recorded on our

December 31, 2019

statement of stockholders’ deficit.

As of

December 31, 2019,

Clyra Medical had the following common shares outstanding:

Shareholder	Shares		Percent
BioLargo, Inc.		26,202		36	%
Sanatio Capital		15,064		21	%
Scion Solutions (1)		15,500		21	%
Other		15,897		22	%
Total		72,663

(

)

Does

not

include an additional

15,500

shares held in escrow subject to performance metrics.

We consolidate on our financial statements the operations of our partially owned subsidiary Clyra . After reviewing the guidance of ASC Topic

810,

“Consolidation”, BioLargo controls Clyra Medical. While BioLargo does

not

have voting interest control through

50%

ownership of Clyra Medical, it does exercise control under the “Variable Interest Model.” BioLargo is the primary beneficiary since it has the power to direct Clyra Medical’s activities that most significantly impact Clyra Medical’s performance and it has the obligation to absorb losses or receive benefits (through royalties and licensing) that could be potentially significant to Clyra Medical. Biolargo has consolidated Clyra’s operations through

December 31, 2019