BIOLARGO, INC. The following discussion and analysis should be read in conjunction with our audited consolidated financial statements and the related notes to the consolidated financial statements included elsewhere in this report.
This discussion contains forward-looking statements that involve risks and
uncertainties. Such statements, which include statements concerning future
revenue sources and concentration, selling, general and administrative expenses,
research and development expenses, capital resources, additional financings and
additional losses, are subject to risks and uncertainties, including, but not
limited to, those discussed above in Part I, Item 1 and elsewhere in this Annual
Report, particularly in "Risk Factors," that could cause actual results to
differ materially from those projected. The forward-looking statements set forth
in this Annual Report are as of
Results of Operations-Comparison of the years ended
We operate our business in distinct business segments:
? ONM Environmental, which manufactures and sells our odor and VOC control
products and services, including our flagship product, CupriDyne Clean;
? BLEST, which provides professional engineering services supporting our
internal business units, advancing innovations like the AEC to remove PFAS
contaminants from water, and serving outside clients on a fee for service
basis;
? Clyra Medical, which develops and sells medical products based on our
technology;
? BioLargo Water, located in Edmonton, Alberta Canada , that has been
historically pure research and development, and is now transitioning to focus
on commercializing our AOS system; and
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? Our corporate operations, which support the operating segments with legal,
accounting, human resources, and other services.
Our consolidated revenue for the year ended
ONM Environmental
Our wholly-owned subsidiary ONM Environmental generates revenues through sales of our flagship product CupriDyne Clean, by providing design, installation, and maintenance services on the systems that deliver CupriDyne Clean at its clients' facilities, and through sales of private-label products based on our CupriDyne Clean technology.
Revenue (ONM Environmental)
ONM Environmental's revenues for the year ended
Revenues from sales of industrial odor control products (e.g., CupriDyne Clean)
were
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 2% in 2022 to 45%. The decrease was related to normal price fluctuations for raw materials and increased purchase volume.
Selling, General and Administrative Expense (ONM Environmental)
ONM Environmental's SG&A expenses were
Operating Income (ONM Environmental)
ONM Environmental generated operating income of
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BLEST (engineering division)
Revenue (BLEST)
BLEST generated
In addition to providing service to third party clients, BLEST provides services
to
Cost of Goods (Services) Sold (BLEST)
BLEST's cost of services includes employee labor, materials, as well as subcontracted labor costs. In 2022, its cost of services were 61% of its revenues, versus 69% in 2021. This decrease is due to contracts with better margins. We expect the cost of services to remain consistent in 2023 based on the contracts currently in progress.
Selling, General and Administrative Expense (BLEST)
BLEST SG&A expenses were
Operating Loss (BLEST)
BLEST had an operating loss of
BLEST provides substantial support to
Because the subsidiary had a net 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. We expect that in 2023 its sales and thus its gross profit will continue to increase. 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 is difficult.
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 increased by 9% ($559,000 ) in the
year ended December 31, 2022 , to $6,731,000 . Our non-cash expenses (through the
issuance of stock and stock options) were $2,362,000 in 2022, compared with 2021
total of $2,241,000 . The largest components of our SG&A expenses included (in
thousands):
December 31, 2022 December 31, 2021
Salaries and payroll related $ 2,754 $ 2,581
Professional fees 629 662
Consulting 867 920
Office expense 1,502 1,177
Board of director expense 401 262
Sales and marketing 287 315
Investor relations 291 255
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Our salaries and payroll-related increased in the year ended
Impairment Expense
Impairment expense decreased by 42% for the year ended
Research and Development
In the year ended
Other Income and Expense
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
Our Canadian subsidiary applied for and received a refund on our income taxes
pursuant to the "
The
Interest expense
Our interest expense for the year ended
Our outstanding debt as of
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Net loss for the year ended
The net income (loss) per business segment is as follows (in thousands):
Net income (loss) Year ended December Year ended December
31, 2022 31, 2021
ONM Environmental $ 1,304 $ (511 )
BLEST (425 ) (629 )
Clyra Medical (1,412 ) 593
BioLargo Water (604 ) (566 )
BioLargo corporate (3,995 ) (5,781 )
Consolidated net loss $ (5,132 ) $ (6,894 )
In the year ended
In the year ended
The change in Clyra Medical's net income/loss in the years ended
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
year ended
During the year ended
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As of
Subsequent to
If we are unable to rely on our current arrangement with
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
We operate our business in five distinct business segments. Each of these
segments obtains cash to fund operations in unique ways. ONM and BLEST generate
cash by selling products and services. Clyra Medical obtains cash from revenues,
and third-party investments of sales of its common stock. BioLargo Water
generates cash through government research grants and tax credits.
Although ONM Environmental, BLEST, and Clyra Medical generated revenues in the
year ended
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 methods, estimates and judgments the Company uses in applying these most critical accounting policies have a significant impact on the results of the Company reports in its financial statements.
Revenue Recognition
We adopted ASU 2014-09, "Revenue from Contracts with Customers", Topic 606, on
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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 1: Identify the contract(s) with a customer.
Step 2: Identify the performance obligations in the contract.
Step 3: Determine the transaction price.
Step 4: Allocate the transaction price to the performance obligations in the contract.
Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation.
We have revenue from two subsidiaries, ONM and BLEST. ONM identifies its contract with the customer through a written purchase order, 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. ONM recognizes revenue at a point in time when the order for its goods are shipped if its agreement with the customer is FOB ONM's warehouse facility, and when goods are delivered to its customer if its agreement with the customer is FOB destination. Revenue is recognized with a reduction for sales discounts, as appropriate and negotiated in the customer's purchase order. ONM also installs misting systems for which it bills on a time and materials basis. It identifies its contract with the customer through a written purchase order in which the details of the time to be billed and materials purchased and an estimated completion date. The performance obligation is the completion of the installation. Revenue is recognized in arrears as the work is performed.
BLEST identifies 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. BLEST's contracts typically call for invoicing for time and materials incurred for that contract. A few contracts have called for milestone or fixed cost payments where BLEST bills an agreed-to amount per month for the life of the contract. In these instances, completed work, billed hourly, is recognized as revenue. If the billing amount is greater or lesser than the completed work, a receivable or payable is created. These accounts are adjusted upon additional billings as the work is completed. To date, there have been no discounts or other financing terms for the contracts.
Warrants
Warrants issued with our convertible and non-convertible debt instruments 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.
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The warrant relative fair values are also recorded as a discount to the convertible promissory notes. At present, these equity features of the convertible promissory notes have recorded a discount to the convertible notes that is substantially equal to the proceeds received.
Share-based Payments
It is the Company's policy to expense share-based payments as of the date of grant or over the term of the vesting period in accordance with Auditing Standards Codification Topic 718 "Share-Based Payment." Application of this pronouncement requires significant judgment regarding the assumptions used in the selected option pricing model, including stock price volatility and employee exercise behavior. Most of these inputs are either highly dependent on the current economic environment at the date of grant or forward-looking expectations projected over the expected term of the award.
Fair Value Measurement
Generally accepted accounting principles establishes a hierarchy to prioritize the inputs of valuation techniques used to measure fair value. The hierarchy gives the highest ranking to the fair values determined by using unadjusted quoted prices in active markets for identical assets (Level 1) and the lowest ranking to fair values determined using methodologies and models with unobservable inputs (Level 3). Observable inputs are those that market participants would use in pricing the assets based on market data obtained from sources independent of the Company. Unobservable inputs reflect the Company's assumptions about inputs market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The Company has determined the appropriate level of the hierarchy and applied it to its financial assets and liabilities.
Management believes the carrying amounts of the Company's financial instruments
as of
Recent Accounting Pronouncements
See Note 2 to the Consolidated Financial Statements, "Summary of Significant Accounting Policies - Recent Accounting Pronouncements", for the applicable accounting pronouncements affecting the Company.
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