Note 3 - Acquisition of In-process Research and Development

12 Months Ended

Dec. 31, 2018

Notes to Financial Statements

Business Combination Disclosure [Text Block]

Note

3.

Acquisition of In-process Research and Development

On

September 26, 2018,

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

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

September 26, 2018 (

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

21,000

shares of the Clyra Medical common stock; (ii)

10,000

shares of Clyra Medical common stock redeemable for

7,142,858

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

$1,250,000

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

$1

million “base capital” to fund its business operations.

On

December 17, 2018,

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

$1

million “base capital”; at that time,

one

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

15,500

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

one

-

fifth

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

$100,000

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

$100,000

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

$500,000

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

$1

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

$2

million in gross revenue.

The promissory note in the principal amount of

$1,250,000

issued by Clyra Medical to Scion on

September 26, 2018

accrues interest at the rate of

5%.

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

25%

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

not

paid off within

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 in annual installments in an amount equal to the greater of (i)

25%

of investment proceeds received during the

12

-month period, and (ii)

5%

of Clyra Medical’s gross revenues.

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

12,755

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

7,142,858

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

may

exchange its

10,000

Clyra Medical common shares for the

7,142,858

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

December 31, 2018,

per the Closing Agreement,

one

-half of these shares have been earned and thus

may

be redeemed, and

one

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

7,142,858

BioLargo shares is

$1,286,000,

and

one

-half of this value is included on our

December 31, 2018

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