Note 10 - Commitments and Contingencies

9 Months Ended

Sep. 30, 2018

Notes to Financial Statements

Commitments and Contingencies Disclosure [Text Block]

Note

10.

Commitments and Contingencies

Clyra Acquisition Corp (Scion Acquisition)

On

September 26, 2018,

we entered into a transaction whereby we would acquire the assets of Scion Solutions, LLC (“Scion”), and in particular its stem cell based technology, the SkinDisc, and key team members to support the sale and distribution of Clyra’s products based on our BioLargo technologies.

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 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.

The parties entered into a Stock Purchase Agreement and Plan of Reorganization (“Purchase Agreement”) whereby Scion and Clyra agreed to contribute all of their assets to a new entity (initially named Clyra Acquisition Corp., to be later renamed Clyra Medical Technologies, Inc., and referred to herein as “Clyra Acquisition”) in exchange for stock of the new entity. In exchange for the contribution of its assets, Clyra received from Clyra Acquisition the exact number of common and preferred shares it has outstanding (totaling

33,015

shares), and entered into a plan of reorganization whereby it will distribute the shares of the acquisition corporation to its shareholders such that its shareholders will hold the exact same number of common and preferred shares in the new entity as it did in Clyra prior to the transaction.

The consideration provided to Scion is subject to an escrow agreement and earn out provisions and includes: (i)

21,000

shares of the Clyra Acquisition common stock; (ii)

10,000

shares of Clyra Acquisition common stock redeemable for BioLargo common shares (detailed below); and (iii) a promissory note in the principal amount of

$1,250,000

to be paid through new capital investments and revenue, as detailed below. The Clyra Acquisition common stock will be held in escrow subject to the new entity raising

$1,000,000

“base capital” to fund its business operations. If

$1,000,000

in base capital is received within

120

days,

one

-half of the common stock would be released, and the

second

half would be subject to the following performance metrics, each vesting

one

-

fifth

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

$100,000

gross revenue; (b) the recognition by Clyra of

$100,000

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

$500,000

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

$1,000,000

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

$2,000,000

in gross revenue. If

$1,000,000

base capital is

not

raised within

120

days, then either party

may

completely terminate the transaction upon which termination we would have

no

further rights in the SkinDisc nor any further obligations to Scion.

The promissory note issued by Clyra Acquisition to Scion accrues interest at the rate of

5%.

Principal and interest due under the note are to be paid periodically once the company receives

$1,000,000

in “base capital”, at a rate of

25%

of investment proceeds received. If the note is

not

paid off within

18

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

12

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

18

-month maturity date are required to be made as investment proceeds are received, at a rate of

25%

of such proceeds, and

5%

of Clyra Acquisition’s gross revenues. BioLargo purchased the Scion intellectual property and

12,755

common shares from Clyra Acquisition. and in exchange issued

7,142,858

shares of its common stock, and in turn licensed back the technology to Clyra Acquisition. Scion

may

redeem these shares from Clyra Acquisition by exchanging its

10,000

common shares once (and only if) those

10,000

Clyra Acquisition shares are vested as discussed above.

We were initially introduced to the SkinDisc product and Scion Solutions through Dr. Liden and Tanya Rhodes’s work with Clyra (both Dr. Liden and Ms. Rhodes have ownership interest in Scion). Prior to the execution of the above-described agreements, BioLargo did

not

have any material relationship with Scion’s founder Spencer Brown.

The transactions contemplated by the Purchase Agreement were approved by BioLargo’s Board of Directors by written consent on

September 26, 2018.

In connection with the transaction, the Board of Directors obtained a fairness opinion from an independent appraiser, Berg Capital Markets, LLC. The fairness opinion states that the terms of the transaction is fair, from a financial point of view, to BioLargo, Clyra, and their shareholders. Calvert Employment Agreement

On

May 2, 2017,

the Company entered into an employment agreement with its President and Chief Executive Officer Dennis P. Calvert (the “Calvert Employment Agreement”), replacing in its entirety the previous employment agreement with Mr. Calvert dated

April 30, 2007.

The Calvert Employment Agreement provides that Mr. Calvert will continue to serve as our President and Chief Executive Officer and receive base compensation equal to his current rate of pay of

$288,603

annually. In addition to this base compensation, the agreement provides that he is eligible to participate in incentive plans, stock option plans, and similar arrangements as determined by the Company’s Board of Directors, health insurance premium payments for himself and his immediate family, a car allowance of

$800

per month, paid vacation of

four

weeks per year, and bonuses in such amount as the Compensation Committee

may

determine from time to time.

The Calvert Employment Agreement provides that Mr. Calvert will be granted an option (the “Option”) to purchase

3,731,322

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

$0.45

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

ten

years from the date of grant and vesting in equal increments over

five

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

not

yet vested shall be immediately vested in the event of, and prior to, a change of control, as defined in the Calvert Employment Agreement. The agreement also provides for a grant of

1,500,000

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

$3,000,000

in cash, or the recognition of

$3,000,000

in revenue, over a

12

-month period from the sale of products and/or the license of technology, and (iii) the Company’s breach of the employment agreement resulting in his termination. The Option contains the other terms standard in option agreements issued by the Company, including provisions for a cashless exercise.

The Calvert Employment Agreement has a term of

five

years, unless earlier terminated in accordance with its terms. The Calvert Employment Agreement provides that Mr. Calvert’s employment

may

be terminated by the Company due to his death or disability, for cause, or upon a merger, acquisition, bankruptcy or dissolution of the Company. “Disability” as used in the Calvert Employment Agreement means physical or mental incapacity or illness rendering Mr. Calvert unable to perform his duties on a long-term basis (i) as evidenced by his failure or inability to perform his duties for a total of

120

days in any

360

-day period, or (ii) as determined by an independent and licensed physician whom Company selects, or (iii) as determined without recourse by the Company’s disability insurance carrier. “Cause” means that Mr. Calvert has (i) engaged in willful misconduct in connection with the Company’s business; or (ii) been convicted of, or pled guilty or nolo contendere in connection with, fraud or any crime that constitutes a felony or that involves moral turpitude or theft. If Mr. Calvert’s employment is terminated due to merger or acquisition, then he will be eligible to receive the greater of (i) 

one

year’s compensation plus an additional

one

-half year for each year of service since the effective date of the employment agreement or (ii) 

one

year’s compensation plus an additional

one

-half year for each year remaining in the term of the agreement. Otherwise, he is only entitled to receive compensation due through the date of termination.

The Calvert Employment Agreement requires Mr. Calvert to keep certain information confidential,

not

to solicit customers or employees of the Company or interfere with any business relationship of the Company, and to assign all inventions made or created during the term of the Calvert Employment Agreement as “work made for hire”.

Clyra Consulting Agreement

Our partially owned subsidiary Clyra (see Note

8

) entered into a consulting agreement with Beach House Consulting, LLC, through which Jack B. Strommen will be providing consulting services to Clyra related to its sales and marketing activities once it has received FDA Approval (as defined in Note

8

and the associated agreement) on a product, at which point the agreement provides that Mr. Strommen is to receive

$23,438

per month for a period of

four

years. This agreement has

not

started, and the total cash obligation related to the agreement would be

$1,125,024

over

four

years.