Note

Summary of Significant Accounting Policies

In the opinion of management, the accompanying balance sheet and related statements of operations, cash flows, and stockholders’ deficit include all adjustments, consisting only of normal recurring items, necessary for their fair presentation in conformity with accounting principles generally accepted in the United States of America.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company, its wholly owned subsidiaries, 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

38%

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. All intercompany accounts and transactions have been eliminated (see Note

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

September 30, 2019,

our cash balances were made up of the following (in thousands):

	December 31, 2018		September 30 , 2019
BioLargo, Inc. and wholly owned subsidiaries	$	193	$	2,071

Clyra Medical Technologies, Inc.		462		65

Total	$	655	$	2,136

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

and

September 30, 2019

was

zero

Credit Concentration

During the

nine

months ended

September 30, 2018

and

2019,

we had

two

customers that each accounted for more than

10%

of consolidated revenues in the respective periods, as follows:

	September 30 , 201 8			September 30 , 201 9
Customer A		44	%		13	%
Customer B		12	%		<10	%
Customer C		<10	%		10	%

We had

two

customers that accounted for more than

10%

of consolidated accounts receivable at

December 31, 2018

and at

September 30, 2019

as follows:

	December 31, 201 8			September 30 , 201 9
Customer W		12	%		<10	%
Customer X		31	%		<10	%
Customer Y		<10	%		17	%
Customer Z		<10	%		15	%

Inventory

Inventories are stated at the lower of cost or net realizable value using the average cost method. The allowance for obsolete inventory as of

December 31, 2018

and

September 30, 2019

was

$3,000

As of

December 31, 2018

and

September 30, 2019,

inventories consisted of (in thousands):

	December 31, 201 8		September 30 , 201 9
Raw material	$	14	$	10
Finished goods		12		9
Total	$	26	$	19

Impairment

Long-lived and definite lived intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset

may

not

be recoverable. If the sum of the expected future undiscounted cash flows from the use of the asset and its eventual disposition is less than the carrying amount of the asset, then an impairment loss is recognized. The impairment loss is measured based on the fair value of the asset. Any resulting impairment is recorded as a reduction in the carrying value of the related asset in excess of fair value and a charge to operating results. As of

December 31, 2018

and

September 30, 2019,

management determined that there was

impairment of its long-lived assets.

Earnings (Loss) Per Share

We report basic and diluted earnings (loss) per share (“EPS”) for common and common share equivalents. Basic EPS is computed by dividing the loss attributable to common shareholders by the weighted average shares outstanding. Diluted EPS is computed by adding to the weighted average shares the dilutive effect if stock options and warrants were exercised into common stock. For the

three

and

nine

months ended

September 30, 2018

and

2019,

the denominator in the diluted EPS computation is the same as the denominator for basic EPS due to the anti-dilutive effect of the warrants and stock options on the Company’s net loss.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and revenues and expenses during the period reported. Actual results could differ from those estimates. Estimates are used when accounting for stock-based transactions, debt transactions, derivative liabilities, allowance for bad debt, asset depreciation and amortization, among others.

The methods, estimates and judgments we use in applying these most critical accounting policies have a significant impact on the results of our financial statements.

Share-Based Compensation Expense

We recognize compensation expense for stock option awards on a straight-line basis for employees over the applicable service period of the award, which is the vesting period. We recognize compensation expense for stock option awards for non-employees at the fair value on the grant date. Generally, the options issued to non-employees have been earned upon issuance. For the instances that options are issued to non-employees with a vesting schedule, the fair value is calculated on the grant date and the expense is amortized and recorded according to the vesting schedule. Share-based compensation expense is based on the grant date fair value estimated using the Black-Scholes Option Pricing Model.

For stock and stock options issued to consultants and other non-employees for services, the Company measures and records an expense as of the earlier of the date at which either: a commitment for performance by the non-employee has been reached or the non-employee’s performance is complete. The equity instruments are measured at the current fair value, and for stock options, the instruments are measured at fair value on the grant date using the Black Scholes option model.

The following methodology and assumptions were used to calculate share-based compensation for the

nine

months ended

September 30, 2018

and

2019:

	2018								2019
	Non Plan				2018 Plan				Non Plan				20 18 Plan
Risk free interest rate	2.43	–	2.91	%			2.91	%	2.00	-	2.65	%	2.00	-	2.65	%
Expected volatility	538	-	563	%	538	-	548	%	147	-	152	%	147	-	152	%
Expected dividend yield			—				—				—				—
Forfeiture rate			—				—				—				—
Life in years			7				7				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.

Warrants issued with other securities

Warrants issued with our convertible promissory notes, note payables, and lines of credit 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.

The note issued with the warrant is recorded at its 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 note is examined for any intrinsic beneficial conversion feature (“BCF”) of which the convertible price of the note is less than the closing common stock price on date of issuance. If the relative fair value method is used to value the convertible promissory note 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. As presented, these equity features of the convertible promissory notes have recorded a discount to the convertible notes that is substantially equal to the proceeds received.

Debt Modification and Extinguishment

Per the guidance of ASC

470

50,

Debt Modifications and Extinguishments, modified terms are considered substantially different if the present value of the cash flows after modification differ by at least

10%

prior to the modification. If so, it is an extinguishment of the debt. Loss on extinguishment of debt is calculated by analyzing fair value of the new debt instrument and its beneficial conversion feature, if any, plus the value of the warrant issued with the new debt instrument, if any, and comparing with the carrying value of the extinguished debt.

Non-Cash Transactions

We have established a policy relative to the methodology to determine the value assigned to each intangible we acquire, and/or services or products received for non-cash consideration of our common stock. The value is based on the market price of our common stock issued as consideration, at the date of the agreement of each transaction or when the service is rendered or product is received.

Revenue Recognition

We adopted ASU

2014

09,

“Revenue from Contracts with Customers”, Topic

606,

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

Identify the contract(s) with a customer.

Step

Identify the performance obligations in the contract.

Step

Determine the transaction price.

Step

Allocate the transaction price to the performance obligations in the contract.

Step

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

For product revenue, we identify the contract with the customer through a written purchase order (which

may

be part of a national purchasing agreement), 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. We recognize revenue at a point in time when the order for its goods are shipped if the agreement with our customer is FOB our warehouse facility, and when goods are delivered to its customer if the agreement with our customer is FOB destination. Revenue is recognized with a reduction for sales discounts, as appropriate and negotiated in the customer’s purchase order.

For service revenue, we identify 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. Service contracts typically call for invoicing for time and materials incurred for that contract. To date, there have been

discounts or other financing terms for the contracts.

In the future, we

may

generate revenues from royalties or license fees from our intellectual property. In the event we do so, we anticipate a licensee would pay a license fee in

one

or more installments and ongoing royalties based on their sales of products incorporating or using our licensed intellectual property. Upon entering into a licensing agreement, we will determine the appropriate method of recognizing the royalty and license fees.

Government Grants

We have been awarded multiple research grants from governmental and quasi-governmental institutions. The grants received are considered “other income” and are included in our Consolidated Statements of Operations and Comprehensive Loss. We received our

first

grant in

2015

and have been awarded over

grants totaling over

$3.6

million. Some of the funds from these grants are given directly to

third

parties (such as the University of Alberta or a

third

-party research scientist) to support research on our technology. The grants have terms generally ranging between

nine

and

eighteen

months and support a majority, but

not

all, of the related research budget costs. This cooperative research allows us to utilize (i) a depth of resources and talent to accomplish highly skilled work, (ii) financial aid to support research and development costs, (iii) independent and credible validation of our technical claims.

The grants typically provide for (i) recurring monthly amounts, (ii) reimbursement of costs for research talent for which we invoice to request payment, and (iii) ancillary cost reimbursement for research talent travel related costs. All awarded grants have specific requirements on how the money is spent, typically to employ researchers.

None

of the funds

may

be used for general administrative expenses or overhead in the United States. These grants have substantially increased our level of research and development activities in Canada. We continue to apply for Canadian government and agency grants to fund research and development activities.

Not

all of our grant applications have been awarded, and

assurance can be made that any pending grant application, or any future grant applications, will be awarded.

Income

Taxes

The asset and liability approach is used to recognize deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of asset and liabilities. Deferred tax assets and liabilities are determined based on the differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The effect on deferred tax asset and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

We account for uncertainties in income tax law under a comprehensive model for the financial statement recognition, measurement, presentation and disclosure of uncertain tax positions taken or expected to be taken in income tax returns as prescribed by generally accepted accounting principles (“GAAP”). Under GAAP, the tax effects of a position are recognized only if it is “more-likely-than-

not”

to be sustained by the taxing authority as of the reporting date. If the tax position is

not

considered “more-likely-than-

not”

to be sustained, then

benefits of the position are recognized.

Fair Value of Financial Instruments

Management believes the carrying amounts of the Company’s financial instruments (excluding debt and equity instruments) as of

December 31, 2018

and

September 30, 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, lines of credit, and other assets and liabilities.

Tax Credits

Our research and development activities in Canada

may

entitle our Canadian subsidiary to claim benefits under the “Scientific Research and Experimental Development Program”, a Canadian federal tax incentive program designed to encourage Canadian businesses of all sizes and in all sectors to conduct research and development in Canada. Benefits under the program include credits to taxable income. If our Canadian subsidiary does

not

have taxable income in a reporting period, we instead receive a tax refund from the Canadian Revenue Authority. Those refunds are classified in Other Income on our Consolidated Statement of Operations and Comprehensive Loss.

Recent Accounting Pronouncements

August 2018,

the FASB issued Accounting Standards Update

No.

2018

13,

“Fair Value Measurement (Topic

820

), Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement.” The amendments in this update modify the disclosure requirements on fair value measurements in Topic

820,

Fair Value Measurement. The amendments in this update are effective for public business entities for fiscal years beginning after

December 15, 2019,

including interim periods within that fiscal year. Management has

not

concluded its evaluation of the guidance. Its initial analysis is that it does

not

believe the new guidance will substantially impact the Company’s financial statements.

June 2018,

The FASB issued Accounting Standards Update

No.

2018

07,

“Compensation – Stock Compensation (topic

718

): Improvements to Nonemployee Share-Based Payment Accounting”. The amendments in this update expand the scope of Topic

718

to include share-based payment transactions for acquiring goods and services from nonemployees. An entity should apply the requirements of Topic

718

to nonemployee awards except for specific guidance on inputs to an option pricing model and the attribution of cost (that is, the period of time over which share-based payment awards vest and the pattern of cost recognition over that period). The amendments specify that Topic

718

applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. The amendments also clarify that Topic

718

does

not

apply to share-based payments used to effectively provide (

) financing to the issuer or (

) awards granted in conjunction with selling goods or services to customers as part of a contract accounted for under Topic

606,

Revenue from Contracts and Customers. The amendments in this update are effective for public business entities for fiscal years beginning after

December 15, 2018,

including interim periods within that fiscal year. This new guidance did

not

materially impact our stock compensation expense.

February 2016,

the FASB issued ASU Update

No.

2016

02,

“Leases,” which requires lessees to recognize most leases on their balance sheets as a right-of-use asset with a corresponding lease liability, and lessors to recognize a net lease investment. Additional qualitative and quantitative disclosures are also required. We adopted this standard effective

January 1, 2019

using the modified retrospective transition method approved by the FASB in

July 2018,

which resulted in a

$399,000

gross up of assets and liabilities; this balance

may

fluctuate over time as we enter into new leases, extend or terminate current leases. As of

September 30, 2019,

the gross up of our balance sheet related to our operating leases totals

$341,000.