10-K 1 blgo20191231_10k.htm FORM 10-K blgo20191231_10k.htm
 

 

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

(Mark One)

 

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

 

For the Fiscal Year ended December 31, 2019

 

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)

 

(IRS Employer

Identification No.)

 

 

14921 Chestnut St., Westminster, CA

92683 

(Address of principal executive offices)

(Zip Code)

 

Registrant’s telephone number, including area code: (888) 400-2863

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock

BLGO

OTCQB

 

Securities registered under Section 12(g) of the Exchange Act: none

 

Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ☐    No  ☒

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ☐    No  ☒

 

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 every Interactive Data File required to be submitted 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 such files).   Yes  ☒    No  ☐

 

 

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

 

 

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 aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common stock was last sold as of the last business day of the registrant’s most recently completed second fiscal quarter was $20,778,202.

 

The number of shares outstanding of the issuer’s class of common equity as of March 26, 2020 was 172,335,580; no preferred shares are issued or outstanding as of that date.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Information required by Items 10, 11, 12, 13 and 14 of Part III of this Annual Report on Form 10-K are incorporated by reference from the Registrant’s Proxy Statement for its annual meeting to be held July 23, 2020.

 

 

 

 

TABLE OF CONTENTS

 

 

 

 

Page

PART I.

   

Item 1.

Business

1

Item 1A.

Risk Factors

16

Item 1B.

Unresolved Staff Comments

28

Item 2.

Properties

28

Item 3.

Legal Proceedings

28
     

PART II.

   

Item 5.

Market for Registrant’s Common Equity, Related Stockholders Matters and Issuer Purchases of Equity Securities

29

Item 6.

Selected Financial Data

30

Item 7.

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

30

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

38

Item 8.

Financial Statements and Supplementary Data

38

Item 9.

Changes In and Disagreements with Accountants on Accounting and Financial Disclosure

38

Item 9A.

Controls and Procedures

38

Item 9B.

Other Information

39
     

PART III.

   

Item 10.

Directors, Executive Officers, and Corporate Governance

40

Item 11.

Executive Compensation

40

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

40

Item 13.

Certain Relationships and Related Transactions, and Director Independence

40

Item 14.

Principal Accounting Fees and Services

40
     

PART IV.

   

Item 15.

Exhibits, Financial Statement Schedules

41

Signatures

46

Index to Financial Statements

F-1

Report of Independent Registered Public Accounting Firm

F-2

Consolidated Financial Statements for the Years Ended December 31, 2018 and 2019

F-3

 

 

 

PART I

 

ITEM 1. BUSINESS

 

USE OF FORWARD-LOOKING STATEMENTS IN THIS REPORT

 

This annual report on Form 10-K for the year ended December 31, 2019 (the “Annual Report”) contains forward-looking statements that involve substantial risks and uncertainties. All statements, other than statements of historical fact, included in this Annual Report regarding our strategy, future operations, future financial position, future revenues, projected costs, prospects and plans and objectives of management are forward-looking statements. These forward-looking statements include, but are not limited to, predictions regarding:  

 

•          our business plan;

 

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

 

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

 

•          expenses we will incur in operating our business;

 

•          our liquidity and sufficiency of existing cash;

 

•          the success of our financing plans; and

 

•          the outcome of pending or threatened litigation.

 

You can identify these and other forward-looking statements by the use of words such as “anticipates,” “believes,” “estimates,” “expects,” “intends,” “may,” “plans,” “projects,” “will,” “would” and similar expressions, or the negative of such terms, although not all forward-looking statements contain these identifying words. Forward-looking statements also include the assumptions underlying or relating to any of the foregoing statements.

 

We have based these forward-looking statements on our current expectations and projections about future events. Although we believe that the expectations underlying our forward-looking statements are reasonable, these expectations may prove to be incorrect, and all of these statements are subject to risks and uncertainties. Therefore, you should not place undue reliance on our forward-looking statements. We have included important risks and uncertainties in the cautionary statements included in this Annual Report, particularly the section titled “Risk Factors” incorporated by reference herein. We believe these risks and uncertainties could cause actual results or events to differ materially from the forward-looking statements that we make. Should one or more of these risks and uncertainties materialize, or should underlying assumptions, projections or expectations prove incorrect, actual results, performance or financial condition may vary materially and adversely from those anticipated, estimated or expected. Our forward-looking statements do not reflect the potential impact of future acquisitions, mergers, dispositions, joint ventures or investments that we may make. We do not assume any obligation to update any of the forward-looking statements contained herein, whether as a result of new information, future events or otherwise, except as required by law. In the light of these risks and uncertainties, the forward-looking events and circumstances discussed in this report may not occur, and actual results could differ materially from those anticipated or implied in the forward-looking statements. Any forward-looking statement made by us in this report is based only on information currently available to us and speaks only as of the date on which it is made.

 

When we refer in this report to “BioLargo,” the “company,” “our company,” “we,” “us” and “our,” we mean BioLargo, Inc., and our subsidiaries, including BioLargo Life Technologies, Inc., which holds our intellectual property; Odor-No-More, Inc., which manufactures, markets, sells and distributes our odor and volatile organic compound control products; our Canadian subsidiary BioLargo Water, Inc., which develops and markets our AOS water treatment technologies; BioLargo Engineering, Science & Technologies, LLC, a professional engineering services division; and BioLargo Development Corp., which employs and provides benefits to our employees. We also own approximately 36% of Clyra Medical Technologies, Inc. (“Clyra Medical”) as of December 31, 2019, an entity we formed to commercialize our technologies in the medical and dental fields.

 

The information contained in this Annual Report is as of December 31, 2019, unless expressly stated otherwise.

 

 

 

Our Business - Innovator and Solution Provider

 

BioLargo, Inc. is an innovator of technology-based products and an environmental engineering solutions provider driven by a mission to make life better. We feature unique disruptive solutions to deliver clean air, clean water and a clean, safe environment.

 

Our mission is highlighted by our most recent innovation supported in part with grant funding from the U.S. Environmental Protection Agency to deliver a cost effective solution to remove PFAS from water. PFAS is a contaminant commonly referred to as ‘forever chemicals’ and the ‘contaminant of the decade’ that has been linked to adverse health effects, with cost to clean up estimates by analysts to approach $160 billion globally over the next 20-30 years.

 

We deliver:

 

 

complete environmental solutions to clients;

 

 

cost-effective products sold through distribution partners; and

 

 

proven technology to our licensing partners

 

BioLargo combines its robust innovation culture with a highly trained team to be fully equipped to serve clients’ needs in a wide range of environmental projects from start to finish. Our three environmentally focused operating units work together to deliver complete solutions, technology innovation, scientific validation, engineering, design, build, and construction services, maintenance, manufacturing, training, permitting, regulatory compliance, system integration, testing, monitoring and the like.

 

As a result of our continued commercial progress as well as the continual validation of our technologies, we are now actively engaged in partnership discussions with industry leaders at every level. We are continually reminded by these potential partners that they believe it is better to be the disruptor than to be the disrupted. We fully expect our products and technologies to find commercial adoption around the world and are focused on finding the right partners.

 

We also continue to develop and commercialize disruptive technologies by providing the capital, support, and expertise to expedite them from “cradle” to “maturity”. Our business strategy is straightforward: we invent or acquire technologies that we believe have the potential to be disruptive in large commercial markets; we incubate and develop these technologies to advance them and promote their commercial success as we leverage our considerable scientific, engineering, and entrepreneurial talent; we then monetize our technologies through a variety of business structures including licensure through established channel partners, joint venture, sale, spin off, or in some circumstances deploying direct-to-market strategies.

 

We seek to unlock the value of our portfolio of underlying technologies to both advance our purposeful mission while we create value for our stockholders. Once our innovative technologies reach the market, we support their deployment through expanded engineering and service offering, thus simultaneously ensuring high-quality customer service and increasing the revenue potential related to the technology. Because of the success of our engineering services division, in the past year our engineering services have grown to become a significant component of our overall business model. In recent months, the company has also seen a dramatic shift toward expanding product sales through channel partnerships, as exemplified by the Joint Venture agreement with BKT & Tomorrow Water, described in greater detail in the section “Joint Venture Agreement with BKT & Tomorrow Water”. The company is also actively engaged in discussions with other potential high-profile channel partners to pursue licensure agreements for the company’s patented technologies and will disclose material information about these discussions as it becomes available. While these discussions are continuing through the current crisis, and we have no way to accurately predict, we would not be surprised if most potential partners will want to see the crisis subside before material partnerships would be executed.

 

 

Our first significant commercial success is our air quality control products and services division Odor-No-More, Inc., which is focused on odor and volatile organic compound (“VOC”) control products sold under the brands CupriDyne Clean and Nature’s Best Science. We plan to gear up for rapid growth as resources become available and as the Covid-19 crisis subsides, as our products are experiencing more widespread market adoption in the waste handling industry through national purchasing agreements with four of the largest industry members, resulting in record revenues for this division in calendar year 2019. To this end, we now offer a menu of services to our clients including engineering design, construction, and installation of misting systems and related equipment used to deliver our liquid chemistry products, as well as ongoing maintenance services for installed systems. We also believe these products will continue to expand through distribution and licensing partnerships around the world in various markets like wastewater treatment and more.

 

We have also begun expanding with early adopters into new vertical segments such as wastewater treatment, the cannabis industry and various industrial facilities like steel manufacturing and livestock processing operations. In 2019 we executed a five-year white-label distribution agreement with Cannabusters, Inc., a company organized and owned by Mabre Corporation to feature our odor and VOC control technology to the cannabis industry in combination with their air handling and air quality systems. We believe this to be an important opportunity for BioLargo’s odor and VOC control products, as the cannabis and hemp industries are predicted to grow significantly in the US in the coming years and are known to contend with significant odor and VOC challenges (read more under Emerging High-Growth Opportunity in Cannabis / Hemp Industry). We expect the expansion of these commercial developments to be highly dependent upon the COVID-19 crisis subsiding at some level.

 

Our second commercial operation, BioLargo Engineering, Science & Technologies, LLC (“BLEST”), provides professional engineering and consulting services to third party clients on a fee-for-service basis, and also serves as our in-house engineering team to advance our proprietary technologies and complement service offerings of our other business segments, such as the engineering, design, scale-up, and fabrication activities associated with the commercialization of our water technology subsidiary’s Advanced Oxidation System (AOS) technology, as well as development of a product to treat PFAS contaminated water.

 

In addition to our two operating subsidiaries, we have technologies and products in the development pipeline progressing towards commercialization, including our water treatment system for decontamination and disinfection (our “Advanced Oxidation System”, or “AOS” – see Pilot Projects discussion below), and our medical products focused on healing chronic wounds, including our recently acquired stem cell therapy called the SkinDiscTM, which is focused on regenerative tissue management and is licensed to our minority-owned subsidiary Clyra Medical Technologies, Inc. (“Clyra Medical”).

 

We believe our current success with our industrial odor and VOC control products serves to validate our overall business strategy which is focused on technology-based products and services capable of disrupting the status quo in their applicable industry market segment. We believe that the future of our medical and clean water technologies has similar and also very large market opportunities ahead as they are introduced commercially. We also believe that the model of pursuing licensing deals with well-established channel partners in each respective market is currently being validated by the Joint Venture agreement signed with BKT and Tomorrow Water, and that the company has positive indications that further license agreements with prospective channel partners are worth pursuing for the company’s water treatment and air quality control technologies.

 

We believe it is important to note that in each operating unit, the Covid-19 virus crisis may have a delaying effect on our plans for growth and expansion. We urge the reader to consider our forward-looking statements in light of the extraordinary circumstances of today’s business, social and economic climate. Rapid expansion requires capital and/or partners and given the uncertainty around the virus, we may face delays.

 

 

Odor-No-More Industrial Odor and VOC Solutions

 

Our CupriDyne Clean industrial products reduce and eliminate tough odors and VOC’s in various industrial settings, delivered through misting systems, sprayers, water trucks and similar water delivery systems. We believe the product is the number one performing odor-control product in the market, and that it offers substantial savings to our customers compared with competing products. Our products are proven effective in eliminating a number of VOCs including, but no limited to, hydrogen sulfide (H2S), mercaptans, fatty acids, sulfur compounds and terpenes.

 

Waste Handling

 

Our customer base for our odor and VOC business is expanding. We are now selling product to four of the largest solid waste handling companies in the country, and also have secured multiple flagship clients in the wastewater treatment industry, which we expect to become a priority market.

 

Many of our customers have adopted CupriDyne Clean as a replacement for non-performing competitive products, some of which have been in use by customers for decades. Upon using CupriDyne Clean, our customers consistently express a very high degree of satisfaction with its performance compared to prior solutions. Because of this, we are realizing systematic adoption by our very large corporate customers and expect to serve these customers for years to come. Our experience has helped refine our value proposition and assemble a comprehensive menu of products and services. Our success in this market has validated the market opportunity for our products and services and encourages us to continue investing in infrastructure and sales and marketing to increase revenues. We estimate there are approximately 2,000 active landfills1, 8,000 transfer stations2, and 15,000 wastewater treatment agencies3 in the United States. While all may not have ongoing odor problems or neighbor complaints, we believe many of the facilities have need for a disruptive odor solution like CupriDyne Clean.

 

The total addressable market for the waste handling and wastewater treatment industries is greater than $1.3 billion. While we are still assessing the size of the cannabis, agriculture and steel manufacturing industries, we believe they could readily double the market opportunities for our product CupriDyne Clean. We have some early experience in the oil field services and oil field remediation markets and are highly encouraged by our products performance controlling VOC’s commonly found in those markets like BTEX (benzene, toluene, ethylbenzene and xylene) and H2S.

 

Turn-key Full-service Solutions

 

At the request of our clients, we offer a menu of services to landfills, transfer stations, and wastewater treatment facilities. These services include ongoing maintenance and on-site support services to assist our clients in the design and continued use of the various systems that deliver our liquid products in the field (such as misting systems). We have recently expanded these serves to engineering design, construction and installation. Our engineering team at BLEST has been instrumental in supporting these operations. Our system design, build and install business continues to grow. We have completed multiple installs during the last quarter and have several bids outstanding for CupriDyne Clean delivery systems.

 

Regional Adoption

 

Sales of our CupriDyne Clean products and related services were initially made at the local level, on a per-location/facility basis. We would demonstrate our product to the manager of operations at a transfer station or landfill, and he or she ultimately would decide whether to use our products. If owned by a national company, in some instances before the operations manager could buy our products, we were required to obtain official “vendor” status with the company and sign a “national purchasing agreement” (“NPA”). Doing so required a tremendous amount of effort and time. These agreements typically include the addition of our line of products which will be offered through an online purchasing portal to the members around the nation. The process of integrating the data is often delayed by months from the start date of our agreements given their very technical nature. These processes establish an easy and familiar selling and purchasing process for the ongoing and long-term relationships we seek to develop. We now have NPAs with four of the largest solid waste handling companies in the United States. Some of these accounts are now introducing us to regional managers around the country who have the ability to direct the facilities in their region to use our product. We are often replacing companies that have served these customers for 20 to 30 years giving support for our claim of ‘disruption’ to an industry.

 

 

We believe that “regional adoption” is a scalable approach for the larger solid waste handling companies that, with sufficient resources, we can implement nationwide. Our current national accounts represent the opportunity to serve more than 3,000 local operations around North America.

 

We now have a body of evidence that has been developed through direct work with our large national accounts that supports our product claims, namely superior performance, cost savings and service excellence. As a result, we are receiving support from the leadership of our national accounts to help expand our services within their organizations. This support has and will continue to demand that we increase our activity to deliver RFPs (requests for proposals), follow up with and make site visits as a result of introductions to local operators by regional and corporate leaders, follow up on referrals from local operators to other local operators and provide high level customer service and responsiveness to regional office requests for site visits, and offer our products and services to multiple locations with these regional operations. Our experience has shown that the cycle from identifying a new customer that wants to use our products to installing delivery systems and related equipment (if needed), to deploying our products can take from 60 to 180 days. The work is demanding but we know the up-front investment by our team will be rewarded with expanded adoption and recurring revenues. We are continually reminded that in many instances we are replacing companies that have been serving these customers for decades.

 

We believe that our products will become known as the odor and VOC elimination product that will become selected as a “best practices” tool for the waste handling industry. As we continue to achieve that level of recognition, we believe our large national accounts will want to modify their stance to encourage their local operators around the country to choose our product as the top performer and highest value provider. 

 

In 2019, Odor-No-More hired waste handling industry veteran Mitch Noto as its Director of Corporate Development in an effort to further develop the company’s relationships and connections in the national waste handling industry and to further position CupriDyne® Clean as a key component of “best practices” for industrial odor control. With more than 28 years operations and environmental management experience at one of the largest waste handling companies in the United States, Mr. Noto brings invaluable experience and connections. He most recently spearheaded post-collection operations nationwide and trained and mentored more than 150 field leaders responsible for operational management. He is a recognized expert in waste handling operations.

 

Joint Venture Agreement with BKT & Tomorrow Water

 

In December 2019, we entered into a “Joint Venture Framework Agreement” with a leading wastewater treatment solution provider based in South Korea (BKT Tech Co. Ltd., “BKT”), to create a South Korean entity that would manufacture odor and VOC control products based on CupriDyne® Clean. The joint venture has been formed and fund and intends to begin operations as soon as possible.

 

BKT is a leading wastewater treatment solutions provider operating in the USA, South Korea and Vietnam with a reputation for adopting innovative, environmentally sustainable technologies and practices. Headquartered in Daejeon, South Korea, BKT has an extensive distribution network throughout Southeast Asia serving more than 400 customers in South Korea alone, and has a presence in more than eight countries globally. Under the terms of the agreement, BioLargo invested $100,000 in the JV, while BKT and its U.S.-based subsidiary Tomorrow Water invested $75,000 each, for proportionate non-dilutive interests. The JV will manufacture the CupriDyne Clean -based odor and VOC control products for distributors throughout Southeast Asia, including BKT. The JV must achieve minimum sales targets to maintain exclusive rights in the Asian markets, and an annual dividend of $2 million paid to BioLargo to secure exclusive rights in perpetuity. Finally, BKT also purchased $350,000 of BioLargo common stock (1,593,807 shares).

 

Cannabis Industry

 

Odor-No-More recently entered into a 5-year “white-label” distribution agreement with Cannabusters, Inc., a sister company to Mabre Air Systems, to sell its CupriDyne Clean odor and VOC control products to Cannabis and Hemp grow and production facilities, which represent a target market that management’s research indicates is in sore need of new odor control products and services. Cannabusters has decades of experience with air quality management through their sister company Mabre Air Systems, a leader in air quality control systems in Italy.

 

 

The cannabis industry is facing increased scrutiny by regulators to better control of hazardous air pollutants called terpenes that are a natural part of production and processing. These gases can also cause malodors that demand attention and can be problematic as these companies seek to maintain good community relations and avoid legal entanglements or lawsuits over nuisance odors. Odor abatement operating procedures are part and parcel to the permitting processes for companies involved in the industry and have typically included traditional carbon filters. With the growth and concentration of cannabis related operators, the industry has come to recognize that the volume of terpenes and air flow in a typical operation are often more than the traditional carbon filter-based systems can manage effectively. Odor complaints persist. Third party experts have tested our product and demonstrated that they eliminate the odor-causing chemicals emanating from cannabis grow and production operations. As a result, we have had a number of experts in the cannabis industry tell us that our products could become part of the ‘best practices’ operating procedures for this industry and are working toward that goal. With more than 15,000 licensed operators in California alone, we believe this is a substantial market opportunity.

 

We believe the Covid-19 virus crisis may have a delaying effect on our plans for growth and expansion. We urge the reader to consider our forward-looking statements in light of the extraordinary circumstances of today’s business, social and economic climate.

 

Wastewater Treatment

 

We are beginning to sell CupriDyne Clean to wastewater treatment facilities in our local markets. Our clients are prominent municipal agencies and have indicated a desire to expand the use of our products and services to additional locations in their service areas. As a result of our success in the field, a client featured our product as an example of ‘Best Practices’ for the wastewater treatment industry at a national water quality conference hosted by the Water Environment Federation. We anticipate overall longer selling cycles given the technical sophistication of the customers in this market, and believe that channel partnerships with leading companies that already sell and service this highly technical market will be required for our ultimate success. We are encouraged and are evaluating various strategies to maximize our marketing and selling proposition into this mature and well-established market. We are actively engaged in discussions with potential distribution partners and leading engineering firms with well established relationships to the clients in order to service this very large market. To this end, we also recently added a 21-year veteran of the water and wastewater industry, Tonya Chandler to the BioLargo team to serve as Director of Strategic Marketing and Business Development and assist us in developing this distribution channel.

 

We also are in discussions with very large international distributors to sell and distribute our products around the world. These efforts would be directly supported with our newly formed joint venture to manufacture product for deliver and distribution in southeast Asia.

 

Full Service Environmental Engineering

 

Our subsidiary BioLargo Engineering, Science & Technologies, LLC (“BLEST”) offers environmental engineering services to third parties, and provides engineering support services to our internal teams to accelerate the commercialization of our technologies. Its website is found at www.BioLargoEngineering.com.

 

BLEST focuses its efforts in four areas:

 

 

Providing engineering services to third-party clients;

 

 

Supporting the AOS development efforts by working with our Canadian subsidiary, BioLargo Water;

 

 

Supporting our team at Odor-No-More to provide engineering and design of the CupriDyne Clean delivery systems to the waste handling industry; and

 

 

Developing new products or engineered solutions for high value targets like:

 

 

o

our work to develop a feasible and affordable treatment technology to address the national crisis of per- and polyfluoroalkyl substance (PFAS) water contamination, funded through a US EPA SBIR Phase I, and for which BLEST has recently submitted a Phase II EPA SBIR grant proposal to fund the scale-up and field demonstration of the new technology;

 

 

 

o

our work to refine and validate CupriDyne Clean’s efficacy and delivery systems for managing terpenes from cannabis production, and to refine and validate CupriDyne Clean’s efficacy and delivery systems for eliminating hydrogen sulfide (H2S), a common air contaminant associated with industries like wastewater treatment;

 

 

o

our work to provide initial proof of claim for CupriDyne Clean’s efficacy in high volume industrial settings for VOC and air contaminant mitigation; and

 

 

o

Legionella prevention and monitoring systems.

 

The subsidiary is based in Oak Ridge (a suburb of Knoxville), Tennessee, and employs seven scientists and engineers who collectively have over two hundred years of experience in diverse engineering fields. The team is led by Randall Moore, who served as Manager of Operations for Consulting and Engineering for the Knoxville office of CB&I Environmental & Infrastructure and was formerly a leader at The Shaw Group, Inc., a Fortune 500 global engineering firm. The other team members are also former employees of CB&I and Shaw. The team is highly experienced across multiple industries and they are considered experts in their respective fields, including chemical engineering, wastewater treatment (including design, operations, data gathering and data evaluation), process safety, energy efficiency, air pollution, design and control, technology evaluation, technology integration, air quality management & testing, engineering management, permitting, industrial hygiene, applied research and development, air testing, environmental permitting, HAZOP review, chemical processing, thermal design, computational fluid dynamics, mechanical engineering, mechanical design, NEPDES permitting, RCRA/TSCA compliance and permitting,  project management, storm water design & permitting, computer assisted design (CAD), bench chemistry, continuous emission monitoring system operator, data handling and evaluation and decommissioning and decontamination of radiological and chemical contaminated facilities.

 

Business Development at BLEST

 

In 2019, BLEST was awarded subcontracts to do work on seven U.S. Air Force bases in Texas, Kansas, Illinois and Arizona, and is attempting to secure additional contracts. Primary contractor Bhate Environmental Associates, Inc. has bid multiple additional projects with BioLargo to conduct “Fence-to-Fence (F2F) environmental compliance”. The total value of the contracts awarded (split between the prime contractor Bhate and its subcontractors, including BLEST) is in excess of $15 million over five years (with one year guaranteed). BLEST is responsible for air quality compliance, one of the three major components of the services.

 

BLEST recently completed a feasibility and placement study for 1.1 million tons of magnesium rich production tailings in Northern California for a new client, and has confirmed technical ability to convert the contents of the tailings ponds into a marketable product. This project is now transitioning into laboratory-based process development work to validate the chemical process to produce magnesium hydroxide of 99% purity from the tailings. This project has a current back log of over $125,000.

 

CIBC, BLEST’s client that is planning to build a $750 million municipal waste processing facility in Chesapeake, VA, has begun its Phase I of this project. BLEST, serving as Owner’s Engineer, will prepare a comprehensive Design Basis and a bid Specification to solicit a fixed price bid from an EPC contractor to design and construct Phase I of the plant. BLEST anticipates the Design Basis and Bid Spec to provide $90,000 in revenue to BLEST.

 

BLEST received multiple awards from Lamb Weston in February 2020, totaling approximately $78,000 for four plant sites. Lamb Weston is upgrading air pollution control systems at these sites to control emissions of oil mist and particulate from potato frying operations. BLEST is serving as design consultant and engineering oversight for new systems at each plant. With the COVID-19 crisis this work will be delayed.

 

 

Water contamination – new technology to eliminate PFAS

 

Per- and poly-fluoroalkyl substances (“PFAS”) are a class of man-made chemicals found in a wide variety of household and commercial goods, including food, fabrics, cleaning products, electronics, and more. A growing body of evidence shows that PFAS ingestion by humans is linked to cancer, fertility problems, asthma, and more. Scientists are discovering PFAS contamination in local municipal drinking water across the United States (and around the world), meaning that people and wildlife are likely being exposed to these contaminants daily. In the U.S. alone, it is estimated that PFAS contamination may be threatening the drinking water supply for over 110 million people. With PFAS posing widespread and serious water safety problems, governments and industry are actively seeking new technologies and processes to eliminate PFAS from groundwater and drinking water. In response to “extensive public interest”, the U.S. Environmental Protection Agency (“EPA”) created an “action plan” to provide short- and long-term solutions, develop national research and risk-communication programs, and otherwise take a pro-active approach to what they describe as an “emerging environmental challenge.” (See https://www.epa.gov/pfas.)

 

 EPA has established health advisories for PFOA and PFOS based on the agency’s assessment of the latest peer-reviewed science to provide drinking water system operators, and state, tribal and local officials who have the primary responsibility for overseeing these systems, with information on the health risks of these chemicals, so they can take the appropriate actions to protect their residents. EPA is committed to supporting states and public water systems as they determine the appropriate steps to reduce exposure to PFOA and PFOS in drinking water. As science on health effects of these chemicals evolves, EPA will continue to evaluate new evidence.

 

To provide Americans, including the most sensitive populations, with a margin of protection from a lifetime of exposure to PFOA and PFOS from drinking water, EPA has established the health advisory levels at 70 parts per trillion. Some states have lower limits. In summer of 2019, the State of California’s Division of Drinking Water updated its own guidelines to set notification levels as low as 5.1 parts per trillion for certain PFAS compounds. Recently Michigan has proposed to set detection limits as low as 6-8 parts per trillion (ppt) highlighting the increasing urgency of solving this environmental challenge. Given these extremely stringent PFAS limits and the seriousness of failing to provide drinking water that meets these standards, municipalities have an urgent and serious need for technologies that can effectively and cost-efficiently eliminate PFAS contaminants from drinking water supplies. Testing concluded that 86 water systems in Southern California serving 9 million residents had PFAS contamination. In response, cities are shutting down water wells until the contamination can be removed. A leading water agency based in Southern California estimates the cost associated with the clean-up of PFAS in its ground water wells to reach $850 million and market analysts estimate the price to clean up PFAS globally could exceed $160 billion over the next 20 – 30 years. In 2019, BLEST management made it a priority to develop a novel technology that could realistically address this problem.

 

Based on a novel concept to eliminate PFAS compounds, in 2019 the EPA awarded BLEST an SBIR Phase I Competitive grant in the amount of $100,000 to further investigate its solution for the removal of PFAS from water. BLEST has leveraged the grant to develop a proprietary PFAS treatment device called an “Aqueous Electrostatic Concentrator” (or “AEC”). The device, currently at a laboratory “bench” scale, has demonstrated significant capabilities in reducing PFAS contaminants in water, achieving over 99% removal in continuous water flow in many applications, with projected electrical costs below 30 cents per 1,000 gallons. BLEST engineers have determined that the AEC technology is highly scalable to the water volumes required by large municipalities. Work is progressing and highly encouraging on the AEC and management believes it could be ready for commercial trails within the next 3-6 months. The AEC has a number of key value propositions over incumbent technologies, namely lower cost and higher efficiency in the removal of PFAS.

 

 

Given the team’s long team as project leaders in some of the most notable remediation projects around the world over the past 30 years, and the break through innovation of the AEC, management is rapidly becoming recognized as a leading innovator in the field of PFAS remediation and as such, is being invited to present on the AEC at a conferences around the world. During 2019 they presented at an event organized by prominent Southern California innovation association Sustain SoCal and The Technology Collaboration Center- Water Industry Workshop held in Houston Texas, and has also been asked to present its PFAS and other solutions at several other similar events by other organizations in 2019, including the BlueTech Week in San Diego in November of 2019 and the Confluence Tech Showcase in Westchester Ohio in December. They have been asked to be a key-note speaker at a number of events that have been delayed recently as a result of the coronavirus outbreak. They are scheduled to present at the European Water Tech Week conference to be held in the Netherlands in the fall of 2020. BLEST has applied for a Phase II EPA grant for funding to finish the product design and start a go-to-market campaign. BLEST and BioLargo management have also already been approached by potential partners and customers for the AEC, and company management will provide more information about these relationships as discussions progress.

 

BioLargo Water and the Advanced Oxidation System - AOS

 

BioLargo Water is our wholly owned subsidiary located on campus at the University of Alberta, Canada, that has been primarily engaged in the research and development of our Advanced Oxidation System (“AOS”).  The AOS is our patented water treatment device that generates a series of highly oxidative species of iodine and other molecules that, because of its proprietary configuration and inner constituents, allow it to eliminate pathogenic organisms and organic contaminants as water passes through the device and it performs with extreme efficacy while consuming very little electricity. Its key application is rapid and highly efficient decontamination and disinfection of various types of waters.

 

The AOS technology has received more than 75 research grants and been a feature of more than 20 collaborations with academia and industry. It has continued to be recognized for its scientific innovation and disruptive market potential. The AOS is now being prepared to be launched commercially. Recent scale-up designs have demonstrated its ability to achieve a scalable modular design on a skid mount, which can process 500 gallons per minute. This configuration can then be replicated to achieve very large-scale municipal treatment objectives opening up a host of commercial opportunities. BioLargo Water has recently launched a crowd funding initiative at www.WaterWorksFund.com which we believe will yield a number of valuable benefits, including industry wide exposure.

 

The key value proposition of the AOS is its ability to eliminate a wide variety of contaminants with high performance while consuming extremely low levels of both input electricity and chemistry – a trait made possible by the complex set of highly oxidative iodine compounds generated within the AOS reactor. Our proof-of-concept studies and case studies have generated results that project the AOS will be more cost- and energy-efficient than commonly used advanced water treatment technologies such as UV, electro-chlorination, and ozonation. This value proposition sets the AOS technology above other water treatment options, as we believe the AOS may allow safe and reliable water treatment for significantly lower cost compared to its competitors and may even enable advanced water treatment in applications where it otherwise would have been prohibitively costly.

 

The AOS has the potential to allow reliable and cost-effective water treatment in numerous industries and applications where high-level disinfection or elimination of hard-to-treat organic contaminants is required. We believe the total serviceable market for our AOS is $10.75 billion for the poultry processing, food & beverage, and storm water segments with a target beachhead market for poultry processing in North America at an estimated $240 million.

 

AOS History

 

Our AOS was the result of breakthroughs in both advanced iodine electrochemistry and advances in materials engineering, and its invention led to BioLargo’s co-founding of a multi-year industrial 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. As an innovator, we had hoped to be able to offer a breakthrough solution into an emerging market to help shorten the adoption cycle. That did not happen. Given the fact that oil companies are now managing yet another price crisis and there has been no regulatory mandate for compliance and industry has taken a wait and see position with regards to such mandates, therefore we will continue to focus on energies on other markets until such time as proper resources are available. Our AOS is an award-winning invention that is supported by science and engineering financial support and highly competitive grants (over 75) from various federal and provincial funding agencies in Canada such as NSERC, NRC- IRAP, and Alberta Innovates and in the United States by the Metropolitan Water District of Southern California.

 

 

In a similar situation, the company had invested considerable time positioning the AOS to serve in the maritime industry to help treat ballast water discharged from shipping vessels to help protect local water ways from potentially invasive species contamination. The governing bodies responsible, the International Maritime Organization (IMO) and the US Coast guard, later extended the deadlines for regulatory compliance to what has now become a total extension of 15 years from its originally planned adoption, and pushed compliance out to the year 2030. While many companies in this sector failed or, at a minimum suffered extreme financial hardships, we wisely elected to stand down from this market and focus on markets with well-established regulatory frameworks.

 

In the fall of 2017, we had developed a strategic alliance with one of the largest engineering firms in the world to focus on the scale-up and refinement of the AOS technology. Within months of forming that strategic alliance, our then new alliance partner suffered a financial melt-down as a result of a multi-billion loss in a protracted litigation, which then resulted in the rapid dismantling and sale of all the assets of the 55,000-employee global engineering firm (CB&I).

 

In each of these situations, while obviously painful, we remained steadfast and confident that our AOS had an important role to play in the water industry. We diversified the focus of the AOS to targets where we could add value where other technologies simply could not, like poultry process (food & beverage) and now storm-water treatment. We leveraged our considerable talent to secure major grant funding to help us advance the science. We ‘made lemonade from lemons’ by starting our own full-service environmental engineering firm built on the cornerstone of innovators and team leaders from CB&I to now become known as BioLargo Engineering Science & Technologies, (BLEST).

 

Recent work done in two studies in collaboration with Dr. Rimeh Daghrir of the Centres des Technologies de L’Eau in Saint Laurent, Québec and Dr. Greg Goss of the University of Alberta in Edmonton, AB, have helped to demonstrate that AOS-treated water is not toxic when discharged to the environment, a crucial step in the process of commercializing the AOS technology. These studies helped to show that while some iodinated disinfection byproducts are produced by the AOS in low quantities (less than 1 ppb), it is not expected that the AOS produces effluent that is unsafe for the environment. Furthermore, the study conducted by Dr. Daghrir found additional evidence that the AOS is capable of degrading and eliminating pharmaceutical micropollutants such as antibiotics found in water, strengthening the technology’s claim to eliminating hard-to-treat micropollutants.

 

AOS – Going Commerial

 

Our immediate goals for the development and commercialization of the AOS are: 1) to secure direct investment into the BioLargo Water subsidiary to empower its staff to complete its development cycle, 2) complete the ongoing pre-commercial field pilot studies which are necessary to generate the techno-economic data required to secure commercial trials, entice future customers, and commence traversal of regulatory pathways, 3) conduct the first commercial trials with the AOS, and 4) secure first sale of the AOS. It is our belief that once pre-commercial pilots have concluded with the AOS, we will be able to entice major water industry players to partner with BioLargo Water to accelerate market adoption of the AOS.

 

Pre-commercial Pilot Projects for AOS

 

We are now underway on multiple pre-commercial field pilot projects involving the AOS water treatment system.

 

The first project involves treating poultry wastewater on-site at a facility in Alberta Canada, with support from the Canadian Poultry Growers Association. In this pilot, the AOS was assessed for its ability to eliminate bacteria and other contaminants from poultry processing wastewater effectively and cost-efficiently and to establish operating costs (OPEX) and capital costs (CAPEX) in a field setting. BioLargo Water built and installed a complete water “treatment train” with equipment to address all aspects of the client’s water treatment needs, including organic contaminants, suspended solids, and biological organisms, in addition to the connected AOS unit. Therefore, this pilot also represents BioLargo’s first assessment as a “total solutions provider”, which could open the door for a wider array of future water treatment market opportunities. Funded in part by Canadian government grants, the first phase of this pilot has successfully concluded. We are now working with the operator to establish a commercial pilot project to treat wastewater from all farm operations to Canadian potable standards such that it can be reused in poultry processing operations.

 

 

This will be the first-ever commercial trial for the AOS technology, marking a pivotal moment in the commercialization of BioLargo’s proprietary technology.

 

In another recently concluded pilot project, the AOS was used on-site at a Californian micro-brewery as a polishing (final disinfection) step in a wastewater “treatment train” whose goal is to reduce wastewater contaminant load to levels that would allow the microbrewery to reduce its wastewater discharge fines and enable water reuse. This pilot established the efficacy of the AOS in a field setting for disinfection, the OPEX and CAPEX of the system, and the AOS’ ability to “plug and play” in the context of diverse supporting equipment and logistics.

 

In addition, in late 2019 we commenced an AOS pre-commercial pilot that to treat Southern California stormwater at our Westminster, California facility. The pilot’s goal is to demonstrate the technical and economic feasibility of deploying the AOS to enable stormwater treatment and reuse, an important and emerging water management application in the US and Canada. The pilot is helping establish the capital and operating costs of the AOS in this application, a crucial step before potential commercial pilot clients and paying customers would consider the technology in this industrial setting. The pilot project is supported in part by research and development funding of to up to $189,000 from the National Research Council of Canada Industrial Research Assistance Program (NRC IRAP). BioLargo Water is collaborating on the project with Richard Watson & Associates, Inc. and Carollo Engineers, Inc. Richard Watson has been active in stormwater quality management since 1990 and currently consults to three watershed management groups in Los Angeles County. Carollo Engineers, a leading environmental engineering firm providing cost-effective, innovative, and reliable water treatment solutions, will provide engineering and water treatment validation for the project.

 

These pilot projects represent an important step for our AOS technology. We are confident in our disruptive water treatment technology and have proven its treatment capabilities in the lab. However, pilot projects for the AOS, as with any technology, are crucial to prove its reliability to industry stakeholders as well the capital cost and operating costs of our technology at-scale. These data will be critical to pave the way for future market adoption. We have other pilots currently in evaluation to support this same cause.

 

We have recently completed a design for a 500 gallon per minute AOS spiral design and construction is under way of a commercial prototype. We believe this accomplishment will open up a host of commercial opportunities as we show that our system can handle high volume applications.

 

We believe that our current designs for the AOS are cost-effective, commercially viable and should be ready for their first commercial launch in 2020. We secured a patent on the AOS in 2018, and another in March 2019. We intend to continue refining and improving the AOS continually to accomplish a series of goals: expanded patent coverage, extended useful life, lower capital costs, lower energy costs, optimized performance, precise configurations for specific industry challenges, portability, and identifying its performance limits. Our current and most pressing goal for the AOS, as evidenced by the pilot projects described above, is to demonstrate its efficacy in field settings, which is a crucial and necessary step for the commercialization of any water treatment system.

 

We are also evaluating opportunities to collaborate with our new joint venture partner BKT based in South Korea and its sister company based in Southern California, Tomorrow Water to work together to develop international financial support for cross border technology transfer as well as commercial opportunities.

 

BioLargo Water has recently launched a crowd funding initiative at www.WaterWorksFund.com which we believe will yield a number of valuable benefits, including industry wide exposure.

 

 

We believe the Covid-19 virus crisis may have a delaying effect on our plans for growth and expansion. We urge the reader to consider our forward-looking statements in light of the extraordinary circumstances of today’s business, social and economic climate.

 

Advanced Wound Care - Clyra Medical

 

We also are a minority stockholder and licensor of technology to Clyra Medical Technologies, Inc., a company we founded which is focused on advanced wound care, infection control and regenerative tissue therapy. Clyra has been supported through direct investment by investors, has recently secured its FDA 510(k) clearance for its first product. Clyra has assembled a world-class team that includes a 30-member advisory board of experts and clinicians from the industry. Clyra is also actively engaged in partnership discussions with industry leaders as it is preparing for targeted clinical work to validate its high value product designs.

 

We initially formed Clyra Medical to commercialize our technology in the medical products industry, which we believe can be disruptive to many competing product lines. Our initial product designs focus in the “advanced wound care” field, which includes traumatic injury, diabetic ulcers, and chronic hard-to-heal wounds. We also have designs for products focused on preventing or controlling infections. In late 2018, we also acquired our second technology, a stem cell therapy technology, SkinDisc, that is both complementary to our antimicrobial product designs and it also presents a high value proposition to offer stand-alone products to the advanced wound care industry to assist in regenerating tissue. With the addition of highly skilled team members with extensive experience and proven track record of success in the medical industry and, the addition of the SkinDisc, Clyra have expanded its plans to focus and build out a complete line of products to deliver state of the art solutions to assist in healing wounds. It is also presently evaluating a number of additional licensing opportunities to add complementary technologies and products to its portfolio with the goal of offering a complete menu of proprietary and patented products to better serve the advanced wound care patient population with state-of-the-art medical products. We believe the total addressable market for these products in the advanced wound care, dental, orthopedics and regenerative tissue markets exceeds $1 billion.

 

FDA Pre-market Clearance under Section 510(k)

 

On September 17 2019, Clyra received notification that it had received pre-market clearance from the U.S. Food and Drug Administration (“FDA”) to market its Clyra Wound Irrigation Solution, designed for cleansing, irrigating, and debriding dermal wounds and burns, in addition to moistening and lubricating absorbent wound dressings, under Section 510(k) of the Food, Drug, and Cosmetic Act. This product combines the broad-spectrum antimicrobial capabilities of iodine in a platform complex that promotes and facilitates wound healing. It is highly differentiated from existing antimicrobials in multiple ways - by the gentle nature in which they perform, extremely low dosing of active ingredients, reduced product costs, extended antimicrobial activity, and biofilm efficacy. In addition, iodine has no known acquired microbial resistance, unlike many competing products.

 

Clyra is leveraging its success on this initial product to create derivative products for infection control and wound therapy in the orthopedics, dental and veterinary markets.

 

Clyra has multiple patent applications pending for medical products, and are preparing additional applications. While these patent applications are pending, we intend to continue expanding patent coverage as we refine and expand our medical products.

 

We believe this product’s future role in the advanced wound care industry will be disruptive to many incumbent competing products like silver, hypochlorous acid and even other iodine-based products and therefore our extraordinary investment of time and money will have significant opportunity to generate a considerable return on investment as the products find their way through the FDA process for clearance and then to market adoption. Simply stated, we believe it is worth it and that we will succeed.

 

Clyra is actively engaged in negotiating collaborations with industry partners and is working to secure the capital invested directly into Clyra, that is needed to accelerate clinical validations for its high value product applications as well as sales and marketing.

 

 

SkinDisc

 

Our second technology and its related products center around the SkinDisc technology which we acquired in late 2018 from Scion Solutions, LLC (“Scion”). Scion is led by Spencer Brown, a medical device industry veteran with more than 35 years’ experience in sales, account management, and distribution in the medical device industry. The SkinDisc product was developed by Dr. Brock Liden, a renowned medical podiatrist and expert in wound care and diabetic limb salvage. The SkinDisc is a therapy product that uses a patient’s own bone marrow and plasma in a unique mixture to generate a cell-rich bio gel for use with chronic wounds. It has been tested in over 250 patient cases with no adverse effects, and has successfully aided in the salvage of limbs that otherwise would have been amputated in time frames as short at 4 to 7 weeks with one or two applications.

 

 

Intellectual Property

 

We have 20 patents issued, including 18 in the United States, and multiple pending. We believe these patents provide a foundation from which to continue building our patent portfolio, and we believe that our technology is sufficiently useful and novel that we have a reasonable basis upon which to rely on our patent protections. 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. See the detailed discussion below of our patent portfolio.

 

We regard our intellectual property as critical to our ultimate success. Our goal is to obtain, maintain and enforce patent protection for our products and technologies in geographic areas of commercial interest and to protect our trade secrets and proprietary information through laws and contractual arrangements.

 

Our Chief Science Officer, Mr. Kenneth R. Code, has been involved in the research and development of the technology since 1997. He has participated in the Canadian Federal Scientific Research and Experimental Development program, and he was instrumental in the discovery, preparation and filing of the first technology patents. He has worked with manufacturers, distributors and suppliers in a wide variety of industries to gain a full appreciation of the potential applications and the methodologies applicable to our technology for their manufacture and performance. He continues to research methods and applications to continue to expand the potential uses of our technology as well as work to uncover new discoveries that may provide additional commercial applications to help solve real world problems in the field of disinfection.

 

We incurred approximately $1,500,000 in expense related to our research and development activities in 2019, a decrease of approximately $250,000 compared with the prior year. This was due to a shit of focus in our Canadian facility to commercializing our AOS technology.

 

We believe that our suite of intellectual property covers the presently targeted major areas of focus for our licensing strategy. The description of our intellectual property, at present, is as follows:

 

U.S. Patents

 

●            U.S. Patent 10,238,990, issued on March 26, 2019, and 10,051,866, issued on August 21, 2018, which protect our AOS system.

 

●            U.S. Patent 10,046,078, issued on August 14, 2018, relating to the misting systems that eliminate odors in waste transfer stations, landfills, and other waste handling facilities.

 

●            U.S. Patent 9,883,653 issued on February 8, 2018, which encompasses a litter composition used in the absorption of animal wastes.

 

●            US Patent 9,414,601 granted August 16, 2016, relating to the use of an article for application to a surface to provide antimicrobial and/or anti-odor activity. At least one of the reagents is coated with a water-soluble, water dispersible or water-penetrable covering that prevents ambient conditions of 50% relative humidity at 25ºC from causing more than 10% of the total reagents exposed to the ambient conditions from reacting in a twenty-four hour period.

 

 

●            U.S. Patent 8,846,067, issued on September 30, 2014, which encompasses a method of treating a wound or burn on tissue to reduce microbe growth about a wound comprising applying an antimicrobial composition to the wound or burn on tissue using a proprietary stable iodine gel or liquid. This patent covers our technology as used in products being developed by our subsidiary, Clyra Medical Technologies.

 

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

 

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

 

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

 

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

 

●            U.S. Patent 8,574,610, issued on November 5, 2013, relating to flowable powder compositions, including our cat litter additive.

 

●            U.S. Patent 8,257,749, issued on September 4, 2012, relating to the use of our technology as protection of against antimicrobial activity in environments that need to be protected or cleansed of microbial or chemical material. These environments include closed and open environments and absorbent sheet materials that exhibit stability until activated by aqueous environments. The field also includes novel particle technology, coating technology or micro-encapsulation technology to control the stability of chemicals that may be used to kill or inhibit the growth of microbes to water vapor or humidity for such applications.

 

●            U.S. Patent 8,226,964, issued on July 24, 2012, relating to use of our technology as a treatment of residue, deposits or coatings within large liquid carrying structures such as pipes, drains, ducts, conduits, run-offs, tunnels and the like, using iodine, delivered in a variety of physical forms and methods, including using its action to physically disrupt coatings. The iodine’s disruptive activity may be combined with other physical removal systems such as pigging, scraping, tunneling, etching or grooving systems or the like.

 

●            U.S. Patent 8,021,610, issued on September 20, 2011, titled “System providing antimicrobial activity to an environment,” relating to the reduction of microbial content in a land mass. Related to this patent are patents held in Canada and the European Union.

 

●            U.S. Patent 7,943,158, issued on May 17, 2011, titled “Absorbent systems providing antimicrobial activity,” relating to the reduction of microbial content by providing molecular iodine to stabilized reagents.

 

●            U.S. Patent 7,867,510, issued on January 11, 2011, titled “Material having antimicrobial activity when wet,” relating to articles for delivering stable iodine-generating compositions.

 

Pending Patent Applications

 

Most recently, we filed two patent applications in the United States for our advanced wound care formulas. The inventions in these applications form the basis for the work at Clyra Medical and the products for which that subsidiary intends to seek FDA approval. In addition to these applications, we have filed patent applications in multiple foreign countries, including the European Union, pursuant to the PCT, and other provisional applications.

 

 

Subject to adequate financing, we intend to continue to expand and enhance our suite of intellectual property through ongoing focus on product development, new intellectual property development and patent applications, and further third-party testing and validations for specific areas of focus for commercial exploitation. We currently anticipate that additional patent applications will be filed during the next 12 months with the USPTO and the PCT, although we are uncertain of the cost of such patent filings, which will depend upon the number of such applications prepared and filed. The expense associated with seeking patent rights in multiple foreign countries is expensive and will require substantial ongoing capital resources. However, we cannot give any assurance that adequate capital will be available. Without adequate capital resources, we will be forced to abandon patent applications and irrevocably lose rights to our technologies.

 

Our Company

 

BioLargo, Inc. is a corporation organized under the laws of the state of Delaware. Our common stock is quoted on the OTC Markets OTCQB “Venture Marketplace” under the trading symbol “BLGO”.

 

Our corporate offices are located at 14921 Chestnut St., Westminster, California 92683. We have a research facility and offices at the University of Alberta in Canada, and our engineering team is located at 105 Fordham Road in Oak Ridge, Tennessee. Our telephone number is (888) 400-2863. We operate through multiple wholly-owned subsidiary entities, including: BioLargo Life Technologies, Inc., to hold our intellectual property; Odor-No-More, Inc., to manufacture, market, sell and distribute our odor control products; BioLargo Water Investment Group, Inc., which is the sole owner of a Canadian subsidiary, BioLargo Water, Inc., for our Canadian research and development and AOS commercialization operations; BioLargo Development Corp., through which our employees are employed; BioLargo Engineering, Science & Technologies, LLC. Additionally, we own 36% of Clyra Medical Technologies, Inc., formed to develop and market medical products based on our technology.

 

Our principal corporate website is www.BioLargo.com. We also maintain a blog at www.biolargo.blogspot.com. Websites concerning our subsidiaries are www.odornomore.com, www.CupriDyne.com, www.clyramedical.com, www.biolargowater.com, and www.biolargoengineering.com. The information on our websites and blog are not, and shall not be deemed to be, a part of this Annual Report on Form 10-K.

 

Executive Officers

 

As of December 31, 2019, our executive officers were:

 

 

Dennis P. Calvert: Chief Executive Officer, President and Chairman of the Board

 

 

Charles K. Dargan II: Chief Financial Officer

 

 

Joseph L. Provenzano: Corporate Secretary and Vice President of Operations

 

Mr. Provenzano also serves as president of our wholly owned subsidiary, Odor-No-More, Inc. Steven V. Harrison is president of our subsidiary Clyra Medical Technologies, Inc. Mr. Calvert is president of our technology holding company, BioLargo Life Technologies, Inc., and of BioLargo Water USA, Inc. Richard Smith is president of our Canadian subsidiary BioLargo Water, Inc.

 

Employees

 

As of December 31, 2019, we had 25 full time employees. Our employees including professional engineers, masters of engineering, and PhDs, as well as sales, support and administrative personnel. We also utilize consultants on an as-needed basis who provide certain specified services to us.

 

 

ITEM 1A.  RISK FACTORS

 

Our future results of operations, financial condition and liquidity and the market price for our securities are subject to numerous risks, many of which are driven by factors that we cannot control. The following cautionary discussion of risks, uncertainties and assumptions relevant to our business includes factors we believe could cause our actual results to differ materially from expected and historical results. Other factors beyond those listed below, including factors unknown to us and factors known to us which we have not currently determined to be material, could also adversely affect our business, results of operations, financial condition, prospects and cash flows. Also see “Forward-looking Statements” above.

 

Risks Relating to our Business

 

COVID-19

 

The Covid-19 crisis creates an environment in which no person can be certain about what is next. The global reach and impact are far reaching and place extreme pressure on financing, sales, accounts receivable collection cycles, and any growth plan. We believe the Covid-19 virus crisis may have a delaying effect on our plans for growth and expansion. We urge the reader to consider our forward-looking statements in light of the extraordinary circumstances of today’s business, social and economic climate. While our company is mobilizing to be a solutions provider to help inhibit the spread of Covid-19, these business plans are not mature and may be more difficult that we expect. While it may be reasonable to assume that the crisis will subside, we cannot be certain about the timing and a host of impacts that cannot be easily predicted to occur.

 

Our limited operating history makes evaluation of our business difficult.

 

We have limited and only nominal historical financial data upon which to base planned operating expenses or forecast accurately our future operating results. Because our operations are not yet sufficient to fund our operational expenses, we rely on investor capital to fund operations. Our limited operational history make it difficult to forecast the need for future financing activities. Further, our limited operating history will make it difficult for investors and securities analysts to evaluate our business and prospects. Our failure to address these risks and difficulties successfully could seriously harm us.

 

We have never generated significant revenues, have a history of losses, and cannot assure you that we will ever become or remain profitable.

 

We have not yet generated any significant revenue from operations, and, accordingly, we have incurred net losses every year since our inception. To date, we have dedicated most of our financial resources to research and development, general and administrative expenses, and initial sales and marketing activities. We have funded the majority of our activities through the issuance of convertible debt or equity securities. Although sale of our CupriDyne Clean products are increasing, and we are devoting more energy and money to our sales and marketing activities, we continue to anticipate net losses and negative cash flow for the foreseeable future. Our ability to reach positive cash flow depends on many factors, including our ability to fund sales and marketing activities, and the rate of client adoption. There can be no assurance that our revenues will be sufficient for us to become profitable in 2020 or future years, or thereafter maintain profitability. We may also face unforeseen problems, difficulties, expenses or delays in implementing our business plan, including generally the need for odor control products in solid waste handling operations, which we may not fully understand or be able to predict.

 

Our cash requirements are significant. We will continue to require additional financing to sustain our operations and without it we may not be able to continue operations.

 

Our cash requirements and expenses continue to be significant. Our net cash used in continuing operations for the year ended December 31, 2019 was almost $4,000,000, over $300,000 per month, of which approximately $100,000 per month was financed by outside investors directly into Clyra Medical Technologies, Inc. During that same period, we generated only $1,861,000 in total gross revenues. Thus, in order to become profitable, we must significantly increase our revenues. Although our revenues are increasing through sales of our products and from our engineering division, we expect to continue to use cash in 2019 as it becomes available.

 

 

At December 31, 2019, we had working capital deficit of approximately $3,289,000. Our auditor’s report for the year ended December 31, 2019 includes an explanatory paragraph to their audit opinion stating that our recurring losses from operations and working capital deficiency raise substantial doubt about our ability to continue as a going concern. We do not currently have sufficient financial resources to fund our operations or those of our subsidiaries. Therefore, we need additional financing to continue these operations.

 

We have relied on private securities offerings, as well as Lincoln Park Capital (see below), to provide cash needed to close the gap between operational revenue and expenses. Our ability to rely on private financing may change if the United States enters a recession, or if the stock market does not recover from the current bull market. The coronavirus pandemic, and the responses of governments worldwide to the pandemic, has caused a $4 trillion dollar loss in the U.S. stock market. We expect that many private investors will forego high-risk investments, and thus while we have been able to rely on private investments in the past, we may not be able to do so in the near future.

 

In August 2017, we entered into a three-year purchase agreement with Lincoln Park Capital Fund LLC (“Lincoln Park”) through which we may direct Lincoln Park to purchase shares of our common stock at prices that depend on the market price of our stock (the “LPC Agreement”). Over time, and subject to multiple limitations, one of which is that our stock closes at $0.15 or more per share, we may direct Lincoln Park to purchase up to $10,000,000 of our common stock. Since inception of the LPC Agreement, through December 31, 2019, we directed Lincoln Park to purchase 4,025,733 shares of our common stock, and received $1,349,969 in proceeds. In the first quarter of 2020, we relied on the LPC Agreement, cash from sales, collection of accounts receivable, as well as the capital provided by the JV transaction for South Korea for operational cash. On March 30, 2020, we entered into a new purchase agreement with Lincoln Park which improves the terms of the facility and with an initial purchase of 1,785,715 shares of common stock for $250,000. The extent to which we may continue to rely on Lincoln Park as a source of funding in 2020 depends on multiple factors, including the extent to which we are able to secure working capital from other sources. If obtaining sufficient funding from Lincoln Park were to prove unavailable or prohibitively dilutive, we will need to secure another source of funding in order to satisfy our working capital needs. Should the financing we require to sustain our working capital needs be unavailable or prohibitively expensive when we require it, the consequences could be a material adverse effect on our business, operating results, financial condition and prospects.

 

We regularly issue stock, or stock options, instead of cash, to pay some of our operating expenses. These issuances are dilutive to our existing stockholders.

 

We are party to agreements that provide for the payment of, or permit us to pay at our option, securities rather than cash in consideration for services provided to us. We include these provisions in agreements to allow us to preserve cash. We anticipate that we will continue to do so in the future. All such issuances preserve our cash reserves, but are also dilutive to our stockholders because they increase (and will increase in the future) the total number of shares of our common stock issued and outstanding, even though such arrangements assist us with managing our cash flow. These issuances also increase the expense amount recorded.

 

Our stockholders face further potential dilution in any new financing.

 

Our private securities offerings typically provide for convertible securities, including notes and warrants. Any additional capital that we raise would dilute the interest of the current stockholders and any persons who may become stockholders before such financing. Given the low price of our common stock, such dilution in any financing of a significant amount could be substantial.

 

 

Our stockholders face further potential adverse effects from the terms of any preferred stock that may be issued in the future.

 

Our certificate of incorporation authorizes 50 million shares of preferred stock. None are outstanding as of the date hereof. In order to raise capital to meet expenses or to acquire a business, our board of directors may issue additional stock, including preferred stock. Any preferred stock that we may issue may have voting rights, liquidation preferences, redemption rights and other rights, preferences and privileges. The rights of the holders of our common stock will be subject to, and in many respects subordinate to, the rights of the holders of any such preferred stock. Furthermore, such preferred stock may have other rights, including economic rights, senior to our common stock that could have a material adverse effect on the value of our common stock. Preferred stock, while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, can also have the effect of making it more difficult for a third party to acquire a majority of our outstanding voting stock, thereby delaying, deferring or preventing a change in control of our company.  

 

There are several specific business opportunities we are considering in further development of our business. None of these opportunities is yet the subject of a definitive agreement, and most or all of these opportunities will require additional funding obligations on our part, for which funding is not currently in place.

 

In furtherance of our business plan, we are presently considering a number of opportunities to promote our business, to further develop and broaden, and to license, our technology with third parties. While discussions are underway with respect to such opportunities, there are no definitive agreements in place with respect to any of such opportunities at this time. There can be no assurance that any of such opportunities being discussed will result in definitive agreements or, if definitive agreements are entered into, that they will be on terms that are favorable to us.  

 

Moreover, should any of these opportunities result in definitive agreements being executed or consummated, we may be required to expend additional monies above and beyond our current operating budget to promote such endeavors. No such financing is in place at this time for such endeavors, and we cannot assure you that any such financing will be available, or if it is available, whether it will be on terms that are favorable to our company. 

 

We expect to incur future losses and may not be able to achieve profitability.

 

Although we are generating revenue from the sale of our products, and we expect to generate revenue from new products we are introducing, and eventually from other license or supply agreements, we anticipate net losses and negative cash flow to continue for the foreseeable future until our products are expanded in the marketplace and they gain broader acceptance by resellers and customers. Our current level of sales is not sufficient to support the financial needs of our business. We cannot predict when or if sales volumes will be sufficiently large to cover our operating expenses. We intend to expand our marketing efforts of our products as financial resources are available, and we intend to continue to expand our research and development efforts. Consequently, we will need to generate significant additional revenue or seek additional financings to fund our operations. This has put a proportionate corresponding demand on capital. Our ability to achieve profitability is dependent upon our efforts to deliver a viable product and our ability to successfully bring it to market, which we are currently pursuing. Although our management is optimistic that we will succeed in licensing our technology, we cannot be certain as to timing or whether we will generate sufficient revenue to be able to operate profitably. If we cannot achieve or sustain profitability, then we may not be able to fund our expected cash needs or continue our operations. If we are not able to devote adequate resources to promote commercialization of our technology, then our business plans will suffer and may fail.  

 

Because we have limited resources to devote to sales, marketing and licensing efforts with respect to our technology, any delay in such efforts may jeopardize future research and development of technologies and commercialization of our technology. Although our management believes that it can finance commercialization efforts through sales of our securities and possibly other capital sources, if we do not successfully bring our technology to market, our ability to generate revenues will be adversely affected.  

 

 

Our internal controls are not effective.

 

We have determined that our disclosure controls and procedures and our internal control over financial reporting are currently not effective. The lack of effective internal controls, has not yet, but could in the future, materially adversely affect our financial condition and ability to carry out our business plan. As more financial resources come available, we need to invest in additional personnel to better manage the financial reporting processes.

 

Our management team for financial reporting, under the supervision and with the participation of our chief executive officer and our chief financial officer, conducted an evaluation of the effectiveness of the design and operation of our internal controls. Recognizing the dynamic nature and growth of the Company’s business in the past two years, including the growth of the core operations and the increase in the number of employees, management has recognized the strain on the overall internal control environment. As a result, management has concluded that its internal controls over financial reporting are not effective. Management identified a material weakness with respect to deficiencies in its financial closing and reporting procedures. Management believes this is due to a lack of resources. Management intends to add accounting personnel and operating staff and more sophisticated systems in order to improve its reporting procedures and internal controls, subject to available capital. Until we have adequate resources to increase address these issues, any material weaknesses may materially adversely affect our ability to report accurately our financial condition and results of operations in the future in a timely and reliable manner. In addition, although we continually review and evaluate internal control systems to allow management to report on the sufficiency of our internal controls, we cannot assure you that we will not discover additional weaknesses in our internal control over financial reporting. Any such additional weakness or failure to remediate the existing weakness could materially adversely affect our financial condition or ability to comply with applicable financial reporting requirements and the requirements of the Company’s various financing agreements. 

 

If we are not able to manage our anticipated growth effectively, we may not become profitable.

 

We anticipate that expansion will continue to be required to address potential market opportunities for our technology and our products. Our existing infrastructure is limited. While we believe our current manufacturing processes as well as our office and warehousing provide the basic resources to expand as we grow sales of CupriDyne Clean to more than $2 million per month, our infrastructure will need more staffing to support manufacturing, customer service, administration as well as sales/account executive functions. There can be no assurance that we will have the financial resources to create new infrastructure, or that any such infrastructure will be sufficiently scalable to manage future growth, if any. There also can be no assurance that, if we invest in additional infrastructure, we will be effective in expanding our operations or that our systems, procedures or controls will be adequate to support such expansion. In addition, we will need to provide additional sales and support services to our partners if we achieve our anticipated growth with respect to the sale of our technology for various applications. Failure to properly manage an increase in customer demands could result in a material adverse effect on customer satisfaction, our ability to meet our contractual obligations, and our operating results.  

 

Some of the products incorporating our technology will require regulatory approval.

 

The products in which our technology may be incorporated have both regulated and non-regulated applications. The regulatory approvals for certain applications may be difficult, impossible, time consuming and/or expensive to obtain. While our management believes such approvals can be obtained for the applications contemplated, until those approvals from the FDA or the EPA or other regulatory bodies, at the federal and state levels, as may be required are obtained, we may not be able to generate commercial revenues for regulated products. Certain specific regulated applications and their use require highly technical analysis and additional third-party validation and will require regulatory approvals from organizations like the FDA. Certain applications may also be subject to additional state and local agency regulations, increasing the cost and time associated with commercial strategies. Additionally, most products incorporating our technology that may be sold in the European Union (“EU”) will require EU and possibly also individual country regulatory approval. All such approvals, including additional testing, are time-consuming, expensive and do not have assured outcomes of ultimate regulatory approval. 

 

 

We need to outsource and rely on third parties for the manufacture of the chemicals, material components or delivery apparatus used in our technology, and part of our future success will be dependent on the timeliness and effectiveness of the efforts of these third parties.

 

We do not have the required financial and human resources or capability to manufacture the chemicals necessary to make our odor control products. Our business model calls for the outsourcing of the manufacture of these chemicals in order to reduce our capital and infrastructure costs as a means of potentially improving our financial position and the profitability of our business. Accordingly, we must enter into agreements with other companies that can assist us and provide certain capabilities, including sourcing and manufacturing, which we do not possess. We may not be successful in entering into such alliances on favorable terms or at all. Even if we do succeed in securing such agreements, we may not be able to maintain them. Furthermore, any delay in entering into agreements could delay the development and commercialization of our technology or reduce its competitiveness even if it reaches the market. Any such delay related to such future agreements could adversely affect our business.  While we have been able to secure materials and supplies like plastic containers through the COVID-19 crisis, we have not assurances that our ability to purchase in large quantities on a continual basis.

 

If any party to which we have outsourced certain functions fails to perform its obligations under agreements with us, the commercialization of our technology could be delayed or curtailed.

 

To the extent that we rely on other companies to manufacture the chemicals used in our technology, or sell or market products incorporating our technology, we will be dependent on the timeliness and effectiveness of their efforts. If any of these parties does not perform its obligations in a timely and effective manner, the commercialization of our technology could be delayed or curtailed because we may not have sufficient financial resources or capabilities to continue such efforts on our own.

 

We rely on a small number of key supply ingredients in order to manufacture our products.

 

All of the supply ingredients used to manufacture our products are readily available from multiple suppliers. However, commodity prices for these ingredients can vary significantly, and the margins that we are able to generate could decline if prices rise. If our manufacturing costs rise significantly, we may be forced to raise the prices for our products, which may reduce their acceptance in the marketplace.

 

If our technology or products incorporating our technology do not gain market acceptance, it is unlikely that we will become profitable.

 

The potential markets for products into which our technology can be incorporated are rapidly evolving, and we have many successful competitors including some of the largest and most well-established companies in the world. The commercial success of products incorporating our technology will depend on the adoption of our technology by commercial and consumer end users in various fields.

 

 Market acceptance may depend on many factors, including:

 

 

the willingness and ability of consumers and industry partners to adopt new technologies from a company with little or no history in the industry;

 

 

our ability to convince potential industry partners and consumers that our technology is an attractive alternative to other competing technologies;

 

 

our ability to license our technology in a commercially effective manner;

 

 

our ability to continue to fund operations while our products move through the process of gaining acceptance, before the time in which we are able to scale up production to obtain economies of scale; and

 

 

our ability to overcome brand loyalties.

 

 

If products incorporating our technology do not achieve a significant level of market acceptance, then demand for our technology itself may not develop as expected, and, in such event, it is unlikely that we will become profitable. 

 

Any revenues that we may earn in the future are unpredictable, and our operating results are likely to fluctuate from quarter to quarter.

 

We believe that our future operating results will fluctuate due to a variety of factors, including:

 

 

delays in product development by us or third parties;

 

 

market acceptance of products incorporating our technology;

 

 

changes in the demand for, and pricing of, products incorporating our technology;

 

 

competition and pricing pressure from competitive products; and

 

 

expenses related to, and the results of, proceedings relating to our intellectual property.

 

We expect our operating expenses will continue to fluctuate significantly in 2020 and beyond, as we continue our research and development and increase our marketing and licensing activities. Although we expect to generate revenues from licensing our technology in the future, revenues may decline or not grow as anticipated, and our operating results could be substantially harmed for a particular fiscal period. Moreover, our operating results in some quarters may not meet the expectations of stock market analysts and investors. In that case, our stock price most likely would decline.

 

Some of our revenue may be dependent on the award of new contracts from the U.S. government, which we do not directly control.

 

Some of our revenue has been generated from sales to the U.S. Defense Logistics Agency through a bid process in response to request for bids. The timing and size of requests for bids is unpredictable and outside of our control. The number of other companies competing for these bids is also unpredictable and outside of our control. In the event of more competition for these awards, we may have to reduce our margins. These variables make it difficult to predict when or if we will sell more products to the U.S. government, which in turns makes it difficult to stock inventory and purchase raw materials.

 

We have limited product distribution experience, and we rely in part on third parties who may not successfully sell our products.

 

We have limited product distribution experience and rely in part on product distribution arrangements with third parties. In our future product offerings, we may rely solely on third parties for product sales and distribution. We also plan to license our technology to certain third parties for commercialization of certain applications. We expect to enter into additional distribution agreements and licensing agreements in the future, and we may not be able to enter into these additional agreements on terms that are favorable to us, if at all. In addition, we may have limited or no control over the distribution activities of these third parties. These third parties could sell competing products and may devote insufficient sales efforts to our products. As a result, our future revenues from sales of our products, if any, will depend on the success of the efforts of these third parties.

 

 

We may not be able to attract or retain qualified senior personnel.

 

We believe we are currently able to manage our current business with our existing management team. However, as we expand the scope of our operations, we will need to obtain the full-time services of additional senior management and other personnel. Competition for highly-skilled personnel is intense, and there can be no assurance that we will be able to attract or retain qualified senior personnel. Our failure to do so could have an adverse effect on our ability to implement our business plan. As we add full-time senior personnel, our overhead expenses for salaries and related items will increase from current levels and, depending upon the number of personnel we hire and their compensation packages, these increases could be substantial.

 

If we lose our key personnel or are unable to attract and retain additional personnel, we may be unable to achieve profitability.

 

Our future success is substantially dependent on the efforts of our senior management, particularly Dennis P. Calvert, our president and chief executive officer. The loss of the services of Mr. Calvert or other members of our senior management may significantly delay or prevent the achievement of product development and other business objectives. Because of the scientific nature of our business, we depend substantially on our ability to attract and retain qualified marketing, scientific and technical personnel. There is intense competition among specialized and technologically-oriented companies for qualified personnel in the areas of our activities. If we lose the services of, or do not successfully recruit, key marketing, scientific and technical personnel, then the growth of our business could be substantially impaired. At present, we do not maintain key man insurance for any of our senior management, although management is evaluating the potential of securing this type of insurance in the future as may be available. 

 

Nondisclosure agreements with employees and others may not adequately prevent disclosure of trade secrets and other proprietary information.

 

In order to protect our proprietary technology and processes, we rely in part on nondisclosure agreements with our employees, potential licensing partners, potential manufacturing partners, testing facilities, universities, consultants, agents and other organizations to which we disclose our proprietary information. These agreements may not effectively prevent disclosure of confidential information and may not provide an adequate remedy in the event of unauthorized disclosure of confidential information. In addition, others may independently discover trade secrets and proprietary information, and in such cases we could not assert any trade secret rights against such parties. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights, and failure to obtain or maintain trade secret protection could adversely affect our competitive business position. Since we rely on trade secrets and nondisclosure agreements, in addition to patents, to protect some of our intellectual property, there is a risk that third parties may obtain and improperly utilize our proprietary information to our competitive disadvantage. We may not be able to detect unauthorized use or take appropriate and timely steps to enforce our intellectual property rights. 

 

We may become subject to product liability claims.

 

As a business that manufactures and markets products for use by consumers and institutions, we may become liable for any damage caused by our products, whether used in the manner intended or not. Any such claim of liability, whether meritorious or not, could be time-consuming and/or result in costly litigation. Although we maintain general liability insurance, our insurance may not cover potential claims of the types described above and may not be adequate to indemnify for all liabilities that may be imposed. Any imposition of liability that is not covered by insurance or is in excess of insurance coverage could harm our business and operating results, and you may lose some or all of any investment you have made, or may make, in our company. 

 

Litigation or the actions of regulatory authorities may harm our business or otherwise distract our management.

 

Substantial, complex or extended litigation could cause us to incur major expenditures and distract our management. For example, lawsuits by employees, former employees, investors, stockholders, partners, customers or others, or actions taken by regulatory authorities, could be very costly and substantially disrupt our business. As a result of our financing activities over time, and by virtue of the number of people that have invested in our company, we face increased risk of lawsuits from investors. Such lawsuits or actions could from time to time be filed against our company and/or our executive officers and directors. Such lawsuits and actions are not uncommon, and we cannot assure you that we will always be able to resolve such disputes or actions on terms favorable to our company.

 

 

If we suffer negative publicity concerning the safety or efficacy of our products, our sales may be harmed.

 

If concerns should arise about the safety or efficacy of any of our products that are marketed, regardless of whether or not such concerns have a basis in generally accepted science or peer-reviewed scientific research, such concerns could adversely affect the market for those products. Similarly, negative publicity could result in an increased number of product liability claims, whether or not those claims are supported by applicable law.

 

The licensing of our technology or the manufacture, use or sale of products incorporating our technology may infringe on the patent rights of others, and we may be forced to litigate if an intellectual property dispute arises.

 

If we infringe or are alleged to have infringed another party’s patent rights, we may be required to seek a license, defend an infringement action or challenge the validity of the patents in court. Patent litigation is costly and time consuming. We may not have sufficient resources to bring these actions to a successful conclusion. In addition, if we do not obtain a license, do not successfully defend an infringement action or are unable to have infringed patents declared invalid, we may:

 

 

incur substantial monetary damages;

 

 

encounter significant delays in marketing our current and proposed product candidates;

 

 

be unable to conduct or participate in the manufacture, use or sale of product candidates or methods of treatment requiring licenses;

 

 

lose patent protection for our inventions and products; or

 

 

find our patents are unenforceable, invalid or have a reduced scope of protection

 

Parties making such claims may be able to obtain injunctive relief that could effectively block our company’s ability to further develop or commercialize our current and proposed product candidates in the United States and abroad and could result in the award of substantial damages. Defense of any lawsuit or failure to obtain any such license could substantially harm our company. Litigation, regardless of outcome, could result in substantial cost to, and a diversion of efforts by, our company.

 

Our patents are expensive to maintain, our patent applications are expensive to prosecute, and thus we are unable to file for patent protection in many countries.

 

Our ability to compete effectively will depend in part on our ability to develop and maintain proprietary aspects of our technology and either to operate without infringing the proprietary rights of others or to obtain rights to technology owned by third parties. Pending patent applications relating to our technology may not result in the issuance of any patents or any issued patents that will offer protection against competitors with similar technology. We must employ patent attorneys to prosecute our patent applications both in the United States and internationally. International patent protection requires the retention of patent counsel and the payment of patent application fees in each foreign country in which we desire patent protection, on or before filing deadlines set forth by the International Patent Cooperation Treaty (“PCT”). We therefore choose to file patent applications only in foreign countries where we believe the commercial opportunities require it, considering our available financial resources and the needs for our technology. This has resulted, and will continue to result, in the irrevocable loss of patent rights in all but a few foreign jurisdictions.

 

 

Patents we receive may be challenged, invalidated or circumvented in the future, or the rights created by those patents may not provide a competitive advantage. We also rely on trade secrets, technical know-how and continuing invention to develop and maintain our competitive position. Others may independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets.

 

We are subject to risks related to future business outside of the United States.

 

Over time, we may develop business relationships outside of North America, and as those efforts are pursued, we will face risks related to those relationships such as:

 

 

foreign currency fluctuations;

 

 

unstable political, economic, financial and market conditions;

 

 

import and export license requirements;

 

 

trade restrictions;

 

 

increases in tariffs and taxes;

 

 

high levels of inflation;

 

 

restrictions on repatriating foreign profits back to the United States;

 

 

greater difficulty collecting accounts receivable and longer payment cycles;

 

 

less favorable intellectual property laws, and the lack of intellectual property legal protection;

 

 

regulatory requirements;

 

 

unfamiliarity with foreign laws and regulations; and

 

 

changes in labor conditions and difficulties in staffing and managing international operations.

 

The volatility of certain raw material costs may adversely affect operations and competitive price advantages for products that incorporate our technology.

 

Most of the chemicals and other key materials that we use in our business, such as minerals, fiber materials and packaging materials, are neither generally scarce nor price sensitive, but prices for such chemicals and materials can be cyclical. Supply and demand factors, which are beyond our control, generally affect the price of our raw materials. We try to minimize the effect of price increases through production efficiency and the use of alternative suppliers, but these efforts are limited by the size of our operations. If we are unable to minimize the effects of increased raw material costs, our business, financial condition, results of operations and cash flows may be materially adversely affected.

 

Certain of our products sales historically have been highly impacted by fluctuations in seasons and weather.

 

Industrial odor control products have proven highly effective in controlling volatile organic compounds that are released as vapors produced by decomposing waste material. Such vapors are produced with the highest degree of intensity in temperatures between 40 degrees Fahrenheit (5 degrees Celsius) and 140 degrees Fahrenheit (60 degrees Celsius). When weather patterns are cold or in times of precipitation, our clients are less prone to use our odor control products, presumably because such vapors are less noticeable or, in the case of precipitation, can be washed away or altered. This leads to unpredictability in use and sales patterns for, especially, our CupriDyne Clean product line which accounts for over one-half our total sales.

 

 

The cost of maintaining our public company reporting obligations is high.

 

We are obligated to maintain our periodic public filings and public reporting requirements, on a timely basis, under the rules and regulations of the SEC. In order to meet these obligations, we will need to continue to raise capital. If adequate funds are not available, we will be unable to comply with those requirements and could cease to be qualified to have our stock traded in the public market. As a public company, we incur significant legal, accounting and other expenses. In addition, the Sarbanes-Oxley Act of 2002, as well as related rules adopted by the SEC, has imposed substantial requirements on public companies, including certain corporate governance practices and requirements relating to internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act.

 

Business disruptions could seriously harm our future revenue and financial condition and increase our costs and expenses.

 

Our operations, and those of our contractors and consultants, could be subject to pandemics, earthquakes, power shortages, telecommunications failures, water shortages, floods, hurricanes, typhoons, fires, extreme weather conditions, medical epidemics, acts of terrorism, acts of war and other natural or man-made disasters or business interruptions, for which we are predominantly self-insured. The occurrence of any of these business disruptions could seriously harm our operations and financial condition and increase our costs and expenses. We rely in part on third-party manufacturers to produce and process our products or the raw materials used to make our products. Our ability to obtain supplies of our products or raw materials could be disrupted if the operations of these suppliers are affected by a man-made or natural disaster, pandemics, epidemics, or other business interruption, including the recent novel strain of coronavirus (SARS-CoV-2 aka COVID-19) that originally surfaced in Wuhan, China in December 2019. The extent to which COVID-19 impacts our business will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of COVID-19 and the actions to contain 2 or treat its impact, among others. Our corporate headquarters and offices of Odor-No-More are in Southern California near major earthquake faults and fire zones. Our operations and financial condition could suffer in the event of a major earthquake, fire or other natural disaster.

 

A coronavirus pandemic is ongoing in many parts of the world and may result in significant disruptions to our clients and/or supply chain which could have a material adverse effect on our business and revenues.

 

A coronavirus pandemic exists as of the filing of this report. As the pandemic is still evolving as of this time, much of its impact remains unknown, and it is impossible to predict the impact it may have on the development of our business and on our revenues.

 

Our corporate headquarters and offices of our Odor-No-More division are in Southern California. On March 19, 2020, California’s Governor issued an executive order that all residents of the State must stay at home indefinitely except as needed to maintain “essential critical infrastructure”. As a result, many businesses have closed and many people are out of work. Although many of our clients are included in the definitions of “essential critical infrastructure”, such as wastewater treatment plants and refuse collection infrastructure, it is likely that this “stay at home” order and its effect on California’s economy (and similar orders across the country and world, and their effect on the U.S. and worldwide economy) will adversely affect our clients willingness to purchase our products and services, and thus adversely affect our revenues. No one knows how long these “stay at home” orders will remain in effect, and experts expect that an extended (months-long) stay at home requirement is likely to have an extended and significant impact on the economy as a whole.

 

The severity of the coronavirus pandemic could also make access to our existing supply chain difficult or impossible by delaying the delivery of key raw materials used in our product candidates and therefore delay the delivery of our products. Any of these results could materially impact our business and have an adverse effect on our business.

 

 

A recession in the United States may affect our business.

 

If the U.S. economy were to contract into a recession or depression, our existing clients, and potential future clients, may divert their resources to other goods and services, and our business may suffer.

 

 

 

Risks Relating to our Common Stock

 

The sale or issuance of our common stock to Lincoln Park may cause dilution, and the sale of the shares of common stock acquired by Lincoln Park, or the perception that such sales may occur, could cause the price of our common stock to fall.

 

On August 25, 2017, we entered into the LPC Agreement with Lincoln Park, pursuant to which Lincoln Park has committed to purchase up to $10,000,000 of our common stock, noted above in our Risks Related to our Business. We generally have the right to control the timing and amount of any sales of our shares to Lincoln Park. Sales of our common stock, if any, to Lincoln Park will depend on market conditions and other factors to be determined by us. We may ultimately decide to sell to Lincoln Park all, some or none of the shares of our common stock that may be available for us to sell pursuant to the LPC Agreement. If and when we do sell shares to Lincoln Park, after Lincoln Park has acquired the shares, Lincoln Park may resell all, some or none of those shares at any time or from time to time in its discretion. Therefore, sales to Lincoln Park by us could result in substantial dilution to the interests of other holders of our common stock, as well as sales of our stock by Lincoln Park into the open market causing reductions in the price of our common stock. Additionally, the sale of a substantial number of shares of our common stock to Lincoln Park, or the anticipation of such sales, could make it more difficult for us to sell equity or equity-related securities in the future at a time and at a price that we might otherwise desire to effect sales.

 

Our common stock is thinly traded and largely illiquid.

 

Our stock is currently quoted on the OTC Markets (OTCQB). Being quoted on the OTCQB has made it more difficult to buy or sell our stock and from time to time has led to a significant decline in the frequency of trades and trading volume. Continued trading on the OTCQB will also likely adversely affect our ability to obtain financing in the future due to the decreased liquidity of our shares and other restrictions that certain investors have for investing in OTCQB traded securities. While we intend to seek listing on the Nasdaq Stock Market (“Nasdaq”) or another national stock exchange when our company is eligible, there can be no assurance when or if our common stock will be listed on Nasdaq or another national stock exchange.

 

The market price of our stock is subject to volatility.

 

 

Because our stock is thinly traded, its price can change dramatically over short periods, even in a single day. An investment in our stock is subject to such volatility and, consequently, is subject to significant risk. The market price of our common stock could fluctuate widely in response to many factors, including:

 

 

developments with respect to patents or proprietary rights;

 

 

announcements of technological innovations by us or our competitors;

 

 

announcements of new products or new contracts by us or our competitors;

 

 

actual or anticipated variations in our operating results due to the level of development expenses and other factors;

 

 

 

changes in financial estimates by securities analysts and whether any future earnings of ours meet or exceed such estimates;

 

 

conditions and trends in our industry;

 

 

new accounting standards;

 

 

general economic, political and market conditions and other factors; and

 

 

the occurrence of any of the risks described herein.

 

You may have difficulty selling our shares because they are deemed a “penny stock”.

 

Because our common stock is not quoted or listed on a national securities exchange, if the trading price of our common stock remains below $5.00 per share, which we expect for the foreseeable future, trading in our common stock will be subject to the requirements of certain rules promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which require additional disclosure by broker-dealers in connection with any trades involving a stock defined as a penny stock (generally, any non-Nasdaq equity security that has a market price of less than $5.00 per share, subject to certain exceptions). Such rules require the delivery, before any penny stock transaction, of a disclosure schedule explaining the penny stock market and the risks associated therewith and impose various sales practice requirements on broker-dealers who sell penny stocks to persons other than established customers and accredited investors (generally defined as an investor with a net worth in excess of $1,000,000 or annual income exceeding $200,000 individually or $300,000 together with a spouse). For these types of transactions, the broker-dealer must make a special suitability determination for the purchaser and have received the purchaser’s written consent to the transaction before the sale. The broker-dealer also must disclose the commissions payable to the broker-dealer and current bid and offer quotations for the penny stock and, if the broker-dealer is the sole market-maker, the broker-dealer must disclose this fact and the broker-dealer’s presumed control over the market. Such information must be provided to the customer orally or in writing before or with the written confirmation of trade sent to the customer. Monthly statements must be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks. The additional burdens imposed on broker-dealers by such requirements could discourage broker-dealers from effecting transactions in our common stock, which could severely limit the market liquidity of our common stock and the ability of holders of our common stock to sell their shares. 

 

Because our shares are deemed a “penny stock,” rules enacted by FINRA make it difficult to sell previously restricted stock.

 

Rules put in place by the Financial Industry Regulatory Authority (FINRA) require broker-dealers to perform due diligence before depositing unrestricted common shares of penny stocks, and as such, some broker-dealers, including many large national firms (such as eTrade and Charles Schwab), are refusing to deposit previously restricted common shares of penny stocks. We routinely issued non-registered restricted common shares to investors, vendors and consultants. The issuance of such shares is subjected to the FINRA-enacted rules. As such, it can be difficult for holders of restricted stock, including those issued in our private securities offerings, to deposit the shares with broker-dealers and sell those shares on the open market.

 

Because we will not pay dividends in the foreseeable future, stockholders will only benefit from owning common stock if it appreciates.

 

We have never declared or paid a cash dividend to stockholders. We intend to retain any earnings that may be generated in the future to finance operations. Accordingly, any potential investor who anticipates the need for current dividends from his investment should not purchase our common stock, and must rely on the benefit of owning shares, and presumably a rise in share price. We cannot predict the future price of our stock, and due to the factors enumerated herein, can make no assurance of a future increase in the price of our common stock.

 

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

 

None.

 

ITEM 2. PROPERTIES

 

Our company owns no real property. We currently lease approximately 9,000 square feet of office and industrial space at 14921 Chestnut St., Westminster, CA 92683. The current lease term is from September 1, 2016 to August 31, 2020, at a monthly rent of $8,379. In addition to serving as our principal offices, it is also a manufacturing facility where we manufacture our products, including our CupriDyne Clean Industrial Odor, and Specimen Transport Solidifiers.

 

We also lease approximately 13,000 square feet of office and warehouse space at 105 Fordham Road, Oak Ridge, Tennessee, 37830, for our professional engineering division. The lease term is from September 1, 2017 through September 30, 2022, at a monthly rent of $5,400.

 

We also lease approximately 1,500 square feet of office and lab space from the University of Alberta. The current lease term expires January 31, 2021, at monthly rent of $5,226 Canadian dollars. These offices serve as our primary research and development facilities.

 

Our telephone number is (888) 400-2863.

 

 

ITEM 3. LEGAL PROCEEDINGS

 

Our company is not a party to any legal proceeding.

 

 

PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASE OF EQUITY SECURITIES

 

Market Information

 

Since January 23, 2008, our common stock has been quoted on the OTC Markets “OTCQB” marketplace (formerly known as the “OTC Bulletin Board”) under the trading symbol “BLGO”.

 

The table below represents the quarterly high and low closing prices of our common stock for the last two fiscal years as reported by Yahoo Finance.

 

   

2018

   

2019

 
   

High

   

Low

   

High

   

Low

 

First Quarter

  $ 0.41     $ 0.21     $ 0.27     $ 0.16  

Second Quarter

  $ 0.45     $ 0.23     $ 0.31     $ 0.16  

Third Quarter

  $ 0.45     $ 0.22     $ 0.38     $ 0.22  

Fourth Quarter

  $ 0.30     $ 0.18     $ 0.36     $ 0.22  

 

 

The closing bid price for our common stock on March 27, 2020, was $0.17 per share. As of such date, there were approximately 645 registered owners of approximately 50,000,000 shares of our common stock, and approximately 2,500 beneficial owners (held in street name) of approximately 75,000,000 shares.

 

Dividends

 

We have never declared or paid a cash dividend to stockholders. We intend to retain any earnings which may be generated in the future to finance operations.

 

 

Securities Authorized for Issuance Pursuant to Equity Compensation Plans

 

Equity Compensation Plan Information as of December 31, 2019

 

Plan Category

Number of securities to be

issued upon exercise of

outstanding options,

warrants and rights

(a)

Weighted average

exercise price of

outstanding options,

warrants and rights

(b)

Number of securities

remaining available for

future issuance

(c)

Equity compensation

plans approved by

security holders

17,983,808(1)

$0.36

32,785,644

Equity compensation

plans not approved by

security holders(2)

19,604,107

$0.41

n/a

Total

37,587,915

$0.40

32,785,644

 

 

(1)

Includes 8,769,451 shares issuable under the 2007 Equity Plan, which expired September 6, 2017, and 9,214,356 shares issuable under the 2018 Equity Incentive Plan adopted by the Board on March 7, 2018 and subsequently approved by stockholders on May 23, 2018.  

(2)

This includes various issuances to specific individuals either as a conversion of un-paid obligations pursuant to a plan adopted by our board of directors, or as part of their agreement for services.

 

 

Sales of Unregistered Securities

 

The following is a report of the sales of unregistered securities in the past three years not previously reported in a Quarterly Report on Form 10-Q or in a Current Report on Form 8-K.

 

On December 31, 2019, we issued 255,225 shares of our common stock to vendors to reduce amounts owed to the vendors in the aggregate amount of $69,000.

 

On December 20, 2019, we issued 24,575 shares of our common stock as payment of $5,984 interest due on promissory notes.

 

During the three months ended December 31, 2019, we issued 5,362,471 shares of our common stock in satisfaction of $875,943 in principal and interest due on promissory notes.

 

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 6. SELECTED FINANCIAL DATA

 

Not applicable

 

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

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

 

This discussion contains forward-looking statements that involve risks and uncertainties. Such statements, which include statements concerning future revenue sources and concentration, 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 above in Part I, Item 1 and elsewhere in this Annual Report, particularly in “Risk Factors,” that could cause actual results to differ materially from those projected. The forward-looking statements set forth in this Annual Report are as of December 31, 2019 unless expressly stated otherwise, and we undertake no duty to update this information.

 

Results of Operations—Comparison of the years ended December 31, 2019 and 2018

 

We operate our business in distinct business segments:

 

 

Odor-No-More, which manufactures and sells our odor and VOC control products and services, including our flagship product, CupriDyne Clean;

 

 

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

 

 

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

 

 

Clyra Medical, our partially owned subsidiary focused on the Advanced Wound Care industry; and

 

 

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

 

 

Consolidated revenue for the year ended December 31, 2019 was $1,861,000, a 36% increase from 2018. Of our business segments, only Odor-No-More and BLEST generate revenues. While both operations had have shown encouraging growth, neither generates enough revenue to fund their operations, and thus the parent corporation, BioLargo, Inc., invests cash into these segments on a regular basis to fund operations. These two segments are discussed separately below. Our Canadian team, BioLargo Water, receives funds from government research grants (reported on our financial statements as “Other income – Grant income”), and receives funding as needed from BioLargo. Clyra Medical, however, relies on direct investment from third parties for 100% of its operating costs and is not supported with capital from BioLargo’s corporate budget or fundraising.

 

We expect the COVID-19 virus pandemic and resulting decrease in economic activity in the United States will likely cause an adverse affect our revenue in the first quarter of 2020, and perhaps subsequent quarters depending on the length of the pandemic and length of orders limiting certain business operations and requiring that citizens remain in their homes. At this time, we have not, and do not plan to, curtail any of our operations, although some of our employees are working from home. While we are taking action to generate revenues from Covid-19 related mitigation measures those revenues are not yet realized and we have no experience to predict the outcome of those efforts.

 

Odor-No-More

 

Our wholly owned subsidiary Odor-No-More generates revenues through sales of our flagship product CupriDyne Clean, by providing design, installation, and maintenance services on the systems that deliver CupriDyne Clean at its clients’ facilities, and through sales of odor absorption products to the U.S. Government. During 2019 Odor-No-More added two employees to focus on business development, increasing sales and increased levels of construction and maintenance contracts. In light of these investments into growth ,Odor-No-More did not generate a net profit in 2019, its revenues continued to increase throughout the year, while we continued to invest in additional operational and sales staffing, and, as a result its net loss decreased in 2019 to $335,000, compared to $433,000 in 2018.

 

Revenue (Odor-No-More)

 

Odor-No-More’s revenues increased 30% in 2019, to $1,459,000. Our revenue includes both sales of products and design, installation and maintenance services of systems that deliver our CupriDyne Clean products. Of product sales, approximately 55% was generated from sales of CupriDyne Clean products. In 2019, we increased our efforts to install CupriDyne Clean delivery systems, and we anticipate that these systems will result in recurring CupriDyne Clean product sales.

 

Sales of our CupriDyne Clean powdered and liquid products increased 43% from the prior year, due to the acquisition of more clients and client locations, and the sale and delivery of more products than in years past. Of our CupriDyne Clean sales, approximately two-thirds were made pursuant to “national purchasing agreements” (“NPA”) with the four largest waste handling companies in the United States. Our design and installation of misting systems to deploy our product accounted for 35% of sales in 2019 compared to 10% in 2018. We are working on how to deploy our product solutions to all of our NPA customers. Doing so during the COVID-19 pandemic has been challenging.

 

Sales to the U.S. military are primarily our Specimen Transport Solidifier pouches and Suction Canister Solidifiers, and are made to the U.S. Defense Logistics Agency through our distributor Downeast Logistics. As a result of a decision by Odor-No-More to focus on CupriDyne Clean sales and design, installation and maintenance services, rather than these other lower-margin products, sales to the U.S. military decreased by 70% in 2019 as compared with 2018.

 

 

Cost of Goods Sold (Odor-No-More)

 

Odor-No-More’s cost of goods sold includes costs of raw materials, contract manufacturing, and portions of salaries and expenses. As a percentage of gross sales, Odor-No-More’s cost of goods was 43% in 2019 versus 51% in 2018. This is due to the reduction in sales to the federal government of the Specimen Transport Solidifier products, which have a markedly lower margin than sales of the CupriDyne Clean products.

 

Selling, General and Administrative Expense (Odor-No-More)

 

Odor-No-More’s Selling, General and Administrative (“SG&A”) expenses include both cash and non-cash expense related to its operations. Odor-No-More’s SG&A expenses increased to $1,167,000 in 2019, as compared with $985,000 in 2018, an increase of 18%. These expenses have increased alongside Odor-No-More’s efforts to increase revenues by hiring additional sales and support staff. Upon such time as the COVID-19 crisis subsides, we would expect its SG&A expenses to increase for the remainder 2020 as the business unit will continue to increase efforts to generate additional revenues.

 

Net Loss (Odor-No-More)

 

Odor-No-More generated $1,459,000 in revenue, a gross margin of $832,000, and had total costs and expenses of $1,169,000, resulting in a net loss of $337,000, compared with $433,000 in 2018, which was supported by BioLargo’s capital infusion. To increase its revenues, Odor-No-More had continued to invest in expanding its sales and operations, resulting in a continuing loss from operations, up and until the COVID-19 crisis occurred, but is now focused primarily on developing distribution and strategic alliances as it seeks to expand sales with existing staff.

 

BLEST (engineering division)

 

Revenue (BLEST)

 

Our engineering segment (BLEST) generated $402,000 of external revenues in 2019, compared to $241,000 in 2018. The increase is due to an increased number of client contracts, including those with Bhate pursuant to which BLEST is providing services and U.S. military installations.

 

Services BLEST provides to BioLargo and its subsidiaries for internal BioLargo projects is considered intersegment revenue and is eliminated in consolidation. In the year ended December 31, 2019, it was $597,000, primarily used to further engineer and develop our flagship AOS water filtration system and our AEC PFAS treatment system. Our engineers are performing a critical role in the AOS pilot projects, some of which are supported by third-party research grants and has been instrumental in developing and supporting a professional engineered design service for misting systems being sold by our Odor-No-More operating unit.

 

Cost of Goods (Services) Sold (BLEST)

 

BLEST’s cost of services includes employee labor as well as subcontracted labor costs. In 2019, its cost of services were 80% of its revenues, versus 71% in 2018. This increase is due to upfront costs associated with long term military contracts. We expect the cost of services to remain closer to 75% in 2020 based on the contracts currently in progress.

 

Selling, General and Administrative Expense (BLEST)

 

BLEST’S SG&A expenses were $478,000 in 2019, compared to $443,000 in 2018. We expect these expenses to remain flat in 2020, as the staff required to increase service to its clients and revenues will be included in cost of services.

 

Net Loss (BLEST)

 

BLEST generated $402,000 in revenue from third parties, a gross margin of $82,000, and had total costs and expenses of $832,000, resulting in a net loss of $749,000, compared with a net loss of $750,000 in 2018.

 

BLEST provides substantial support to BioLargo’s other operations, including BioLargo Water and Odor-No-More. While we are unable to record revenues generated from intracompany services by the engineering group to other operating divisions, it is important to note that the net loss would be eliminated if BLEST were an outside contract-for-hire services company selling services to our water company or our industrial odor and VOC control operating unit.

 

 

Because the subsidiary had a net loss, we invested cash during the year to allow it to maintain operations. BLEST’s need for a cash subsidy to support its operations decreased considerably towards the end of calendar year 2018. We expect this trend to continue, and expect that in 2020 its sales will continue to increase, and thus its gross profit will continue to increase. By the end of 2020, we expect that it will no longer require a cash subsidy to operate, but will be contributing cash to our corporate operations, except where we elect to continue engaging BLEST to support our other operating units.

 

Other Income

 

Our wholly owned Canadian subsidiary has been awarded more than 75 research grants over the years from various Canadian public and private agencies, including the Canadian National Research Institute – Industrial Research Assistance Program (NRC-IRAP), the National Science and Engineering Research Council of Canada (NSERC), and the Metropolitan Water District of Southern California’s Innovative Conservation Program “ICP”. The research grants received are considered reimbursement grants related to costs we incur and therefore are included as Other Income. The amount of grant income increased $60,000 in 2019 to $218,000. We continued to win grants and it is important to note that amounts paid directly to third parties are not included as income in our financial statements.

 

Our Canadian subsidiary applied for and received a refund on our income taxes pursuant to the “Scientific Research and Experimental Development (SR&ED) Program”, a Canadian federal tax incentive program designed to encourage Canadian businesses to conduct research and development in Canada. For the year ended December 31, 2019 and 2018, we received a refund of $63,000 and $73,000.

 

Although we are continuing to apply for government and industry grants, and indications from the various grant agencies is highly encouraging, we cannot be certain of continuing those successes in the future. We are very active in both the US and Canada, pursuing grant support for various uses of our products that we believe can help in managing the COVID-19 crisis.

 

Selling, General and Administrative Expense – consolidated

 

Our SG&A expenses include both cash expenses (for example, salaries to employees) and non-cash expenses (for example, stock option compensation expense). Our SG&A expenses across all business segments increased in the aggregate by 16% ($826,000) in the year ended December 31, 2019 to $6,140,000. Our non-cash expenses (through the issuance of stock and stock options) increased in 2019 compared with 2018 ($2,235,000 compared to $2,232,000) because our employees, vendors and consultants chose to receive a greater number of stock and stock options in lieu of cash owed. The largest components of our SG&A expenses included (in thousands):

 

   

Year ended

December 31, 2018

   

Year ended

December 31, 2019

 

Salaries and payroll related

  $ 1,973     $ 2,186  

Professional fees

    800       809  

Consulting

    839       1,278  

Office expense

    1,037       1,124  

Board of director expense

    280       300  

Sales and marketing

    246       262  

Investor relations

    139       181  

 

Our salaries and payroll-related and office-related expenses increased in 2019 due to increased sales personnel at Odor-No-More. Consulting expense increased due to increased activity at Clyra Medical, as well as increased activity for investor relations, financings, and business development.

 

 

Research and Development

 

In the year ended December 31, 2019, we spent approximately $1,472,000 in the research and development of our technologies and products. This was a decrease of 14% ($247,000) compared to 2018, primarily due to a shift in focus from pure research to commercializing in our Canadian operations. Our R&D expenses do not include over $300,000 in internal billings from our engineering division’s work on internal BioLargo projects.

 

Interest expense 

 

Our interest expense for the year ended December 31, 2019 was $3,996,000, an increase of $501,000 compared with 2018. Of our total interest expense, only $195,000 was paid in cash, and the remainder, $3,801,000, was paid by issuing shares of our common stock. Our non-cash interest related expenses were comprised primarily as follows: (i) $3,376,000 non-cash debt discounts related to warrants issued in conjunction with debt instruments being amortized over the life of the debt instrument (in 2018, it was $2,766,000), and (iii) $200,000 related to interest paid in stock on debt instruments.

 

While we cannot predict our interest expense in 2020, our outstanding debt as of December 31, 2019 was higher than as of December 31, 2018, and thus we expect our interest expense in 2020 to increase. Additionally, we record the relative fair value of the warrants and the intrinsic value of the beneficial conversion feature sold with the convertible notes payable which typically results in a full discount on the proceeds from the convertible notes. This discount is amortized as interest expense over the term of the convertible notes. We expect our interest expense to increase in 2020 because the total amount we amortize (the line item on our balance sheet “Discount on convertible notes payable and line of credit, net of amortization”) increased by $1,375,000 in 2019 – from $323,000 at December 31, 2018, to $1,654,000 at December 31, 2019.

 

Net Loss

 

Net loss for the year ended December 31, 2019 was $11,440,000 a loss of $0.08 per share, compared to a net loss for the year ended December 31, 2018 of $10,696,000 a loss of $0.09 per share. Our net loss this year was somewhat offset by an increase in revenue; nevertheless, the net loss increased mainly due to the increase in non-cash financing costs, non-cash interest expense to obtain capital, and increased payroll and related office expenses which are primarily associated with increased sales personnel at Odor-No-More. The nominal decrease in net loss per share for the year ended December 31, 2019 is primarily attributable to the increase in the number of shares outstanding from 2018 to 2019.

 

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

 

Net loss

 

Year ended

December 31, 2018

   

Year ended

December 31, 2019

 

Odor-No-More

  $ (433 )   $ (337 )

BLEST

    (750 )     (749 )

Clyra Medical

    (883 )     (1,283 )

BioLargo Water

    (571 )     (447 )

BioLargo corporate

    (8,059 )     (8,624 )

Consolidated net loss

  $ (10,696 )   $ (11,440 )

 

 

It is important to note that of the 2019 BioLargo corporate net loss of $9,221,000, interest expense was $3,996,000, of which $3,801,000 was non-cash expense. Additionally, we recorded $1,522,000 of stock option compensation expense and an additional $710,000 of services were paid by the issuance of our common stock. The total of these non-cash items account for $6,033,000 of the consolidated loss of $11,440,000 in total losses. Assuming they continue to expand sales, we believe that Odor-No-More and BLEST (engineering) can achieve positive cash flow from operations at some point in the future. However, with the continued development costs associated with Clyra Medical (even though it is financed directly through the sale of stock in Clyra), and with the addition of any ongoing development costs associated with BioLargo Water to be incurred through pre-commercial piloting, we expect to continue to incur a net loss for the foreseeable future.

 

 

We have made considerable investments in our water and medical technologies as well as supporting the start-up expenses for our engineering team. We believe those investment will pay off as we now are narrowly focused on commercial sales.

 

Liquidity and Capital Resources

 

The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of our business. For the year ended December 31, 2019, we had a net loss of $11,440,000, used $4,422,000 cash in operations, and at December 31, 2019, we had a working capital deficit of $3,289,000, and current assets of $1,065,000.  At December 31, 2019, our total liabilities included $4,757,000 in convertible debt, promissory notes, and line of credit obligations. Of these obligations, we may require conversion of an aggregate principal amount of $3,237,000 at maturity. The remainder of the notes are convertible only at the option of the noteholder. Of the amounts that we cannot require conversion at maturity, as of the date of this report, $70,000 is due on May 7, 2020, and $550,000 is due in August 2020. We do not believe gross profits will be sufficient to fund our current level of operations or pay these debts , and thus we believe we will have to raise additional investment capital to both fund our operations and refinance this debt.

 

We have increasingly relied on our credit line from Lincoln Park Capital (see Note 3 to our Consolidated Financial Statements) to provide working capital, receiving $288,000 during the first quarter of 2020. On March 30, 2020, we entered into a new purchase agreement and registration rights agreement with Lincoln Park for a $10,250,000 equity line, under similar terms as our previous arrangement, which was set to expire in August 2020. Lincoln Park has pledged an initial share purchase of $250,000, at $0.14 per share.

 

In the past, we have received significant investments into our private offerings. In light of the COVID-19 virus pandemic and March 2020 stock market crash, we are not able to predict whether private funding will be available for the remainder of the year. If we are unable to continue to raise cash through private offerings or our Lincoln Park equity line, we will be forced to curtail our operations.

 

We operate our business in five distinct business segments. Each of these segments obtains cash to fund operations in unique ways. Odor-No-More and BLEST generate cash by selling products and services. Clyra Medical obtains cash from third party investments of sales of its common stock. BioLargo Water generates cash through government research grants and tax credits. Our corporate operations generate cash through private offerings of stock, debt instruments, and warrants. In 2019, cash was generated as follows (in thousands):

 

   

Year ended December 31,

2018

   

Year ended December 31,

2019

 

SOURCES OF INCOME AND CASH

               

Revenue from operations

  $ 1,364     $ 1,861  

Grant income

    158       218  

Tax credit income

    73       63  

Cash investments (to BioLargo)

    2,637       5,020  

Cash investments (to Clyra)

    1,005       536  

Total:

  $ 5,237     $ 7,698  

 

 

Although two segments (Odor-No-More and BLEST) generated revenues in the year ended December 31, 2019, neither generated operating profits. As such, we provided a cash subsidy to each business segment to allow it to fund its operations. While revenues have increased in both operating segments, both continue to expand operations and thus continue to generate losses.

 

 

In the first quarter of 2019, we shifted focus at our Canadian subsidiary (BioLargo Water) from pure research and development to commercializing the AOS system. In doing so, we reduced our research staff and thus reduced its monthly cash needs by $15,000. In late 2019, BioLargo Water commenced a Regulation Crowdfunding offering in an attempt to raise internal capital to fund its operations, which remains ongoing. Further efforts are being made to generate commercial revenues, including development of a hand sanitizer product to address the need for that product in light of the COVID-19 pandemic.

 

Clyra Medical is unique in that it funds its operations through third party investments. We do not intend to subsidize its operations in the future.

 

We used $4,422,000 cash in our total operations in 2019. At December 31, 2019, we had current assets of $1,065,000. Thus, to maintain the same level of operations in 2020, and notwithstanding the increasing revenues at Odor-No-More and BLEST, we expect to continue to need to raise significant investment capital. In 2019, we conducted private securities offerings and received $4,466,000 net proceeds. Since first acquiring the BioLargo technology in the spring of 2007, we have received investment capital of approximately $22,000,000 which we have invested in development and commercialization efforts. We intend to continue to raise money through private securities offerings for the foreseeable future.

 

Critical Accounting Policies

 

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

 

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

 

Revenue Recognition

 

We adopted ASU 2014-09, “Revenue from Contracts with Customers”, Topic 606, on January 1, 2018. The guidance focuses on the core principle for revenue recognition.

 

The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps:

 

Step 1: Identify the contract(s) with a customer.

 

Step 2: Identify the performance obligations in the contract.

 

Step 3: Determine the transaction price.

 

 

Step 4: Allocate the transaction price to the performance obligations in the contract.

 

Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation.

 

We have revenue from two subsidiaries, Odor-No-More and BLEST. Odor-No-More identifies its contract with the customer through a written purchase order , in which the details of the contract are defined including the transaction price and method of shipment. The only performance obligation is to create and ship the product and each product has separate pricing. Odor-No-More recognizes revenue at a point in time when the order for its goods are shipped if its agreement with the customer is FOB Odor-No-More’s warehouse facility, and when goods are delivered to its customer if its agreement with the customer is FOB destination. Revenue is recognized with a reduction for sales discounts, as appropriate and negotiated in the customer’s purchase order. Odor-No-More also installs misting systems for which it bills on a time and materials basis. It identifies its contract with the customer through a written purchase order in which the details of the time to be billed and materials purchased and an estimated completion date. The performance obligation is the completion of the installation. Revenue is recognized in arrears as the work is performed.

 

BLEST identifies services to be performed in a written contract, which specifies the performance obligations and the rate at which the services will be billed. Each service is separately negotiated and priced. Revenue is recognized as services are performed and completed. BLEST’s contracts typically call for invoicing for time and materials incurred for that contract. A few contracts have called for milestone or fixed cost payments where BLEST bills an agreed-to amount per month for the life of the contract. In these instances, completed work, billed hourly, is recognized as revenue. If the billing amount is greater or lesser than the completed work, a receivable or payable is created. These accounts are adjusted upon additional billings as the work is completed. To date, there have been no discounts or other financing terms for the contracts.

 

Warrants

 

Warrants issued with our convertible and non-convertible debt instruments are accounted for under the fair value and relative fair value method.

 

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

 

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

 

Convertible debt instruments are recorded at fair value, limited to a relative fair value based upon the percentage of its fair value to the total fair value including the fair value of the warrant. Further, the convertible debt instrument is examined for any intrinsic beneficial conversion feature (“BCF”) of which the conversion price is less than the closing common stock price on date of issuance. If the relative fair value method is used to value the convertible debt instrument and there is an intrinsic BCF, a further analysis is undertaken of the BCF using an effective conversion price which assumes the conversion price is the relative fair value divided by the number of shares the convertible debt is converted into by its terms. The BCF value is accounted for as equity.

 

The warrant and BCF relative fair values are also recorded as a discount to the convertible promissory notes. At present, these equity features of the convertible promissory notes have recorded a discount to the convertible notes that is substantially equal to the proceeds received.

 

Share-based Payments

 

It is the Company’s policy to expense share-based payments as of the date of grant or over the term of the vesting period in accordance with Auditing Standards 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.

 

 

Fair Value Measurement

 

Generally accepted accounting principles establishes a hierarchy to prioritize the inputs of valuation techniques used to measure fair value. The hierarchy gives the highest ranking to the fair values determined by using unadjusted quoted prices in active markets for identical assets (Level 1) and the lowest ranking to fair values determined using methodologies and models with unobservable inputs (Level 3). Observable inputs are those that market participants would use in pricing the assets based on market data obtained from sources independent of the Company. Unobservable inputs reflect the Company’s assumptions about inputs market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The Company has determined the appropriate level of the hierarchy and applied it to its financial assets and liabilities.

 

Management believes the carrying amounts of the Company’s financial instruments as of December 31, 2018 and 2019 approximate their respective fair values because of the short-term nature of these instruments. Such instruments consist of cash, accounts receivable, prepaid assets, accounts payable, convertible notes, and other assets and liabilities.

 

Recent Accounting Pronouncements

 

See Note 2 to the Consolidated Financial Statements, “Summary of Significant Accounting Policies – Recent Accounting Pronouncements”, for the applicable accounting pronouncements affecting the Company.

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

 

Not applicable.

 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

Our consolidated financial statements as of and for the years ended December 31, 2019 and 2018 are presented in a separate section of this report following Item 14 and begin with the index on page F-1.

 

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

None.

 

ITEM 9A. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

We conducted an evaluation, under the supervision and with the participation of management, including our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this Annual Report.

 

 

Our procedures have been designed to ensure that the information relating to our company, including our consolidated subsidiaries, required to be disclosed in our SEC reports is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow for timely decisions regarding required disclosure. However, our Company is continuing to grow and evolve. The volume of our product sales continues to grow, increasing strain on our accounting systems. And, our operations do not yet generate enough cash to fund operations, and thus we rely on financing activities to maintain our level of operations and fund our anticipated growth. In combination, these activities put stress on our overall controls and procedures. Based on this evaluation, our chief executive officer and chief financial officer concluded that as of the evaluation date our disclosure controls and procedures were not effective, due to the material weakness identified below.

 

It should be noted that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.

 

Management’s Report on Internal Control over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Our internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements.

 

Under the supervision and with the participation of our management, including our chief executive officer and the chief financial officer, we have established internal control procedures in accordance with the guidelines established in the 2013 Framework —Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Recognizing the dynamic nature and growth of the Company’s business , including the addition of an engineering division in late 2017, growth of the core operations, and the increase in the number of employees, management has recognized the strain on the overall internal control environment. As a result, management has concluded that its internal controls over financial reporting are not effective. Management identified a material weakness with respect to deficiencies in its financial closing and reporting procedures. Management believes this is due to a lack of resources. Management intends to add accounting personnel and operating staff and more sophisticated systems in order to improve its reporting procedures and internal controls, subject to available capital. A material weakness is a significant deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected. While management has recognized the material weakness, nothing additionally has changed in internal controls over financial reporting in the fourth quarter or the fiscal year ended December 31, 2019.

 

This Annual Report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s independent registered public accounting firm pursuant to rules of the SEC that permit the Company to provide only management’s report in this Annual Report.

 

Our management, including our chief executive officer and chief financial officer, does not expect that our disclosure controls or our internal control over financial reporting, or any system we design or implement in the future, will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

 

ITEM 9B. OTHER INFORMATION

 

None.

 

 

PART III

 

Certain information required by Part III is incorporated by reference from our Proxy Statement to be filed with the SEC in connection with the solicitation of proxies for our 2020 Annual Meeting of Stockholders, currently scheduled to be held on July 23, 2020 (the “Proxy Statement”).

 

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE

 

The information required by this section is incorporated by reference from the section entitled “Proposal 1—Election of Directors” in the Proxy Statement. Item 405 of Regulation S-K calls for disclosure of any known late filing or failure by an insider to file a report required by Section 16 of the Exchange Act. This disclosure is incorporated by reference to the section entitled “Section 16(a) Beneficial Ownership Reporting Compliance” in the Proxy Statement. The information required by this Item with respect to our executive officers is contained in Item 1 of Part I of this Annual Report under the heading “Business—Executive Officers”.

 

ITEM 11. EXECUTIVE COMPENSATION

 

The information required by this section is incorporated by reference from the information in the section entitled “Executive Compensation” in the Proxy Statement.

 

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

 

The information required by this section is incorporated by reference from the information in the section entitled “Security Ownership of Certain Beneficial Owners and Management” in the Proxy Statement.

 

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

 

The information required by this section is incorporated by reference from the information in the section entitled “Certain Relationships and Related Transactions” in the Proxy Statement.

 

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

 

The information required by this section is incorporated by reference from the information in the section entitled “Ratification of Appointment of Independent Auditor” in the Proxy Statement.

 

 

PART IV

 

 

ITEM 15.  EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

 

The following documents are filed as a part of this report:

 

1. Financial Statements. The consolidated financial statements required to be filed in this report are listed on the Index to Financial Statements immediately preceding the financial statements.

 

2. Financial Statement Schedules. Separate financial statement schedules have been omitted either because they are not applicable or because the required information is included in the consolidated financial statements or the notes thereto.

 

3. Exhibits. See the Exhibit  Index for a list of the exhibits being filed or furnished with or incorporated by reference into this report.

 

 

Exhibit Index

 

     

 

Incorporated by Reference Herein

 

Exhibit

Number

 

Exhibit Description

Form

File Date

3.1

 

Bylaws of BioLargo, Inc., as amended and restated

Form 10-KSB

5/23/2003

3.2

 

Certificate of Designations of BioLargo, Inc. creating Series A Preferred Stock

Form 10-KSB

11/16/2004

3.3

 

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

Form 10-KSB

5/4/2007

3.4

 

Amended and Restated Articles of Incorporation of Clyra Medical Technologies, Inc.

Form 8-K

1/6/2016

3.5

 

Certificate of Amendment to Certificate of Incorporation, filed May 25, 2018

Pos Am

6/22/2018

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 Series A Stock Purchase Warrant issued in 2015 Unit Offering

Form 10-K

3/31/2015

4.4

 

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

Form 10-K

3/31/2015

4.5

 

Form of Warrant issued to December 2014/January 2015 noteholders

Form 10-K

3/31/2015

4.6

 

BioLargo, Inc. Investors’ Rights Agreement dated December 30, 2015, as a shareholder of Clyra Medical Technologies, Inc.

Form 8-K

1/6/2016

4.7

 

Form of Note issued in Summer 2017 Offering

Form 10-Q

8/14/2017

4.8

 

Form of Warrant issued in Summer 2017 Offering

Form 10-Q

8/14/2017

4.9

 

Form of One-Year Note issued July 2017

Form 10-Q

8/14/2017

4.10

 

Form of Warrant issued to One-Year Noteholder July 2017

Form 10-Q

8/14/2017

4.11

 

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

Form 10-Q

8/14/2017

4.12

 

Purchase Agreement, dated as of August 25, 2017 by and between BioLargo, Inc. and Lincoln Park Capital Fund, LLC

Form 8-K

8/31/2017

4.13

 

Convertible Promissory Note issued to Vista Capital Investments LLC dated December 14, 2017

Form 8-K

12/22/2017

4.14

 

December 18, 2017, amendment to Promissory Note dated December 14, 2017 issued to Vista Capital Investments, LLC.

Form 8-K

12/22/2017

4.15

 

Line of credit, matures September 1, 2019

Form 10-Q

5/14/2018

 

 

4.16

 

Warrant issued with Line of credit that matures September 1, 2019

Form 10-Q

5/14/2018

4.17

 

$50,000 convertible note, matures March 8, 2020

Form 10-Q

5/14/2018

4.18

 

Form of convertible notes that mature April 20, 2021 (Spring 2018 Offering)

Form 10-Q

5/14/2018

4.19

 

Form of warrant issued with convertible notes that mature April 20, 2021 (Spring 2018 Offering)

Form 10-Q

5/14/2018

4.20

 

Amendment to $440,000 convertible notes that matures July 20, 2019

Form 10-Q

5/14/2018

4.21

 

2018 Equity Incentive Plan

Form S-8

6/22/2018

4.22

 

Stock Option Award Agreement under 2018 Equity Incentive Plan

Form S-8

6/22/2018

4.23

 

Notice of Stock Option Grant under 2018 Equity Incentive Plan

Form S-8

6/22/2018

4.24

 

Restricted Stock Unit Award Agreement under 2018 Equity Incentive Plan

Form S-8

6/22/2018

4.25

 

Notice of Restricted Stock Unit Award under 2018 Equity Incentive Plan

Form S-8

6/22/2018

4.26

 

Promissory Note issued to Vernal Bay Investments, LLC on September 19, 2018

Form 8-K

9/24/2018

4.27

 

Stock Purchase Warrant issued to Vernal Bay Investments, LLC on September 19, 2018

Form 8-K

9/24/2018

4.28

 

Promissory Note issued to Chappy Bean, LLC on September 19, 2018

Form 8-K

9/24/2018

4.29

 

Stock Purchase Warrant issued to Chappy Bean, LLC on September 19, 2018

Form 8-K

9/24/2018

4.30

 

Stock Purchase Agreement and Plan of Reorganziation dated September 26, 2018, with Scion Solutions, LLC

Form 8-K

10/2/2018

4.31

 

Promissory note issued by Clyra Medical Technologies dated September 26, 2018

Form 8-K

10/2/2018

4.32

 

January 2019 Amendment to Promissory Note dated December 14, 2017, by and between BioLargo, Inc. and Vista Capital Investments, LLC.

Form 8-K

1/11/2019

4.33

 

Convertible Promissory Note issued to Vista Capital Investments LLC dated January 7, 2019

Form 8-K

1/11/2019

4.34

 

Convertible Promissory Note issued to Tangiers Global, LLC dated January 31, 2019

Form 8-K

2/11/2019

4.35

 

Stock Purchase Warrant Issued to Lincoln Park Capital on January 31, 2019

Form 8-K

2/11/2019

4.36

 

Amendment dated March 5, 2019 to Convertible Promissory Note issued to Tangiers Global, LLC dated January 31, 2019

Form 8-K

3/8/2019

4.37

 

Amendment dated March 5, 2019 to Promissory Note issued to Vernal Bay Investments, LLC on September 19, 2018

Form 8-K

3/8/2019

4.38

 

Amendment dated March 5, 2019 to Promissory Note issued to Chappy Bean, LLC on September 19, 2018

Form 8-K

3/8/2019

 

 

4.39

 

10% Convertible Promissory Note issued to Bellridge Capital, LP dated April 18, 2019 

Form 8-K

4/23/2019

4.40

 

Convertible Promissory Note issued to Crossover Capital dated May 10, 2019 

Form 10-Q

5/15/2019

4.41

 

Securities Purchase Agreement by and between BioLargo, Inc., and EMA Financial, LP dated June 4, 2019

Form 8-K

6/7/2019

4.42

 

10% Convertible Promissory Note issued to EMA Financial, LP dated June 4, 2019

Form 8-K

6/7/2019

4.43

 

Amendment #1 to the Convertible Note issued on June 4, 2019 to EMA Capital, LP

Form 8-K

6/7/2019

4.44

 

OID twelve-month promissory note

Form 8-K

8/2/2019

4.45

 

Stock purchase warrant issued to OID twelve-month investors

Form 8-K

8/2/2019

4.46

 

$600,000 Promissory note dated August 9, 2019

Form 10-Q

8/14/2019

4.47

 

Warrant to purchase 1.2 million shares issued August 9, 2019

Form 10-Q

8/14/2019

4.48

 

Amendment dated August 12, 2019 to Promissory Note issued to Vernal Bay Investments, LLC on September 19, 2018

Form 10-Q

8/14/2019

4.49

 

Amended and restated note issued to Vernal August 12, 2019

Form 10-Q

8/14/2019

4.50

 

Warrant issued to Vernal August 12, 2019

Form 10-Q

8/14/2019

4.51

 

Warrant issued March 2018, expiring March 2023

S-1

8/29/2019

4.52

 

Form of warrant issued January 2019 to Lincoln Park, expiring January 2024

S-1

8/29/2019

4.53   Registration Rights Agreement, dated as of March 30, 2020, by and between BioLargo, Inc. and Lincoln Park Capital Fund, LLC Form 8-K 3/31/2020

10.1†

 

Employment Agreement dated as of April 30, 2007 between the Company and Kenneth R. Code

Form 10-KSB

5/4/2007

10.2†

 

Engagement Agreement dated February 1, 2008 between BioLargo, Inc. and Charles K. Dargan, II

Form 8-K

2/4/2008

10.3†

 

Amendment to the April 30, 2007 Employment Agreement between the Company and Dennis P. Calvert

Form 8-K

12/31/2012

10.4

 

License Agreement with Insultech Manufacturing LLC dba Clarion Water

Form 10-Q

8/15/2014

10.5

 

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

Form 8-K

1/6/2016

10.6

 

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

Form 8-K

1/6/2016

10.7

 

Consulting Agreement dated December 30, 2015 with Beach House Consulting LLC

Form 8-K

1/6/2016

10.8

 

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

Form 8-K

8/24/2016

10.9†

 

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

Form 8-K

5/4/2017

 

 

10.10†

 

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

Form 8-K

5/4/2017

10.11†

 

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

Form 8-K

5/4/2017

10.12

 

Commercial Office Lease Agreement for Oak Ridge Tennessee

Form 8-K

9/8/2017

10.13

 

Form of Option issued to founding employees of Engineering subsidiary (BLEST)

Form 8-K

9/8/2017

10.14†

 

January 16, 2019 Engagement Extension Agreement by and between BioLargo, Inc. and Charles K. Dargan

Form 8-K

1/18/2019

10.15

 

Securities Purchase Agreement by and between BioLargo, Inc., and Bellridge Capital, LP dated April 18, 2019

Form 8-K

4/23/2019

10.16

 

Securities Purchase Agreement by and between BioLargo, Inc., and Crossover Capital dated May 10, 2019

Form 10-Q

5/15/2019

10.17†

 

Provenzano Employment Agreement dated May 28, 2019

Form 8-K

6/24/2019

10.18†

 

Lock-Up Agreement dated May 28, 2019

Form 8-K

6/24/2019

10.19†

 

2020 Engagement Extension Agreement with Charles K. Dargan II

Form 8-K

2/27/2020

10.20   Purchase Agreement, dated as of March 30, 2020 by and between BioLargo, Inc. and Lincoln Park Capital Fund, LLC. Form 8-K 3/31/2020

21.1*

 

List of Subsidiaries of the Registrant

 

 

23.1*

 

Consent of Haskell & White LLP

 

 

24.1

 

Power of Attorney (see signature page)

 

 

31.1*

 

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

 

 

31.2*

 

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

 

 

32.1*

 

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

 

 

101.INS**

 

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 Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

                 
 

 

 

 

BIOLARGO, INC.

       

Date: March 31, 2020

 

 

 

By:

 

/s/ Dennis P. Calvert       

 

 

 

 

 

 

 

 

Dennis P. Calvert

President and Chief Executive Officer

 

 

POWER OF ATTORNEY

 

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints, jointly and severally, Dennis P. Calvert and Joseph L. Provenzano, and each of them, as his or her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities and on the date indicated:

 

         

Name

  

Title

 

Date

     

        /s/ Dennis P. Calvert

  

Chairman of the Board, Chief

 

March 31, 2020

Dennis P. Calvert   Executive Officer and President    
     

        /s/ Charles K. Dargan II

  

Chief Financial Officer

 

March 31, 2020

Charles K. Dargan II  

(principal financial officer and

principal accounting officer)

   
     

        /s/ Kenneth R. Code

  

Chief Science Officer and Director

 

March 31, 2020

Kenneth R. Code        
     

        /s/ Joseph L. Provenzano

  

Executive Vice President, Corporate

 

March 31, 2020

Joseph L. Provenzano   Secretary and Director    
     

        /s/ Jack B. Strommen

  

Director

 

March 31, 2020

Jack B. Strommen        
     

        /s/ Dennis E. Marshall

  

Director

 

March 31, 2020

Dennis E. Marshall        
         

        /s/ Kent C. Roberts II

  

Director

 

March 31, 2020

Kent C. Roberts II        
     

        /s/John S. Runyan

  

Director

 

March 31, 2020

John S. Runyan        

 

 

 

INDEX TO FINANCIAL STATEMENTS

 

Report of Independent Registered Public Accounting Firm

 

 

F-2

       

Consolidated Balance Sheets as of December 31, 2018 and December 31, 2019

 

 

F-3

 

 

 

 

Consolidated Statements of Operations and Comprehensive Loss for the years ended December 31, 2018 and 2019

 

 

F-4

 

 

 

 

Consolidated Statements of Stockholders’ Equity (Deficit) for the years ended December 31, 2018 and 2019

 

 

F-5

 

 

 

 

Consolidated Statements of Cash Flows for the years ended December 31, 2018 and 2019

 

 

F-6

 

 

 

 

Notes to Consolidated Financial Statements

 

 

F-7 – F-39

 

 

 

Report of Independent Registered Public Accounting Firm

 

 

To the Board of Directors and Stockholders

BioLargo, Inc. and Subsidiaries

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheets of BioLargo, Inc. and Subsidiaries (the “Company”) as of December 31, 2018 and 2019, and the related consolidated statements of operations, stockholders’ equity (deficit), and cash flows for each of the two years in the period ended December 31, 2019, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2018 and 2019, and the consolidated results of its operations and its cash flows for each of the two years in the period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.

 

Going Concern

 

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has experienced recurring losses, negative cash flows from operations, has limited capital resources, a net stockholders’ deficit, and significant debt obligations coming due in the near term. These matters raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

Changes in Accounting Principle

 

As discussed in Note 2 to the consolidated financial statements, effective January 1, 2019, the Company adopted FASB ASC 842, Leases, using the effective date option, as approved by the FASB in July 2018.

 

Basis for Opinion

 

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

 

 

/s/ HASKELL & WHITE LLP

 

We have served as the Company’s auditor since 2011.

 

Irvine, California

March 31, 2020

 

 

 

BIOLARGO, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

AS OF DECEMBER 31, 2018 AND DECEMBER 31, 2019

(in thousands, except for per share data)

   

DECEMBER 31,

2018

   

DECEMBER 31,

2019

 
Assets  

Current assets:

               

Cash and cash equivalents

  $ 655     $ 655  

Accounts receivable, net of allowance

    257       355  

Inventories, net of allowance

    26       16  

Prepaid expenses and other current assets

    17       39  

Total current assets

    955       1,065  
                 

In-process research and development (Note 9)

    1,893       1,893  

Equipment, net of depreciation

    126       95  

Other non-current assets

    35       35  

Right of use, operating lease, net of amortization

          411  

Deferred offering cost

    176       122  

Total assets

  $ 3,185     $ 3,621  
                 
Liabilities and stockholders’ equity (deficit)  

Current liabilities:

               

Accounts payable and accrued expenses

  $ 501     $ 602  

Clyra Medical note payable (See Note 9)

          1,007  

Note payable

    400       50  

Line of credit

    430       50  

Convertible notes payable

    1,365       3,957  

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

    (205 )     (1,472 )

Deferred revenue

          35  

Lease liability, current

          125  

Total current liabilities

    2,491       4,354  

Long-term liabilities:

               

Convertible notes and note payable

    285       700  

Discount on convertible notes payable, net of amortization

    (118 )     (182 )

Clyra Medical note payable (Note 9)

    1,007        

Liability to Clyra Medical shareholder (Note 9)

    643       643  

Lease liability

          286  

Total liabilities

    4,308       5,801  

COMMITMENTS, CONTINGENCIES (Note 12)

               
                 

STOCKHOLDERS’ EQUITY (DEFICIT):

               

Preferred Series A, $.00067 Par Value, 50,000,000 Shares Authorized, -0- Shares Issued and Outstanding, at December 31, 2018 and December 31, 2019, respectively.

           

Common stock, $.00067 Par Value, 400,000,000 Shares Authorized, 141,466,071 and 166,256,024 Shares Issued, at December 31, 2018 and December 31, 2019, respectively.

    95       111  

Additional paid-in capital

    110,222       121,327  

Accumulated other comprehensive loss

    (90 )     (99 )

Accumulated deficit

    (111,723 )     (123,492 )

Total Biolargo Inc. and Subsidiaries stockholders’ equity (deficit)

    (1,496 )     (2,153 )

Non-controlling interest (Note 9)

    373       (27 )

Total stockholders’ equity (deficit)

    (1,123 )     (2,180 )

Total liabilities and stockholders’ equity (deficit)

  $ 3,185     $ 3,621  

 

See accompanying notes to consolidated financial statements and report of Independent Registered Public Accounting Firm.

 

 

 

BIOLARGO, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

FOR THE YEARS ENDED DECEMBER 31, 2018 AND 2019

(in thousands, except for per share data)

   

DECEMBER 31,

2018

   

DECEMBER 31,

2019

 

Revenue

               

Product revenue

  $ 1,123     $ 1,460  

Service revenue

    241       401  

Total revenue

    1,364       1,861  
                 

Cost of revenue

               

Cost of goods sold

    (571 )     (627 )

Cost of service

    (172 )     (318 )

Total cost of revenue

    (743 )     (945 )

Gross profit

    621       916  
                 

Operating expenses:

               

Selling, general and administrative expenses

    5,314       6,140  

Research and development

    1,719       1,472  

Total operating expenses

    7,033       7, 612  
                 

Operating loss

    (6,412 )     (6,696 )
                 

Other income (expense):

               

Grant income

    158       218  

Tax credit income

    73       63  

Interest expense

    (3,494 )     (3,996 )

Debt conversion expense

    (276 )      

Loss on extinguishment of debt

    (745 )     (1,029 )

Total other (expense) income

    (4,284 )     (4,744 )
                 

Net loss

    (10,696 )     (11,440 )
                 

Net loss attributable to noncontrolling interest

    (475 )     (750 )

Net loss attributable to common stockholders

  $ (10,221 )   $ (10,690 )
                 

Net loss per share attributable to common stockholders:

               

Loss per share attributable to stockholders – basic and diluted

  $ (0.09 )   $ (0.08 )

Weighted average number of common shares outstanding:

    122,000,940       152,086,221  
                 

Comprehensive loss attributable to common stockholders

               
                 

Net loss

  $ (10,696 )   $ (11,440 )

Foreign currency translation adjustment

     (28 )     (9 )

Comprehensive loss

    (10,724 )     (11,449 )
                 

Comprehensive loss attributable to noncontrolling interest

    (475 )     (750 )

Comprehensive loss attributable to stockholders

  $ (10,249 )   $ (10,699 )

 

See accompanying notes to consolidated financial statements and report of Independent Registered Public Accounting Firm.

 

 

 

BIOLARGO, INC. AND SUBSIDIARIES 

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 2018 AND 2019

(in thousands, except for share data)

   

Common stock

   

Additional

paid-in

   

Accumulated

   

Accumulated

other comprehensive

   

 

Non-

controlling

   

Total stockholders’

equity
 
   

Shares

   

Amount

   

capital

   

deficit

   

Loss

   

interest

   

(deficit)

 

Balance, December 31, 2017

    104,164,465     $ 70     $ 97,093     $ (101,205 )   $ (62 )   $ 695     $ (3,409 )

Conversion of notes

    18,859,100       13       6,177                         6,190  

Inducement to convert notes

    2,749,197       2       630                         632  

Issuance of common stock for service

    3,214,121       2       906                         908  

Issuance of common stock for interest

    2,042,196       1       523                         524  

Financing fee in common stock

    402,385             127                         127  

Issuance of common stock for the acquisition of In-process research and development

    7,142,858       5       (5 )                        

Sale of stock for cash

    2,891,749       2       837                         839  

Warrant exercise price reduction for cash

                149                         149  

Stock option compensation expense

                1,335                         1,335  

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

                795                         795  

Issuance of Clyra common stock

                852                   153       1,005  

Fair value of warrants for extension of debt

                506                         506  

Deemed dividend for the change in accounting for derivative liability

                297       (297 )                  

Net loss

                      (10,221 )           (475 )     (10,696 )

Foreign currency translation

                            (28 )           (28 )

Balance, December 31, 2018

    141,466,071     $ 95     $ 110,222     $ (111,723 )   $ (90 )   $ 373     $ (1,123 )

Conversion of notes

    12,105,699       8       1,727                         1,735  

Warrant exercise

    7,544,456       5       555                         560  

Issuance of common stock for service

    3,318,490       2       708                         710  

Issuance of common stock for interest

    915,164       1       199                         200  

Financing fee in common stock cancelled

    (150,000 )           (42 )                       (42 )

Stock issuance to officer

    500,000          

                         

Sale of stock for cash

    556,144             125                         125  

Stock option compensation expense

                1,522                         1,522  

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

                3,931                         3,931  

Issuance of Clyra common stock

                186                   350       536  

Debt extinguishment expense

                619                         619  

Warrant reprice

                56                         56  

Exchange Clyra ownership for Biolargo Debt

                440                         440  

Preferred Series A Clyra dividend, converted to Clyra Shares

                270       (270 )                  

Deemed dividend for the change in accounting for derivative liability

                809       (809 )                  

Net loss

                      (10,690 )           (750 )     (11,440 )

Foreign currency translation

                            (9 )           (9 )

Balance, December 31, 2019

    166,256,024     $ 111     $ 121,327     $ (123,492 )   $ (99 )   $ (27 )   $ (2,180 )

 

 

See accompanying notes to consolidated financial statements and report of Independent Registered Public Accounting Firm.

 

 

 

BIOLARGO, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR
THE YEARS ENDED DECEMBER 31, 2018 AND 2019

(in thousands, except for per share data)

   

DECEMBER 31,

2018

   

DECEMBER 31,

2019

 

Cash flows from operating activities

               

Net loss

  $ (10,696 )   $ (11,440 )

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

               

Stock option compensation expense

    1,335       1,522  

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

    898       710  

Common stock issued for interest

    524       200  

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

    2,766       3,376  

Loss on extinguishment of debt

    745       1,029  

Debt conversion expense

    276        

Deferred offering expense

    19       53  

Financing fee paid in stock (cancellation)

    42       (42 )

Warrant reprice

          56  

Amortization and depreciation expense

    50       65  

Bad debt expense

          24  

Changes in assets and liabilities:

               

Accounts receivable

    (163 )     (121 )

Inventories

    28       9  

Accounts payable and accrued expenses

    284       123  

Deferred revenue

          35  

Prepaid expenses and other assets

    1       (21 )

Net cash used in operating activities

    (3,891 )     (4,422 )

Cash flows from investing activities

               

Equipment purchases

    (58 )     (35 )

Net cash used in investing activities

    (58 )     (35 )

Cash flows from financing activities

               

Proceeds from convertible notes payable

    705       1,632  

Proceeds from OID offering

          2,703  

Proceeds from the sale of stock in Clyra Medical

    1,005       536  

Repayment of Clyra Medical note payable

    (243 )      

Proceeds from sale of stock to Lincoln Park Capital

    839       125  

Proceeds from notes payable

    400        

Proceeds from line of credit

    430        

Proceeds from conversion inducement

    357        

Proceeds from warrant buy down

    149        

Proceeds from warrant exercise

          560  

Repayment of note payable

          (915 )

Repayment of letter of credit

          (175 )

Net cash provided by financing activities

    3,642       4,466  

Net effect of foreign currency translation

    (28 )     (9 )

Net change in cash

    (335 )      

Cash at beginning of year

    990       655  

Cash at end of year

  $ 655     $ 655  

Supplemental disclosures of cash flow information

               

Cash paid during the year for:

               

Interest

  $ 54     $ 195  

Income taxes

  $ 13     $ 3  

Non-cash investing and financing activities

               

Fair value of warrants issued with convertible notes and letter of credit

  $ 795     $ 3,931  

Conversion of convertible notes payable into common stock

  $ 6,190     $ 1,735  

Convertible Notes issued with Original Issue Discount

  $     $ 1,008  

Note payable issued for intellectual property

  $ 1,250     $  

Liability to Scion Solutions, LLC

  $ 643     $  

Exchange of Note Payable for Clyra Shares

  $     $ 440  

Fair value of stock issued for equipment

  $ 10     $  

Fair value of stock issued for financing fees

  $ 85     $  

Fair value of stock issued for conversion of Clyra Medical line of credit

  $ 250     $  

Exercise of stock options

  $ 12     $  

Clyra preferred shares dividend exchange for Clyra common stock

  $     $ 270  

Right of use / operating lease

  $     $ 411  

Deemed dividend

  $ 297     $ 809  

 

See accompanying notes to consolidated financial statements and report of Independent Registered Public Accounting Firm

 

 

BIOLARGO, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

Note 1. Business and Organization

 

Description of Business 

 

BioLargo, Inc. is an innovative technology developer and environmental engineering company driven by a mission to "make life better" by delivering robust, sustainable solutions for a broad range of industries and applications, with a focus on clean water, clean air. The company also owns a minority interest  in an advanced wound care subsidiary that has licensed BioLargo Technologies and it plans to spin out or sell when the appropriate opportunity is identified.  Our business strategy is straightforward: we invent or acquire technologies that we believe have the potential to be disruptive in large commercial markets; we develop and validate these technologies to advance and promote their commercial success as we leverage our considerable scientific, engineering, and entrepreneurial talent; we then monetize these technical assets through a variety of business structures that may include licensure, joint venture, sale, spin off, or by deploying direct to market strategies.

 

Liquidity / Going concern

 

The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of our business. For the year ended December 31, 2019, we had a net loss of $11,440,000, used $4,422,000 cash in operations, and at December 31, 2019, we had a working capital deficit of $3,289,000, and current assets of $1,065,000. We do not believe gross profits will be sufficient to fund our current level of operations or pay our debt due prior to December 31, 2020, and will have to obtain further investment capital to continue to fund operations and seek to refinance our existing debt. We have been, and anticipate that we will continue to be, limited in terms of our capital resources. During the year ended December 31, 2019, we generated revenues of $1,861,000 through two subsidiaries (Odor-No-More and BLEST – see Note 11, “Business Segment Information”). Neither generated enough revenues to fund their operations, or fund our corporation operations or other business segments, and thus to continue to operate throughout 2019, we conducted private securities offerings. During the year ended December 31, 2019, we received $4,466,000 net proceeds from various private securities offerings, and ended the year with total cash and cash equivalents of $655,000. We intend to refinance or renegotiate the $550,000 in debt obligations due in August 2020; the remainder of debt due in 2020 is convertible at maturity. Our cash position is insufficient to maintain our current level of operations and research/development, and thus we will be required to raise substantial additional capital to continue to fund our operations in calendar year 2020, as well as our future business plans. We continue to raise money through private securities offerings and our LPC Purchase Agreement (see Notes 3 and 13), and continue to negotiate for more financing from private and institutional investors. No assurance can be made of our success at raising money through private or public offerings.

 

The foregoing factors raise substantial doubt about our ability to continue as a going concern. Ultimately, our ability to continue as a going concern is dependent upon our ability to attract significant new sources of capital, attain a reasonable threshold of operating efficiencies and achieve profitable operations by licensing or otherwise commercializing products incorporating our technologies. The consolidated financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern.

 

Organization

 

We are a Delaware corporation formed in 1991. We have four wholly-owned subsidiaries: BioLargo Life Technologies, Inc., organized under the laws of the State of California in 2006; Odor-No-More, Inc., organized under the laws of the State of California in 2009; BioLargo Water Investment Group Inc. organized under the laws of the State of California in 2019, which wholly owns BioLargo Water, Inc., organized under the laws of Canada in 2014; and BioLargo Development Corp., organized under the laws of the State of California in 2016. Additionally, we own 97.5% (see Note 10) of BioLargo Engineering Science and Technologies, LLC, organized under the laws of the State of Tennessee in 2017 (“BLEST”). We also own 36% of Clyra Medical Technologies, Inc. (“Clyra Medical”), organized under the laws of the State of California in 2012, and consolidate their financial statements (see Note 2, subheading “Principles of Consolidation,” and Note 9).

 

 

BIOLARGO, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

Note 2. Summary of Significant Accounting Policies

 

Principles of Consolidation

 

The consolidated financial statements include the accounts of the Company, its wholly owned subsidiaries, BLEST, and Clyra Medical. Management believes Clyra Medical’s financial statements are appropriately consolidated with that of the Company after reviewing the guidance of ASC Topic 810, “Consolidation”, and concluding that BioLargo controls Clyra Medical. While BioLargo does not have voting interest control through a majority stock ownership of Clyra Medical (it owns 36% of the outstanding voting stock), it does exercise control under the “Variable Interest Model.” There is substantial board overlap, BioLargo is the primary beneficiary since it has the power to direct Clyra Medical’s activities that most significantly impact Clyra Medical’s performance, and it has the obligation to absorb losses or receive benefits (through royalties and licensing) that could be potentially significant to Clyra Medical. Biolargo has consolidated Clyra Medical’s operations for all periods presented. (See Note 9.)

 

All intercompany accounts and transactions have been eliminated.

 

Foreign Currency

 

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

 

Cash and Cash Equivalents

 

The Company considers all highly liquid investments with maturities of three months or less when acquired to be cash equivalents. Substantially all cash equivalents are held in short-term money market accounts at one of the largest financial institutions in the United States. From time to time, our cash account balances are greater than the Federal Deposit Insurance Corporation insurance limit of $250,000 per owner per bank, and during such times, we are exposed to credit loss for amounts in excess of insured limits in the event of non-performance by the financial institution. We do not anticipate non-performance by our financial institution.

 

As of December 31, 2018 and 2019, our cash balances were made up of the following (in thousands):

 

   

2018

   

2019

 

Biolargo, Inc. and subsidiaries

  $ 193     $ 652  

Clyra Medical Technologies, Inc.

    462       3  

Total

  $ 655     $ 655  

 

Accounts Receivable

 

Trade accounts receivable are recorded net of allowances for doubtful accounts. Estimates for allowances for doubtful accounts are determined based on payment history and individual customer circumstances. The allowance for doubtful accounts as of December 31, 2018 was nil and 2019 was $24,000.

 

Credit Concentration

 

We have a limited number of customers that account for significant portions of our revenue. During the year ended December 31, 2018, we had one customer and during the year ended December 31, 2019, there were no customers that accounted for more than 10% of consolidated revenues in the respective periods, as follows:

 

   

2018

   

2019

 

Customer A

    33 %     <10 %

 

 

BIOLARGO, INC. AND SUBSIDIARIES