Note

Share-Based Compensation

Common Stock

May 2, 2017,

pursuant to an employment agreement with the Company’s president, Dennis Calvert (see Note

“Calvert Employment Agreement”), we issued Mr. Calvert

1,500,000

shares of common stock. The shares are subject to a “lock-up agreement” whereby the shares remain unvested unless and until the earlier of (i) a sale of the Company, (ii) the successful commercialization of the Company’s products or technologies as demonstrated by its receipt of at least

$3,000,000

in cash, or the recognition of

$3,000,000

in revenue, over a

-month period from the sale of products and/or the license of technology, and (iii) the Company’s breach of the employment agreement resulting in his termination. The Company will expense the fair value of the stock if and when it is probable that any of the conditions above are met.

Stock options

During the

three

and

six

months ended

June 30, 2016,

we recorded an aggregate

$189,601

and

$491,440,

and during the

three

and

six

months ended

June 30, 2017,

we recorded an aggregate

$235,671

and

$515,959,

in selling, general and administrative expense related to the issuance of stock options. We issued options through our

2007

Equity Incentive Plan and outside of our

2007

Equity Incentive Plan.

2007

Equity Incentive Plan

August

2007,

and as amended

April 29, 2011,

our Board of Directors adopted the BioLargo, Inc.

2007

Equity Incentive Plan (

“2007

Plan”) as a means of providing our directors, key employees and consultants additional incentive to provide services. Both stock options and stock grants

may

be made under this plan. The Board’s Compensation Committee administers this plan. The plan allows grants of common shares or options to purchase common shares. As plan administrator, the Compensation Committee has sole discretion to set the price of the options. The Compensation Committee

may

at any time amend or terminate the plan.

June 19, 2017,

the date of our annual stockholders’ meeting, we recorded the issuance of options to purchase an aggregate

40,000

shares of our common stock to the non-employee members of our Board of Directors, pursuant to the terms of the

2007

Equity Plan which calls for an annual automatic issuance. The exercise price of

$0.43

equals the price of our common stock on the grant date. The fair value of these options totaled

$15,600

and was recorded as selling, general and administrative expense.

February 10, 2017,

we extended our engagement agreement with our Chief Financial Officer. The sole consideration for the

one

-year extension was the issuance of an option to purchase

300,000

shares of our common stock, at an exercise price of

$0.69

per share which was equal to the closing price of our common stock on the date of grant. The option expires

February 10, 2027,

and vests over the term of the engagement with

125,000

shares having vested as of

February 10, 2017,

and the remaining shares to vest

25,000

shares monthly beginning

March 1, 2017,

and each month thereafter, so long as his agreement is in full force and effect. The fair value of the option totaled

207,000

and during the

three

and

six

months ended

June 30, 2017,

we recorded

$51,750

and

$155,250

of selling, general and administrative expense on our statement of operations. The balance will vest monthly through

September

30,

2017.

June 20, 2016,

we recorded the issuance of options to purchase an aggregate

40,000

shares of our common stock to the non-employee members of our Board of Directors, pursuant to the terms of the

2007

Equity Plan which calls for an annual automatic issuance. The exercise price of

$0.45

equals the price of our common stock on the grant date. The fair value of these options totaled

$18,000

and was recorded as selling, general and administrative expense.

March 21, 2016,

our Board of Directors extended by

five

years the expiration of options to purchase

307,777

shares of our common stock issued to our Board of Directors and vendors in

March 2011.

The options were originally issued in exchange for unpaid obligations and now expire on

March 21, 2021.

The weighted-average fair value of the options resulted in additional

$119,971

of selling, general and administrative expenses.

Activity for our stock options under the

2007

Plan for the

six

-months ended

June 30, 2016

and

2017

is as follows:

									Weighted
Balance, June 30, 2016:									Average
	Options		Shares			Exercise			Price per
	Outstanding		Available			Price per share			share
Balances as of December 31, 2015		10,241,086		1,758,914		$0.23	–	1.89	$	0.44
Granted		40,000		(40,000	)		0.45			0.45
Expired		—		—			—			—
Balance, June 30, 2016		10,281,086		1,718,914		$0.23	–	1.89	$	0.44

									Weighted
									Average
Balance, June 30, 2017:	Options		Shares			Exercise			Price per
	Outstanding		Available			Price per share			share
Balances as of December 31, 2016		9,916,586		1,981,414		$0.23	–	1.89	$	0.44
Granted		340,000		(340,000	)	0.39	–	0.69		0.65
Exercised		—		—			—			—
Balance, June 30, 2017		10,256,586		1,641,414		$0.23	–	1.89	$	0.44

Options issued Outside of the

2007

Equity Incentive Plan

During the

three

and

six

-months ended

June 30, 2017,

we issued options to purchase

237,353

and

820,879

shares of our common stock at exercise prices ranging between

$0.43

–

$0.67

per share to vendors and to members of our board of directors. The fair value of the options issued during the

three

and

six

months ended

June 30, 2017,

totaled

$120,311

and

$277,074

and is recorded as selling, general and administrative expenses.

May 2, 2017,

pursuant to his employment agreement, we granted to Mr. Calvert, an option (the “Option”) to purchase

3,731,322

shares of the Company’s common stock. The Option shall be a non-qualified stock option, exercisable at

$0.45

per share, which represents the market price of the Company’s common stock as of the date of the agreement, exercisable for

ten

years from the date of grant and vesting in equal increments on the anniversary of the agreement for

five

years. Notwithstanding the foregoing, any portion of the Option which has

not

yet vested shall be immediately vested in the event of, and prior to, a change of control, as defined in the Calvert Employment Agreement. The Option contains the other terms standard in option agreements issued by the Company, including provisions for a cashless exercise. The fair value of this option totaled

$1,679,095

and will be amortized monthly through

May 2, 2022.

During the

three

months ended

June 30, 2017,

we recorded

$27,985

of selling, general and administrative expense.

During the

three

and

six

months ended

June 30, 2016,

we issued options to purchase

220,554

and

484,077

shares of our common stock at exercise prices ranging between

$0.33

–

$0.45

per share to vendors and to members of our board of directors. During the

three

and

six

months ended

June 30, 2016,

the fair value of these options totaled

$96,196

and

$183,159

and is recorded as selling, general and administrative expenses.

The fair value of the options issued prior to

2016

that vested during the

three

and

six

-months ended

June 30, 2016,

was

$75,405

and

$170,310,

and during the

three

and

six

months ended

June 30, 2017,

was

$20,025

and

$40,050.

Exercise of Stock Option

April 30, 2017,

the Company’s president, Dennis Calvert, delivered a notice of exercise of

3,866,630

shares pursuant to his stock option agreement dated

April 30, 2007.

The exercise price was

$0.18

per share, and the Company issued

2,501,937

shares, calculated by multiplying the difference between the market price of

$0.51

and the exercise price of

$0.18

with the number of shares exercised, and dividing that amount by the market price.

cash consideration was tendered with respect to the exercise. The remaining

3,866,629

shares available for purchase under the option agreement expired unexercised.

Pursuant to a “lock-up agreement” dated

April 30, 2017,

Mr. Calvert agreed to restrict the sales of the shares received until the earlier of (i) the consummation of a sale (in a single transaction or in a series of related transactions) of the Company by means of a sale of (a) a majority of the then outstanding common stock (whether by merger, consolidation, sale or transfer of common stock, reorganization, recapitalization or otherwise) or (b) all or substantially all of its assets; and (ii) the successful commercialization of the Company’s products or technologies as demonstrated by its receipt of at least

$3,000,000

in cash, or the recognition of

$3,000,000

in revenue, over a

-month period from the sale of products and/or the license of technology; and (iii) the Company’s breach of the employment agreement between the Company and Calvert dated

May 2, 2017

and resulting in Calvert’s termination.

Activity of our stock options issued outside of the

2007

Plan for the

six

-months ended

June 30, 2016

and

2017

is as follows:

							Weighted
Balance, June 30, 2016:							Average
	Options			Exercise			Price per
	Outstanding			Price per share			share
Balance, December 31, 2015		19,394,975		$0.18	–	1.00	$	0.40
Granted		484,077		0.33	–	0.45		0.38
Exercised		(60,000	)		0.25			0.25
Balance, June 30, 2016		19,819,052		$0.18	–	1.00	$	0.41

							Weighted
							Average
Balance, June 30, 2017:	Options			Exercise			Price per
	Outstanding			Price per share			share
Balance, December 31, 2016		20,148,766		$0.18	–	1.00	$	0.43
Granted		4,552,201		0.43	–	0.67	$	0.47
Expired		(3,866,629	)		0.18			0.18
Exercised		(3,866,630	)		0.18			0.18
Balance, June 30, 2017		16,967,708		$0.18	–	1.00	$	0.41

We recognize employee compensation expense for stock option awards on a straight-line basis over the applicable service period of the award, which is the vesting period. Share-based compensation expense is based on the grant date fair value estimated using the Black-Scholes Option Pricing Model. The following methodology and assumptions were used to calculate share based compensation for the

six

-months ended

June 30:

	2016						2017
	Non Plan			2007 Plan			Non Plan			2007 Plan
Risk free interest rate	1.77	–	1.91%	1.26	–	1.36%	2.29	–	2.40%	2.31	–	2.40%
Expected volatility	641	–	645%	311	–	315%	578	–	601%	578	–	601%
Expected dividend yield		—			—			—			—
Forfeiture rate		—			—			—			—
Expected life in years		7			5			7			7

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

The risk-free interest rate used in the Black-Scholes calculation is based on the prevailing U.S Treasury yield as determined by the U.S. Federal Reserve. We have never paid any cash dividends on our common stock and do

not

anticipate paying cash dividends on our common stock in the foreseeable future.

Historically, we have

not

had significant forfeitures of unvested stock options granted to employees and Directors. A significant number of our stock option grants are fully vested at issuance or have short vesting provisions. Therefore, we have estimated the forfeiture rate of our outstanding stock options as zero.