Biolargo, Inc.: Form 10-Q for the period ended Mar 31, 2023

This quarterly report on Form 10-Q contains forward-looking statements. These forward-looking statements involve risks and uncertainties, including statements regarding BioLargo’s capital needs, business plans and expectations. Such forward-looking statements involve risks and uncertainties regarding BioLargo’s ability to carry out its planned development and production of products. Forward-looking statements are made, without limitation, in relation to BioLargo’s operating plans, BioLargo’s liquidity and financial condition, availability of funds, operating and exploration costs and the market in which BioLargo competes. Any statements contained herein that are not statements of historical facts may be deemed to be forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “may”, “will”, “should”, “expect”, “plan”, “intend”, “anticipate”, “believe”, “estimate”, “predict”, “potential” or “continue”, the negative of such terms or other comparable terminology. Actual events or results may differ materially. In evaluating these statements, you should consider various factors, including the risks outlined in our Form most recent annual report on Form 10-K, and, from time to time, in other reports BioLargo files with the SEC. These factors may cause BioLargo’s actual results to differ materially from any forward-looking statement. BioLargo disclaims any obligation to publicly update these statements, or disclose any difference between its actual results and those reflected in these statements. The information constitutes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Given these uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.

Unless otherwise expressly stated herein, all statements, including forward-looking statements, set forth in this Form 10-Q are as of March 31, 2023, unless expressly stated otherwise, and we undertake no duty to update this information.

As used in this report, “we” and “Company” refers to (i) BioLargo, Inc., a Delaware corporation; and (ii) its partially or wholly-owned subsidiaries BioLargo Life Technologies, Inc., a California corporation which holds our registered patents, ONM Environmental, Inc., a California corporation which manufactures, markets, sells and distributes our odor and volatile organic compound control products, BioLargo Water Investment Group, Inc., a California corporation (which wholly owns BioLargo Water, Inc., a Canadian corporation), BioLargo Development Corp., a California corporation which employs and provides benefits to our employees, BioLargo Engineering, Science & Technologies, LLC, a Tennessee limited liability company (“BLEST”) that provides professional engineering services out of Oak Ridge Tennessee, BioLargo Energy Technologies, Inc., a California corporation (“BETI”) formed to commercialize our proprietary battery technology, BioLargo Equipment Solutions & Technologies, Inc., a California corporation, and Clyra Medical Technologies, Inc., a California corporation (“Clyra Medical”) which commercializes our technologies in the medical and dental fields. All subsidiaries are wholly owned, except for BETI, BLEST and Clyra Medical.

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

Our Business - Innovator and Solution Provider

BioLargo, Inc. invents, develops, and commercializes innovative platform technologies to solve challenging environmental problems like PFAS contamination (per- and polyfluoroalkyl substances), advanced water and wastewater treatment, industrial odor control, air quality control, infection control, and myriad environmental remediation challenges. Having conducted continual and extensive research and development, BioLargo holds a wide array of issued patents, maintains a robust pipeline of products, and provides full-service environmental engineering. With a keen emphasis on partnerships with academic, government, and commercial organizations and associations, BioLargo has proven itself by executing on challenging environmental engineering projects, demonstrating its powerful technologies through pilots, trials, and early commercial adoption, publishing high-impact academic and industry publications, and winning over 90 grants. We monetize our innovations through direct sales and recurring service contracts, as well as through channel partnerships, meaning licensing agreements, exclusive and non-exclusive distribution agreements, brand development partnerships, sale referral partnerships, strategic joint venture formation, and/or the sale of the IP. Channel partnerships allow us to extend the commercial reach of our products and services disproportionately to our core infrastructure and staffing.

Our revenues increased 288% in the three months ended March 31, 2023, as compared with the same period in 2022, having more than doubled in the year ended December 31, 2022, as compared with the year ended December 31, 2021. The standout has been the pet odor product (brand name “Pooph”) sold by our consumer packaged goods partners at Ikigai Marketing Works, whose sales contributed significantly to the record product revenues of our odor and VOC control products division ONM Environmental, and comprised 86% of our revenues in the quarter.

We have several key ongoing projects that Company management believes will stimulate accelerated growth through 2023. These are:

• The launch in major retailers of the Pooph pet odor control product by our consumer packaged goods partners at Ikigai.
• Our first PFAS removal project at a large industrial site (announced in August 2022), currently in the initial phase of a multi-phase process, which we expect to continue advancing as we engineer a comprehensive PFAS mitigation plan.
• Expanded commercial roll-out of our PFAS treatment technology through a growing network of sales rep organizations.
• Garratt-Callahan’s launch of the jointly developed minimal liquid discharge wastewater treatment product.
• Our engineering work with Ultra Safe Nuclear.
• Our engineering services division’s engagements as consultants to support large capital projects which are sponsored and or financed by the customers.

Technology

We have continually advanced our portfolio of technologies since the first acquisition of early iterations of the BioLargo technology in the spring of 2007. Our innovations have primarily been developed through our internal resources, and some through acquisition. These include patents, patents pending, and trade secrets that include solutions for:

• Water decontamination, including:
• Removal of per- and polyfluoroalkyl substances (PFAS) and chlorides from drinking and ground water
• Micro-pollutant destruction and removal
• Legionella detection and water treatment solutions
• Minimum and zero liquid discharge systems (MLD/ZLD)
• Disinfection
• Electro-oxidation
• Battery energy storage
• Air quality controls and systems including odor and VOC control
• Mineral processing
• Infection control
• Wound management
• Disinfection

Talent

We have grown our team to 33 team members and numerous other part-time consultants, including highly qualified PhDs, engineers, MDs and medical professionals, construction professionals, field service technicians, innovators, sales marketing specialists, entrepreneurial and executive leadership.

Purpose

Our mission to make life better drives us to serve others with integrity, knowledge, technology, and solutions that protect the environment, improve quality of life, and protect lives. Most of our technologies were developed from the ground-up to be sustainable, practical solutions to significant global challenges. We are unique in our ability to tailor our offerings to serve our customers with proven expertise, proven technology and, if needed, we often have the ability to develop new technical solutions to meet our customers’ needs.

Combating the PFAS Forever-Chemical Crisis – the AEC

One of the most significant and timely innovations in our portfolio is our per- and polyfluoroalkyl substances (PFAS) removal and collection/disposal solution we call the Aqueous Electrostatic Concentrator (AEC). Our engineers developed and are now commercializing the AEC, which is a novel water treatment system that removes PFAS from water at a lower operating cost and generating only a fraction of the PFAS-laden waste of the most common currently used solutions (carbon filtration, ion exchange, and reverse osmosis). PFAS chemicals have been linked to cancer, immune disorders, liver dysfunction, and many other human health problems, and are contained in a vast range of manufactured goods, common household products (e.g., cleaning products, cookware), and electronics, and contaminate drinking water in unsafe levels all over the globe.

PFAS is often referred to as the “contaminant of the decade”, and as such, it is considered a multi-billion dollar commercial market opportunity. The EPA proposed new drinking water standards on March 14, 2023, limiting certain PFAS chemicals to four parts per trillion – a standard our AEC can meet. We believe these proposed rules will continue to push the market to find and adopt commercially viable solutions to remove PFAS chemicals from water. Additionally, some emerging regulations on PFAS in the U.S. are expected to skew the market toward seeking treatment technologies that produce as little PFAS-laden solid waste as possible, a favorable trend for our AEC that generates very little PFAS-laden waste. Detection of unsafe levels of PFAS around the world has given rise to a number of market opportunities, including in drinking water, industrial wastewater, municipal wastewater, solid waste, organic foods and more.

We have successfully validated the AEC as an effective system to selectively extract and collect PFAS chemicals from contaminated water including performance testing that shows “non-detect” levels of removal, which meets new EPA standards. We have demonstrated more than nine months of continuous operation showing no materially significant degradation of the AEC system’s components or performance over time. As a modular system, we believe the AEC is scalable to a commercial scale, and we believe that our engineering team has the experience to deliver systems to meet the needs of a commercial installation.

In August 2022, we began engineering a comprehensive PFAS mitigation plan for client operating an industrial site. The initial preliminary engineering phase and project budgeting is complete. We recently delivered a proposal for a system that will serve as a mobile commercial pilot, and scoping, preliminary design and budget for the building of the full-scale system.

The AEC’s commercial roll-out will be executed with the help of a network of sales representative organizations whose role will be to market and sell the treatment system, related equipment, and the Company’s engineering services to municipal and industrial customers across the country. We have secured channel partner agreements with several sales representative organizations ensuring coverage for most of the continental United States.

In October 2022, we entered into a channel partner agreement with Product Recovery Management, Inc. to sell, distribute and act as a contract manufacturer for the AEC and other BioLargo water treatment technologies. Product Recovery Management (PRM), based out of Butner, NC, is a UL-certified equipment integrator specializing in remediation services with over 40 years of history serving customers. PRM designs and manufactures treatment systems that address a wide variety of contamination challenges in the remediation and landfill industries, including PFAS contamination. Their Butner operations include a 250,000 square foot manufacturing facility with large-scale fabrication capabilities.

We are also in negotiations with multiple prospective industrial and municipal customers to treat PFAS contaminated water. In light of the fact that we now have our first commercial project under contract, we believe that our expected success with an industrial customer will be a key factor to help advance marketing efforts in the municipal market as well as potentially minimizing the need for small scale field piloting, which can be expensive and time consuming.

ONM Environmental - Industrial Odor and VOC Solutions

ONM Environmental, Inc. is BioLargo’s subsidiary that delivers robust and comprehensive products and services to control and mitigate odor and volatile organic compounds (“VOCs”) emitted from a variety of industrial activities, including landfills and other waste handling facilities. Its flagship product – CupriDyne® Clean – reduces and eliminates tough odors and VOCs in various industrial settings. CupriDyne® Clean is delivered through misting systems, sprayers, water trucks and similar water delivery systems designed, manufactured and installed by ONM. 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. ONM Environmental holds General, Electrical, Plumbing and Low Voltage contractor licenses issued by the California Contractors State License Board, and offers a menu of services to landfills, transfer stations, wastewater treatment facilities as well as facilities in non-waste related industries. These services include engineering design, construction, installation, ongoing maintenance and on-site support services to assist our clients in the implementation and continued use of the various systems that deliver our liquid products in the field (such as misting systems).

We have been and expect to continue selling product to the largest solid waste handling companies in the country, with a portion of chemistry product sales resulting from national purchasing agreements (NPAs), and are also serving municipalities.

In addition to its goal to keep growing its revenues organically through the sale of odor and VOC control chemistry and air quality control systems to its primary market segment (municipal solid waste handling in California), ONM Environmental aims to accelerate its growth through development of new sales and distribution channels without being limited by our own sales and distribution infrastructure, such as through our partnership with Ikigai Marketing Works, LLC (see “Consumer Packaged Goods Products” below).

Consumer Packaged and Private-Label Products

We sell pet odor-control products under the brand “Pooph” to Ikigai Marketing Works, LLC. After a successful test marketing phase, they have been executing a national advertising campaign through extensive television and internet advertising and have launched the product for web sales on their own website and on Amazon. In late 2022, Ikigai launched the Pooph product in a limited number of Walmart retail stores, expanding to Walmart stores nationwide in the second quarter of 2023. Our agreement with Ikigai grants them an exclusive license to sell the Pooph pet odor-control product, and requires, in addition to purchasing product from us at an agreed-upon manufacturing margin, they are required to pay us an additional six percent of their sales.

As Ikigai has expanded their national television advertising, their sales have increased, and correspondingly, their purchase of product from us has increased, such that for the three months ended March 31, 2023, it comprised 86% of our total (company-wide) revenue.

South Korean Joint Venture

In February 2020 we executed a “Joint Venture Framework Agreement” with a leading wastewater treatment solution provider based in South Korea (BKT Co. Ltd., “BKT”), to create a South Korean entity that would manufacture odor and VOC control products based on our CupriDyne® Clean products. We own 40% of the joint venture. Although the joint venture established manufacturing and is marketing the product, the COVID-19 pandemic significantly impacted the expected growth of the company. While the management team continues to market the product to industrial clients, their efforts have struggled to gain a foothold, and we are in discussions to expand their license to allow for the sale of consumer products.

Full Service Environmental Engineering

BioLargo Engineering, Science & Technologies, LLC (“BLEST”) offers full service environmental engineering to third parties and provides engineering support services to our internal teams to accelerate the commercialization of our technologies.

BLEST focuses its efforts in three areas:

• providing engineering services to third-party clients;
• supporting internal product development and business units’ services to customers (e.g., the AOS); and
• advancing their own technical innovations such as the AEC PFAS treatment technology and the battery energy storage system which was recently added to the portfolio.

The subsidiary is located in Oak Ridge (a suburb of Knoxville, Tennessee), and employs a group of scientists and engineers, many of whom are owners of the entity (BioLargo owns 82.25%). 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. Many of the other team members are also former employees of CB&I and Shaw, with the exception of more recent staff hires. We believe the team is highly experienced across multiple industries and 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. The team has decades of high-level experience in the energy industry. The engineering team has also developed an extended network of trusted engineering subcontractors that assist in serving specific client projects as needed.

In association with Garratt-Callahan, a national industrial water treatment company, BLEST developed a “minimal liquid discharge” (MLD) wastewater treatment system based on Garratt-Callahan’s patented technology that is able to reduce industrial wastewater discharge and therefore reduce wastewater discharge fees for customers. Garratt-Callahan is currently marketing the MLD system to its customers. BLEST will serve as the manufacturing partner and Garratt-Callahan will serve as the selling distributor to leverage their national sales force and over one hundred years of providing services and products to customers. BioLargo’s engineers completed the first full-scale prototype of this new technology and tested it with Garratt-Callahan client provided water, with Garratt-Callahan technical staff present on-site at BLEST’s facility. In this “factory acceptance” testing, the system removed over 98% of the target contaminants from water in continuous operation, in line with results achieved by Garratt-Callahan’s original bench-scale and batch processing tests. This factory acceptance testing was a necessary step before commercial trials and/or sales to Garratt-Callahan customers could begin. Garratt-Callahan has identified multiple customer prospects, as has BioLargo, through its own marketing efforts. We remain confident that this innovation and partnership will find commercial success.

In the second quarter of 2022, BLEST was contracted by Ultra Safe Nuclear to assist in producing the first prototype fuel production systems for their new nuclear reactor called the Micro Modular Reactor (MMR®). Ultra Safe Nuclear is a Seattle-based nuclear energy company that has invented a “fission battery” - a fourth generation modular nuclear reactor – that can deliver safe, zero-carbon, cost-effective energy anywhere. The MMR® uses ceramic-encapsulated nuclear fuel – Fully Ceramic Micro-encapsulated (FCM+++) – an extremely rugged and stable fuel with high temperature stability. BioLargo has been retained to provide engineering design support, fabrication, and integration for the company’s prototype fuel production systems. Because of the success of the early phase of the project, this project is expected to expand over the coming months in scope and significance to BioLargo, making them an important customer for BLEST.

Waste-to-Energy Conversion Plant Project

In April 2022, our engineering subsidiary was hired by a Southern California based sustainable energy services company to conduct a comprehensive project plan (i.e., “feasibility study”) for a waste-to-energy (WTE) conversion plant in South America – one of multiple projects in planning stages by the company. Our engineers completed the initial feasibility study and have delivered a proposal for the next phase of the project (front end engineering design, aka FEED). The client has also requested feasibility studies and a FEED proposal for WTE plants in Asia.

BioLargo Water and the Advanced Oxidation System – AOS

BioLargo Water is our wholly owned subsidiary located in Edmonton, Alberta, Canada, which has and is commercializing our Advanced Oxidation water treatment system (AOS). The AOS is our patented water treatment device that generates highly oxidative and energetic species of iodine and other molecules which allow it to eliminate pathogenic organisms and organic contaminants rapidly and effectively as water passes through the device. The key value proposition of the AOS is its ability to reduce or eliminate a wide variety of waterborne contaminants with high performance while using very little electricity and input chemicals. This is made possible by the highly oxidative iodine compounds and reactive oxygen species generated within the AOS reactor as well as the unique and proprietary physical constitution and geometry of the reactor. Our proof-of-concept studies and on-site pilot projects 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. Furthermore, our technology has been proven capable of removing hard-to-treat organic micropollutants such as pharmaceuticals from water more quickly and energy-efficiently than other technologies. Together, these characteristics make the AOS an economical and versatile tool to enable wastewater treatment and reuse in the face of emerging water contaminants and increasing regulatory scrutiny on industrial wastewater discharge. The capabilities of the AOS as a sustainable water treatment technology have been the subject of several high-impact academic papers in scientific journals. The company pursues a policy of publishing about the technology in academic journals as much as possible in order to promote transparency about the technology’s safety and efficacy while also contributing to the field of advanced water treatment science. In June of 2022, the fourth peer-reviewed scientific paper about the AOS was published, in the journal Environmental Science and Pollution Research.

In the first quarter of 2022, BioLargo Water received a grant from Next Generation Manufacturing Canada (NGen) to support the company’s collaboration with a specialized electrical component designer to assist in optimizing the electrical performance of the AOS with the ultimate goal of maximizing the lifespan of the AOS’ components. In the second quarter of 2022, the development work funded by this grant advanced, focusing on improving the performance of the conductive materials within the AOS which allow for water disinfection and decontamination.

The AOS has been included as a component of treatment train (comprehensive system) for a number of projects being scoped and budgeted through our engineering subsidiary. In addition, it has been included in the catalog of offerings being sold through our independent representatives as well as channel partners.

Municipal Wastewater Treatment Pilot – Montreal

Our commercial-scale AOS demonstration pilot (run in partnership with water experts at the Centre des Technologies de L’Eau) at a municipal wastewater treatment plant near Montreal, Quebec, is ongoing and providing important data that shows the AOS is removing five target pharmaceuticals from the wastewater faster and using less electricity than the ultraviolet (UV) disinfections system used in the facility. Notably, the pilot project also showed that the AOS was able to also remove total coliforms (bacteria) from the municipal wastewater more effectively than the UV disinfection system currently in use at the facility.

In January 2022, BioLargo Water was awarded a grant from the government of Canada’s Natural Sciences and Engineering Research Council (NSERC) that allowed for the extension of the pilot project to allow for use of a new, higher flow-rate AOS system, as well as the installation of an AEC system at the pilot to assess its removal of PFAS chemicals from the municipality’s wastewater, which was completed successfully.

Clyra Medical Technologies

Clyra Medical Technologies, Inc. is our partially owned subsidiary creating medical products based on our technology. It is launching a product to be used by surgeons generally, with a first target market aimed toward orthopedic surgeons for use as a wound irrigation solution and to help manage patient care and outcomes and, for wound care. Clyra has secured its first two hospital customers for the product, established a robust quality control system for FDA compliance, recruited a national director of sales, and is negotiating with three separate channel partners to form a commercial alliance. It has secured its first manufacturer’s representatives and is actively expanding these efforts to build out a national rep network. Its other product designs are on hold until such time as it is able to secure the capital and resources to complete any final development and support additional inventory, technical support and sales for these products. There are channel partnerships in development for Clyra’s Bioclynse product in three separate healthcare markets.

BioLargo Energy Technologies, Inc.

BioLargo acquired a proprietary sodium-sulfur battery technology and has formed and secured initial seed capital for a subsidiary – BioLargo Energy Technologies, Inc. (“BETI”) – designed to address the ongoing shift toward renewable energy production and the growth in global electricity demand, and the consequent drastic expansion in energy storage capacity in the US and world-wide that will be needed to accommodate increased demand and the intermittent nature of renewable energy sources like wind and solar.

The initial capital raised – $650,000 – will be used to construct prototype batteries. These batteries will be tested to confirm energy efficiency, useful life expectancy, energy density, safety profile, number of charge/discharge cycles, and other technical claims that differentiate the battery from incumbent technologies. Batteries built based on the underlying technology a decade ago demonstrated features that far surpass comparable lithium-ion batteries, the dominant incumbent technology in the market:

• This sodium-sulfur battery technology demonstrates increased safety, no runaway fire risks, and a more sustainable design – with no rare-earth elements – that is capable of being manufactured completely from the domestic supply chain.
• Unlike lithium-ion batteries, BioLargo’s battery can charge and discharge completely, with no degradation of performance, ensuring virtually unlimited charge/discharge cycles, without self-discharge.
• BioLargo’s battery technology also demonstrates increased energy efficiency and energy density in comparison to lithium-ion batteries, and a longer useful life expectancy of at least 10 years.

BioLargo’s battery uses common, inexpensive, domestically available materials, and through its unique design and manufacturing process, creates an energy storage solution that has higher energy density than lithium virtually unlimited charge/discharge cycles, stable and secure supply chain management, and which is far safer than lithium-ion batteries, the current dominant energy storage technology. While the concept of sodium-sulfur salt batteries is not new (a concept conceived more than 80 years ago), we are not aware of any known ‘salt’ battery that can match the performance metrics of our battery.

Our battery technology operates at higher temperatures, and its casing and materials when combined, are heavier than lithium-ion, making it more suitable for stationary energy storage applications like grid-scale energy storage, electric vehicle charging stations, and commercial and residential energy storage, and believed to be less suitable for placement into electric vehicles or portable electronics. We are currently building out facilities to manufacture prototype batteries in our Oak Ridge Tennessee operations.

Results of Operations

We operate our business in distinct business segments:

• ONM Environmental, which manufactures and sells our odor and VOC control products and services for sale by itself and third parties through private labels;
• BLEST, our professional engineering services division, advancing innovations like the AEC to remove PFAS contaminants from water, serving outside clients on a fee for service basis, and supporting our internal business units;
• Clyra Medical, our partially owned subsidiary which develops and sells medical products based on our technology;
• BioLargo Water, our Canadian division that has been historically pure research and development, and is now transitioning to focus on commercializing our AOS system; and
• Our corporate operations, which support the operating segments with legal, accounting, human resources, and other services.

Consolidated revenue for the three months ended March 31, 2023, was $3,742,000, a 288% increase over the same period in 2022, and a 78% increase over the prior quarter (ended December 31, 2022). Our revenue from product sales and related services increased by 482%, while our service revenue decreased by 45%.

ONM Environmental

Our wholly-owned subsidiary ONM Environmental generates revenues through (i) sales of our flagship product CupriDyne Clean, including related design, installation, and maintenance services on the systems that deliver CupriDyne Clean at its clients’ facilities, and (ii) sale of private-label products to third parties.

Revenue (ONM Environmental)

ONM Environmental’s revenues increased 491% (to $3,543,000) in the three months ended March 31, 2023, compared with the same period in the prior year. Revenues in the quarter were comprised primarily of $3,218,000 in revenues to one customer selling private label products, and $431,000 in revenues of its industrial odor-control product CupriDyne Clean.

The increase in revenues was almost entirely due to an increase in the volume of sales of private label odor-control products, specifically the Pooph branded pet-odor product purchased by Ikigai, which comprised 91% of ONM Environmental’s revenue total. Because ONM Environmental has no control over Ikigai’s marketing and sales activity of Pooph, it cannot predict its sales of the product to Ikigai in future periods. Ikigai has indicated their intentions to continue their national advertising campaign as they place the product in national retail chains, including the introduction of the product in Walmart nationally. Their execution of those future plans has inherent risks that are out of our control. (See Part II, Item 1A, and the risk factor titled “A significant portion of our revenue is concentrated with one customer.”) Given the foregoing, management cannot be certain of the continued purchase of the Pooph product by Ikigai. Their failure to continue to purchase product would have a material impact on ONM Environmental’s revenues.

Industrial odor-control revenues increased 42% in the three months ended March 31, 2023, compared with the same period in the prior year, and increased 16% compared with the prior quarter (ended December 31, 2022).

Cost of Goods Sold (ONM Environmental)

ONM Environmental’s cost of goods sold includes costs of raw materials, contract manufacturing, and portions of depreciation, salaries and expenses related to the manufacturing and installation of its products. As a percentage of revenue, ONM Environmental’s costs of goods decreased 3% for the three months ended March 31, 2023, to 49%, compared to the same period in 2022, due to increased sales. Cost of goods sold increased 2% from the prior three months ended December 31, 2022. The fluctuation in cost of goods is due our efforts to improve margins in in our private-label products, and increases in raw material costs.

Selling, General and Administrative Expense (ONM Environmental)

ONM Environmental’s selling, general and administrative expenses increased by 22% ($65,000) during the three months ended March 31, 2023, as compared with the same period in 2022. These expenses increased due to a increase of sales and support staff. We expect these expenses to increase to add support if revenue continues to increase in the year ending December 31, 2023.

Operating Income (ONM Environmental)

ONM Environmental generated operating income of $1,387,000 in the three months ended March 31, 2023, compared to operating income of $13,000 in 2022. The generation of operating income this past quarter was entirely dependent on sale of Pooph product to Ikigai.

BLEST (engineering division)

Revenue (BLEST)

Our engineering segment (BLEST) generated $193,000 of revenue in the three months ended March 31, 2023, net of intersegment revenue, compared to $357,000 in 2022, representing a 45% decrease. The decrease is due to a decrease in the number of client contracts, an increase in intercompany services, and multiple clients delaying the start of projects.

In addition to providing services to third party clients, BLEST provides services to BioLargo and its subsidiaries for internal BioLargo projects. These services are billed internally, are considered intersegment revenue, and are eliminated in the consolidation of our financial statements. In the three months ended March 31, 2023, intersegment revenue for BLEST totaled $170,000, consisting primarily of research and development to further our flagship AOS water filtration system and our AEC PFAS treatment system. In addition, BLEST 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 ONM operating unit.

Cost of Goods (Services) Sold (BLEST)

BLEST’s cost of services includes employee labor as well as subcontracted costs. In the three months ended March 31, 2023, cost of services were 69% of its revenues, versus 42% in the same period in 2022. This increase is due to contracts with reduced margins and the reduction in overall revenue, as well as the recognition of deferred revenue in the three months ended March 31, 2022, which did not occur in the same period in 2023.

Selling, General and Administrative Expense (BLEST)

BLEST SG&A expenses were $184,000 in the three months ended March 31, 2023, compared to $134,000 in 2022, primarily due to increased rental costs and staff.

Operating Loss (BLEST)

BLEST incurred an operating loss of $368,000 in the three months ended March 31, 2023, compared to an operating loss of $35,000 in 2022.

Because the subsidiary had an operating loss, we invested cash during the year to allow it to maintain operations. BLEST’s need for a cash subsidy to support its operations has decreased over time. Our goal for this operation is that it produces a profit and contributes to corporate overhead in a significant way, although predicting when that will happen and other uncertainties in the market, and our limited resources, is difficult.

Clyra Medical

Clyra Medical generated $6,000 in revenues in the three months ended March 31, 2023, total costs and expenses of $431,000, including $134,000 in research and development expenses, and an operating loss of $426,000. In the same period in 2022, it generated $11,000 in revenue, had total costs and expenses of $250,000, including $16,000 in research and development expenses, and an operating loss of $239,000. Clyra has been limited in terms of capital resources, and its level of activity has been largely dependent on available cash.

BETI

Formed to develop and commercialize a sodium-sulfur battery technology, BETI raised $650,000 in investment capital in the three months ended March 31, 2023, did not generate revenue, and incurred $87,000 in expenses, primarily related to the build out of space to manufacture battery prototypes.

Selling, General and Administrative Expense – consolidated

Our Selling, General and Administrative expense (“SG&A”) include both cash (for example, salaries to employees) and non-cash expenses (for example, stock option compensation expense). Our consolidated SG&A decreased in the aggregate by 6% ($113,000) in the three months ended March 31, 2023, to $1,722,000. Our non-cash expenses (through the issuance of common stock, warrants, and stock options) decreased in the three months ended March 31, 2023 compared with 2022 ($463,000 compared to $822,000) , which accounted for the largest decline in salaries and consulting expense. The largest components of our SG&A expenses included (in thousands):

In the three months ended March 31, 2023, our non-cash expenses from stock for service, stock options and warrant expense total $496,000. In the three months ended March 31, 2022, our non-cash expenses from stock for service, stock options and warrant expense total $822,000.

Research and Development

In the three months ended March 31, 2023, we spent $565,000 in the research and development of our technologies and products. This was an increase of 44% ($173,000) compared to 2022. The increase is related to headcount and work at BETI.

Interest expense

Our interest expense for the three months ended March 31, 2023, was $48,000, compared with $13,000 in the same period in 2022. Of our total interest expense in 2023, $15,000 was paid in cash, and the remainder was comprised primarily of non-cash debt discounts related to warrants issued in conjunction with debt instruments being amortized over the life of the debt instrument; for the three months ended March 31, 2023, non-cash interest expense totaled $33,000.

Other Income and Expense

The amount of grant income increased $26,000 in the three months ended March 31, 2023, to $31,000. Primarily through our wholly owned Canadian subsidiary, we have been awarded more than 80 research grants over the years from various 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. Grant funds paid directly to third parties are not included as income in our financial statements.

During the three months ended March 31, 2022, we recorded $174,000 in income related to the forgiveness of Paycheck Protection Act loan to ONM Environmental.

Net Loss

Net loss for the three months ended March 31, 2023, was $494,000 a loss of $0.0015 per share, compared to a net loss for the three months ended March 31, 2022, of $1,544,000, a loss of $0.0059 per share, a reduction of 68% . Our net loss this period declined because of the 288% increase in revenues, combined with a reduction in expenses, primarily sales, general and administrative costs.

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

33

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 three months ended March 31, 2023, we generated revenues of $3,742,000 through our subsidiaries (see Note 11), had a net loss of $494,000, used $43,000 cash in operations, and at March 31, 2023, we had working capital of $3,075,000, and current assets of $4,874,000. While our operating loss has decreased in recent quarterly periods, as has our cash used in operations, we expect to continue to need further investment capital to fund operations. We have been, and anticipate that we will continue to be, limited in terms of our capital resources.

During the three months ended March 31, 2023, we (i) sold $105,000 of our common stock to Lincoln Park Capital Fund, LLC (“Lincoln Park”) (see Note 3), (ii) sold $695,000 of our common stock and warrants to accredited investors (see Notes 3 and 6), (iii) sold $225,000 of Clyra Medical Series A Preferred Stock (see Note 8), and (iv) sold $550,000 of BETI common stock (see Note 10).

As of March 31, 2023, our cash and cash equivalents totaled $3,264,000. Our total liabilities included a $78,000 a vehicle loan, $140,000 due in SBA loans issued pursuant to the Paycheck Protection Program (see Note 14), $150,000 due to the SBA issued pursuant to the Economic Injury Disaster program (EIDL) over 30 years, and $247,000 owed by a subsidiary due in 2024 (see Note 4).

Subsequent to March 31, 2023, we continue to sell common stock to Lincoln Park for working capital as needed (see Note 13).

If we are unable to rely on our current arrangement with Lincoln Park to fund our working capital requirements, we will have to rely on other forms of financing, and there is no assurance that we will be able to do so, or if we do so, it will be on favorable terms.

The foregoing factors raise substantial doubt about our ability to continue as a going concern, unless we are able to continue to raise funds through stock sales to Lincoln Park or other private financings, and in the long term, our ability to attain a reasonable threshold of operating efficiencies and achieve profitable operations by licensing or otherwise commercializing products incorporating our technologies. The consolidated financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern.

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.

Our significant accounting policies and methods used in the preparation of the Company’s consolidated financial statements are described in (i) in Part I, Item 1 of this Form 10-Q, Note 2, “Summary of Significant Accounting Policies” and (ii) in the Form 10-K for the year ended December 31, 2022, filed with the SEC on March 31, 2023, in the Notes to Consolidated Financial Statements in Part II, Item 8, and “Critical Accounting Policies and Estimates” in Part II, Item 7. There have been no material changes to the Company’s critical accounting policies and estimates since the filing of its Form 10-K.

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 – the “Exchange Act”) as of the end of the period covered by this Report. There were no changes in our internal control over financial reporting during the quarter ended March 31, 2023, which were identified in connection with management’s evaluation required by paragraph (d) of Rules 13a-15 and 15d-15 under the Exchange Act, that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

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, as our product and services sales continues to grow, and as we diversify our clients to include municipalities, increasing strain on our accounting systems. These activities put stress on our overall controls and procedures. As our operations do not yet generate enough cash to fund operations, and we rely on financing activities to maintain our level of operations and fund our anticipated growth, we do not yet have the ability to implement the more sophisticated control systems used by larger companies. Although we have made some improvements, our chief executive officer and chief financial officer have 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.

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

Under the supervision and with the participation of our management, including our chief executive officer and the chief financial officer, we have established internal control procedures in accordance with the guidelines established in the 2013 Framework —Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Management evaluated the effectiveness of our internal controls, and concluded that due to our limited financial and personnel resources, the fact that we operate our business in three distinct locations in the U.S. and Canada, and the lack of sophisticated reporting systems, we continue to have a material weakness in our internal controls with respect to the closing our financial statements. Until the Company has the financial resources to implement more robust automated systems, or to hire additional dedicated accounting personnel, we expect this material weakness to continue.

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.

PART II

OTHER INFORMATION

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 risk factors set forth in our report on Form 10-K for the period ended December 31, 2022, filed with the SEC on March 31, 2023, and below, discuss risks, uncertainties and assumptions relevant to our business and include 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.

A significant portion of our revenue is concentrated with a one customer.

In the year ended December 31, 2022, almost 50% of our total revenue was from the sale of Pooph branded pet-odor products to Ikigai. In the three months ended March 31, 2023, sales to Ikigai accounted for 86% of our total revenue. Our contract with Ikigai does not require they purchase a minimum amount of product from us, and their demand for our product is dependent entirely on their customers’ demand. They create customer demand through television and other advertising, and sell directly to consumers as well as to retailers. Any decrease in their advertising is likely to correspondingly decrease their purchase of product from us. We have no control over their advertising budget or methods, and therefore have no control over their need for product from us. Other factors beyond our control may affect customer demand for the Pooph product. Any such decrease in demand for Pooph product would have a material adverse effect on our business, results of operations, or financial condition.