This quarterly report on Form 10-Q contains forward-looking statements. These forward-looking statements involve risks and uncertainties, including statements regarding BioLargo’s capital needs, business plans and expectations. Such forward-looking statements involve risks and uncertainties regarding BioLargo’s ability to carry out its planned development and production of products. Forward-looking statements are made, without limitation, in relation to BioLargo’s operating plans, BioLargo’s liquidity and financial condition, availability of funds, operating and exploration costs and the market in which BioLargo competes. Any statements contained herein that are not statements of historical facts may be deemed to be forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “may”, “will”, “should”, “expect”, “plan”, “intend”, “anticipate”, “believe”, “estimate”, “predict”, “potential” or “continue”, the negative of such terms or other comparable terminology. Actual events or results may differ materially. In evaluating these statements, you should consider various factors, including the risks outlined in our Form most recent annual report on Form 10-K, and, from time to time, in other reports BioLargo files with the SEC. These factors may cause BioLargo’s actual results to differ materially from any forward-looking statement. BioLargo disclaims any obligation to publicly update these statements, or disclose any difference between its actual results and those reflected in these statements. The information constitutes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Given these uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.
Unless otherwise expressly stated herein, all statements, including forward-looking statements, set forth in this Form 10-Q are as of March 31, 2022, unless expressly stated otherwise, and we undertake no duty to update this information.
As used in this report, “we” and “Company” refers to (i) BioLargo, Inc., a Delaware corporation; (ii) its wholly-owned subsidiaries BioLargo Life Technologies, Inc., a California corporation, ONM Environmental, Inc., a California corporation, BioLargo Development Corp., a California corporation, and BioLargo Water Investment Group, Inc., a California corporation, and its wholly owned Canadian subsidiary BioLargo Water, Inc. (iii) its majority-owned subsidiary BioLargo Engineering, Science & Technologies, LLC, a Tennessee limited liability company; and (iv) Clyra Medical Technologies, Inc. (“Clyra”), a partially owned subsidiary.
The following discussion and analysis should be read in conjunction with our unaudited consolidated financial statements and the related notes to the consolidated financial statements included elsewhere in this report.
Our Business – Innovator and Solution Provider
BioLargo, Inc. invents, develops, and commercializes innovative platform technologies to solve challenging environmental problems like PFAS contamination, advanced water and wastewater treatment, industrial odor and VOC control, air quality control, infection control, and myriad environmental remediation challenges. Having conducted continual and extensive research and development, BioLargo holds a wide array of issued patents, maintains a robust pipeline of products, and provides full-service environmental engineering. We invent or acquire novel technologies and develop them to maturity through our operating subsidiaries using cutting-edge scientific and engineering methodologies. With a keen emphasis on partnerships with academic, government, and commercial organizations and associations, BioLargo has proven itself by executing on challenging environmental engineering projects, demonstrating its powerful technologies through pilots, trials, and early commercial adoption, publishing high-impact academic and industry publications, and winning over 90 grants. We monetize our innovations through direct sales and recurring service contracts, as well as through channel partnerships, meaning licensing agreements, exclusive and non-exclusive distribution agreements, brand development partnerships, sale referral partnerships, strategic joint venture formation, and/or the sale of the IP. Channel partnerships allow us to extend the commercial reach of our products and services disproportionately to our core infrastructure and staffing.
The past year held a shift in focus at BioLargo toward the development and commercial execution of several key business initiatives with the potential to generate significant organizational and revenue growth for the company. Three of these projects in particular represent the dominant catalysts for near-term monetization of our core technologies and engineering services: 1) the advancement of our PFAS removal system (the AEC, or “Aqueous Electrostatic Concentrator”) toward commercial trials with a Southern California municipal water agency and a federal government agency, 2) the design, manufacture, pre-trial testing, and preparation for field trials with first customers of a novel “minimal liquid discharge” wastewater treatment system in partnership with Garratt-Callahan, the largest privately held water treatment company in America with more than 100 years history, and 3) the manufacture and successful launch of a new pet odor control product based on BioLargo’s intellectual property launched by our partners at Ikigai Marketing Works, LLC, a venture aimed at building a national pet odor-control brand with distribution through big-box retailers to position for sale of the brand to a multi-national consumer products company. Additionally, our engineering services division has begun the initial phase of a large capital project in the cleantech and environmental technologies space – a waste-to-energy conversion plant in South America (see Waste-to-Energy Conversion Plant Project below).
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Three main factors differentiate this past year from the years that preceded it for BioLargo. First, we have built our credibility as cleantech technology innovators and environmental engineering service providers to the point where industry stakeholders, clients, and prospective partners rightfully view us as an effective and reliable means to solve their challenges. This has resulted in what we believe will continue advancing to become high-revenue and profit generating projects with channel partners such as Garratt-Callahan and Ikigai. This “critical mass” of credibility as a cleantech solutions provider is a result of our investments in our talented team of engineers and scientists with a track record of executing complex engineering projects, and our history of developing creative and powerful new technologies. Secondly, our core patented water treatment technologies, the BioLargo Advanced Oxidation System (AOS) and Aqueous Electrostatic Concentrator (AEC), have now been demonstrated in successful pilot projects, either on-site at a prospective client’s facility, or in-house with client-provided contaminated waters. Both of these technologies are now primed for commercialization and monetization. Third, our multi-year effort to remove debt from our balance sheet has almost concluded, with only one $50,000 fixed-price convertible note due in 2023 remaining, along with covid-related low-interest U.S. Small Business Administration loans (not including debt owed by our partially owned subsidiary Clyra Medical Technologies).
In the first quarter of 2022, our subsidiary ONM Environmental generated net operating income of $187,000, as compared with a net operating loss in the first quarter of 2021 of $176,000, and our engineering subsidiary reduced its operating loss from $183,000 in the first quarter of 2021, to only $35,000 in this most recent quarter. Several factors contributed to this: 1) each subsidiary benefited from significant organic growth of contracts within its main target market, 2) both executed some larger projects as compared to prior experience, and 3) in the case of ONM Environmental, license royalties on products based on our intellectual property began to generate a larger amount of revenue. Of the Company’s other two subsidiaries, Clyra Medical Technologies is presently working to raise capital to support the marketing and sales of its newly launched Bioclynse product, and BioLargo Water is working to land the first commercial accounts for its innovative low-energy water treatment technology the BioLargo AOS. After years of investing heavily in research and development of our patented cleantech technologies (roughly $1.5 million in 2021 alone), we are at a turning point where our core assets are either seeing early fruits of commercialization or are now ready for monetization.
Formula for Success: Technology, Talent and Purpose
BioLargo has continually advanced its robust portfolio of technologies since the first acquisition of early iterations of the BioLargo technology in the spring of 2007. Our innovations have primarily been developed through our internal resources, and some through acquisition. These include patents, patents pending, and trade secrets that include solutions for:
We have steadily grown our team to 31 team members and numerous other part-time consultants, including highly qualified PhDs, engineers, MDs and medical professionals, construction professionals, field service technicians, innovators, sales marketing specialists, entrepreneurial and executive leadership.
Our mission to make life better drives us to serve others with integrity, knowledge, technology, and solutions that protect the environment, improve quality of life, and protect lives. All our technologies were developed from the ground-up to be sustainable, practical solutions to significant global challenges. We are unique in our ability to tailor our offerings to serve our customers with proven expertise, proven technology and, if needed, we often have the ability to develop new technical solutions to meet our customer’s needs.
Combating the PFAS Forever-Chemical Crisis – the AEC
One of the most significant and timely innovations in our portfolio is our PFAS removal and collection/disposal solution we call the Aqueous Electrostatic Concentrator (AEC). Our engineers developed and are now preparing to commercialize the AEC, which is a novel water treatment system that removes per- and poly-fluoroalkyl substances (PFAS) from water at a fraction of the operating cost and generating only a fraction of the PFAS-laden waste of the most common currently used solutions (carbon filtration, ion exchange, and reverse osmosis). PFAS chemicals have been linked to cancer, immune disorders, liver dysfunction, and many other human health problems, and are contained in a vast range of manufactured goods, common household products (e.g., cleaning products, cookware), and electronics, and contaminate drinking water in unsafe levels all over the globe.
PFAS is often referred to as the “contaminant of the decade”, and as such, it is considered a multi-billion dollar commercial market opportunity. The White House has named the PFAS crisis as a top policy agenda item and the EPA has and will continue to tighten the regulatory requirements to mitigate and manage and limit human exposure to PFAS, all of which will continue to push the market to find and adopt commercially viable solutions. Notably, some emerging regulations on PFAS in the U.S. are expected to skew the market toward seeking treatment technologies that produce as little PFAS-laden solid waste as possible, a favorable trend for our AEC that generates very little PFAS-laden waste. Detection of unsafe levels of PFAS around the world has given rise to a number of market opportunities, including in drinking water, industrial wastewater, municipal wastewater, solid waste, organic foods and more.
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We have successfully validated the AEC as an effective system to selectively extract and collect PFAS chemicals from contaminated water including performance testing that shows “non-detect” levels of removal. We have recently demonstrated more than six months of continuous operation showing no materially significant degradation of the AEC system’s components or performance over time. We have also successfully demonstrated that the AEC is scalable and functional to a commercial scale and that our engineering team has the experience and proven experience to successfully deliver commercial systems to meet the needs of a commercial installation and sale. Our team has a history of successful execution in the environmental remediation industry and the knowhow to successfully commercialize the AEC.
Equipped with a comprehensive set of data, including removal of PFAS chemicals to “non-detect” levels utilizing client-provided contaminated water, we have expanded our initial marketing of the AEC over the past six months and, through that process, have created a prospective list of commercial opportunities and projects that has provided critical affirmation for our value proposition for the customer market. The process has allowed us to learn from our prospective customers how to tailor our offering to best meet their needs, while at the same time it has created an ever-expanding list of commercial prospects that exceeds $90 million in total revenue potential, subject to our ability to stage in this level of growth. While these potential customers are considering other competing solutions (like carbon filtration, ion exchange and reverse osmosis systems), each of which have serious negative features, they are actively seeking an alternative like our AEC. Although we are highly encouraged and working to turn these prospective customers into clients, we are still at the early stage of the commercial process on each.
We are also currently negotiating with three channel partners and a number of prospective industrial customers to contract for revenue-generating projects to treat their PFAS. Having completed our initial testing of client water (to “non-detect” levels) from a leading water district in southern California, we are working on a proposal to proceed with a commercial field trial. We are preparing a comprehensive plan for review with the agency to be delivered in the near future.
ONM Environmental – Industrial Odor and VOC Solutions
ONM Environmental, Inc. is BioLargo’s subsidiary that delivers robust and comprehensive products and services to control and mitigate odor and volatile organic compounds (“VOCs”) emitted from a variety of industrial activities, including landfills and other waste handling facilities. Its flagship product, CupriDyne® Clean, reduces and eliminates tough odors and VOCs in various industrial settings. CupriDyne Clean is delivered through misting systems, sprayers, water trucks and similar water delivery systems designed, manufactured and installed by ONM. We believe the product is the number-one performing odor-control product in the market, and that it offers substantial savings to our customers compared with competing products. In response to customer demand for expanded services, ONM Environmental now holds General, Electrical, Plumbing and Low Voltage contractor licenses issued by the California Contractors State License Board, and offers a menu of services to landfills, transfer stations, wastewater treatment facilities as well as facilities in non-waste related industries. These services include engineering design, construction, installation, ongoing maintenance and on-site support services to assist our clients in the implementation and continued use of the various systems that deliver our liquid products in the field (such as misting systems).
ONM Environmental offers a deodorizing and sanitizing technology, called EcoMist®, that can be installed directly onto waste collection vehicles and automatically sprays odor control products and/or sanitizer into refuse bins or dumpsters during the waste collection process. EcoMist® is an “out-of-the-box” product, allowing customers to install the system themselves, and will thus not require a significant investment in logistics and servicing to support sales. ONM Environmental is focusing on selling the product to its current customers and garbage truck manufacturers.
We have been and expect to continue selling product to the largest solid waste handling companies in the country, with a portion of chemistry product sales resulting from national purchasing agreements (NPAs) with large waste handling companies. ONM Environmental also is currently servicing an exclusive three-year supply contract with a large municipality in Southern California for the delivery of CupriDyne Clean, which will provide a steady source of chemistry supply revenue for the company over the next three years.
In addition to growing its revenues organically through the sale of odor and VOC control chemistry and air quality control systems to its primary market segment (municipal solid waste handling in California), ONM Environmental aims to accelerate its growth through development of new sales and distribution channels. Some of these, including our partnership with Ikigai Marketing Works, LLC (see Consumer Products below) and our joint venture with BKT Co. Ltd. in South Korea (see South Korean Joint Venture) are already actively advancing toward their end-goal, which is to foster new distribution opportunities for our patented odor and VOC control chemistry without being limited by our own sales and distribution infrastructure. Additional new opportunities for distribution channels are presently being developed, including in new vertical market segments such as pulp and paper, wastewater, oil and gas, construction, and the auto industry, as well as in new geographical markets including South and Central America. Company management will provide more information on each of these emerging partnerships as they each become finalized.
Consumer Private-Label Products
Ikigai Marketing Works, LLC, which was founded by accomplished industry executives from the consumer-packaged goods industry who have executed successful launches of at least five blockbuster products, has licensed from us a CupriDyne-based household pet odor removal product and a laundry additive for pet related odors. After development of television commercials and a successful test marketing campaign, they have begun a national advertising campaign, and plan to launch the products in major retailers in the United States (e.g., Walmart, Target, etc.). Initial sales volume for the product has exceeded early expectations.
On February 12, 2020, we executed a “Joint Venture Framework Agreement” with a leading wastewater treatment solution provider based in South Korea (BKT Co. Ltd., “BKT”), to create a South Korean entity that would manufacture odor and VOC control products based on our CupriDyne Clean products. We own 40% of the joint venture. Although the joint venture established manufacturing and is marketing the product, the COVID-19 pandemic significantly impacted the expected growth of the company, and continues to do so as the country of South Korea continues implementing measures to reduce infections. Management at Odin reports that while initial sales have required extraordinary efforts, continued testing and trial success has reinforced its confidence in continued expansion of sales for the future.
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Full Service Environmental Engineering
Our subsidiary BioLargo Engineering, Science & Technologies, LLC (“BLEST”) offers full service environmental engineering to third parties and provides engineering support services to our internal teams to accelerate the commercialization of our technologies. Its website is found at www.BioLargoEngineering.com.
BLEST focuses its efforts in three areas:
The subsidiary is located in Oak Ridge (a suburb of Knoxville, Tennessee), and employs a group of scientists and engineers who collectively worked together for almost 30 years and experience in diverse engineering fields. The team is led by Randall Moore, who served as Manager of Operations for Consulting and Engineering for the Knoxville office of CB&I Environmental & Infrastructure and was formerly a leader at The Shaw Group, Inc., a Fortune 500 global engineering firm. The other team members are also former employees of CB&I and Shaw. The team is highly experienced across multiple industries and they are considered experts in their respective fields, including chemical engineering, wastewater treatment (including design, operations, data gathering and data evaluation), process safety, energy efficiency, air pollution, design and control, technology evaluation, technology integration, air quality management & testing, engineering management, permitting, industrial hygiene, applied research and development, air testing, environmental permitting, HAZOP review, chemical processing, thermal design, computational fluid dynamics, mechanical engineering, mechanical design, NEPDES permitting, RCRA/TSCA compliance and permitting, project management, storm water design & permitting, computer assisted design (CAD), bench chemistry, continuous emission monitoring system operator, data handling and evaluation and decommissioning and decontamination of radiological and chemical contaminated facilities. The engineering team also has developed an extended network of trusted engineering subcontractors that assist in serving specific client projects as needed, from time to time.
In association with Garratt-Callahan, a national industrial water treatment company, BLEST is developing a “minimal liquid discharge” wastewater treatment system based on Garratt-Callahan proprietary technology that would industrial wastewater discharge and therefore reduce wastewater discharge fees for customers. Garratt-Callahan is currently preparing to launch the MLD system to its customers. BLEST will serve as the manufacturing partner and Garratt Callahan will serve as the selling distributor to leverage their national sales force and over one hundred years of providing services and products to customers. BioLargo’s engineers finished building the first full-scale prototype of this new technology and tested it with Garratt-Callahan client provided water, with Garratt-Callahan technical staff present on-site at BLEST’s facility. In this “factory acceptance” testing, the system removed over 98% of the target contaminants from water provided by a Garratt-Callahan client in continuous operation, in line with results achieved by Garratt-Callahan’s original bench-scale and batch processing tests. This factory acceptance testing was a necessary step before commercial trials with Garratt-Callahan customers can begin. The first customer has already been identified, and initially the plan was to conduct an on-site field trial for that customer. Now, in collaboration with the technical team at Garratt-Callahan, we are recommending that a field trial is not required given the level of validation that has been done. We are working on contractual agreements to move the project forward to first sales.
Waste-to-Energy Conversion Plant Project
In April, our engineering subsidiary (BLEST) was hired to conduct a comprehensive project plan (i.e., “feasibility”) study by a Southern California based sustainable energy services company intending to build a waste-to-energy conversion plant in South America. The site of the proposed conversion plant is approximately 296 acres, where it is planned to process over two million tons of municipal solid waste annually. A feasibility study is typically the first step in the design process for a new project of this size, and will address multiple fundamental factors that will influence the design and operation of the anticipated facility, including technology options, rough costs to construct and operate, environmental impacts, and rough equipment sizing. The feasibility study would then inform and facilitate the development of a design basis document, then conceptual design, and ultimately the front-end engineering design. It is important to note that the term feasibility as used in this context does not involve any sort of technology trials to determine if they are workable, rather the comprehensive plan being prepared is to assist the developer in proper planning, permitting, budgeting for a very large project. Thus far, BioLargo’s engineers have been contracted on the feasibility study only, but expect to be involved in subsequent phases should the project move forward as planned. ONM Environmental was critical in bringing this project to the company and will work with BioLargo’s engineers to execute this project. ONM Environmental brings to the table a team with extensive expertise surrounding the design and operation of waste handling facilities, and BLEST brings a team of veteran engineers with decades of experience designing and integrating complex projects as well as specific expertise in the area of waste-to-energy conversion.
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BioLargo Water and the Advanced Oxidation System – AOS
BioLargo Water is our wholly owned subsidiary located in Edmonton, Alberta, Canada, that developed and is commercializing our Advanced Oxidation water treatment system (AOS). The AOS is our patented water treatment device that generates highly oxidative and energetic species of iodine and other molecules which allow it to rapidly and effectively eliminate pathogenic organisms and organic contaminants as water passes through the device. The key value proposition of the AOS is its ability to reduce or eliminate a wide variety of waterborne contaminants with high performance while using very little electricity and input chemicals. This is made possible by the highly oxidative iodine compounds and reactive oxygen species generated within the AOS reactor as well as the unique and proprietary physical constitution and geometry of the reactor. Our proof-of-concept studies and on-site pilot projects have generated results that project the AOS will be more cost- and energy-efficient than commonly used advanced water treatment technologies such as UV, electro-chlorination, and ozonation. Furthermore, our technology has been proven capable of removing hard-to-treat organic micropollutants such as pharmaceuticals from water more quickly and energy-efficiently than other technologies. Together, these characteristics make the AOS an economical and versatile tool to enable wastewater treatment and reuse in the face of emerging water contaminants and increasing regulatory scrutiny on industrial wastewater discharge. The capabilities of the AOS as a sustainable water treatment technology have been the subject of several high-impact academic papers in scientific journals. The company pursues a policy of publishing about the technology in academic journals as much as possible in order to promote transparency about the technology’s safety and efficacy while also contributing to the field of advanced water treatment science.
BioLargo’s AOS water treatment technology has completed several pre-commercial demonstration pilots, including one at a poultry farm in Alberta, one at a microbrewery in Southern California, and another in Southern California where stormwater was treated by the AOS. It has an ongoing pilot near Montreal to treat municipal wastewater. It is our belief that once these pre-commercial pilots have concluded with the AOS, our ability to entice major water industry players to partner with BioLargo Water to accelerate market adoption of the AOS will be increased dramatically. Our team in Canada is in discussions with potential early adopters in the agriculture space, and has secured significant provincial and federal grant funding to help defray the cost of a first commercial project.
In the first quarter of 2022, BioLargo Water received a grant from Next Generation Manufacturing Canada (NGen) to support the company’s collaboration with a specialized electrical component designer to assist in optimizing the electrical performance of the AOS with the ultimate goal of maximizing the lifespan of the AOS’ components.
Municipal Wastewater Treatment Pilot – Montreal
Our commercial-scale AOS demonstration pilot (run in partnership with acclaimed water experts at the Centre des Technologies de L’Eau) at a municipal wastewater treatment plant near Montreal, Quebec, is ongoing and providing important data that shows the AOS is removing five target pharmaceuticals from the wastewater faster and using less electricity than the ultraviolet disinfections system used in the facility. Notably, the pilot project also showed that the AOS was able to also remove total coliforms (bacteria) from the municipal wastewater more effectively than the UV disinfection system currently in use at the facility.
Recently, BioLargo Water was awarded a grant from the government of Canada’s Natural Sciences and Engineering Research Council (NSERC) that allowed for the extension of the pilot project to allow for use of a new, higher flow-rate AOS system, as well as the installation of an AEC system at the pilot to assess its removal of PFAS chemicals from the municipality’s wastewater.
Clyra Medical Technologies, Inc. is our partially owned subsidiary creating medical products based on our technology. It is launching a product to be used by surgeons generally, with a first target market aimed toward orthopedic surgeons for use as a wound irrigation solution and to help manage patient care and outcomes. Clyra has secured its first two hospital customers for the product, established a robust quality control system for FDA compliance, recruited a national director of sales, and is negotiating with three separate channel partners to form a commercial alliance. Its other product designs are on hold until such time as it is able to secure the capital and resources to complete any final development and support additional inventory, technical support and sales for these products. In March 2022, Clyra and BioLargo finalized an agreement with Scion Solutions, LLC, whereby the intellectual property (primarily, the SkinDisc) acquired in September 2018 was returned to Scion, and in exchange Scion forgave the outstanding principal and interest due on the promissory note owed by Clyra with an outstanding principal amount of $1,007,000, returned all its shares of Clyra common stock, and its two principals forgave $305,000 in accounts payable owed to them. In addition to the SkinDisc intellectual property, Scion received 2,000,000 of the 5,000,000 shares it had earned from the September 2018 sale of SkinDisc to Clyra/BioLargo. There are channel partnerships in development for Clyra’s BioClynse product in three separate healthcare markets.
In the past quarter, our company:
BioLargo has advanced its technologies and infrastructure to achieve a critical mass to capitalize on its commercial efforts and have a positive impact around the world with clean water, clean air, and infection control solutions. The company presents a scalable business model that targets high-impact cleantech market opportunities. We leverage our considerable scientific, engineering, and entrepreneurial talent to monetize our technologies and ensure high-quality customer service and increased revenue potential. We seek to unlock the value of our portfolio of disruptive technologies to advance our mission to “make life better” and continue creating shareholder value.
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We operate our business in distinct business segments:
Consolidated revenue for the three months ended March 31, 2022, was $965,000, which is a 69% increase over the same period in 2021. Our service revenue increased 180%, while revenue from product sales and related services increased by 37%. Our product revenue includes sales of our CupriDyne Clean industrial odor control product, and sales of private-label products based on our CupriDyne formula.
Our wholly-owned subsidiary ONM Environmental generates revenues through (i) sales of our flagship product CupriDyne Clean, including related design, installation, and maintenance services on the systems that deliver CupriDyne Clean at its clients’ facilities, and (ii) sale of private-label products to third parties.
ONM Environmental’s revenues for the three months ended March 31, 2022, were $598,000, an increase of $278,000 or 87% from the same period in 2021. The increase in revenues was due to an increase in the volume of sales of private label odor-control products, and an increase in license royalties. Because ONM Environmental has no control over the marketing and sales activity or levels of its private-label clients, it cannot predict sales volumes related to these clients in future periods. One client has indicated it intends to continue to increase the number of products it is purchasing from ONM Environmental in future periods.
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 increased 6% in 2022, to 51%, compared to the same period in 2021. The increase in cost of goods is due to lower margins in the private-label products, and increases in raw material costs.
Selling, General and Administrative Expense (ONM Environmental)
ONM Environmental’s selling, general and administrative expenses decreased by 8% ($26,000) during the three months ended March 31, 2022, as compared with the same period in 2021. These expenses decreased due to a reduction of sales and support staff. We expect these expenses to remain consistent in the year ending December 31, 2022.
Operating Income (Loss) (ONM Environmental)
ONM Environmental generated $598,000 in revenue, a gross margin of $309,000, and had total costs and expenses of $292,000, resulting in operating income of $13,000, compared with an operating loss of $176,000 for the three months ended March 31, 2021. Provided that its private-label clients continue to purchase product, we expect this trend to continue.
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Our engineering segment (BLEST) generated $355,000 of revenue from third parties in the three months ended March 31, 2022, compared to $128,000 in 2021, representing a 177% increase from the prior year. The increase is due to completion of projects within our budgeted amount, an increased number of client contracts, and the recognition of $119,000 of deferred revenue for ongoing projects that had achieved certain completion milestones.
In addition to providing service to third party clients, BLEST provides services to BioLargo and its subsidiaries for internal BioLargo projects. These services are billed internally, are considered intersegment revenue, and are eliminated in the consolidation of our financial statements. In the three months ended March 31, 2022, it totaled $188,000, primarily used to further engineer and develop our flagship AOS water filtration system and our AEC PFAS treatment system. In addition, BLEST engineers are performing a critical role in the AOS pilot projects, some of which are supported by third-party research grants and has been instrumental in developing and supporting a professional engineered design service for misting systems being sold by our ONM operating unit.
Cost of Goods (Services) Sold (BLEST)
BLEST’s cost of services includes employee labor as well as subcontracted labor costs. In the three months ended March 31, 2022, its cost of services were 42% of its revenues, versus 82% in 2021. This decrease is due to recognition of deferred revenue, and contracts with better margins. Without the recognition of deferred revenue, its cost of services were 63% of revenues. We expect the cost of services to increase in 2022 based on the contracts currently in progress.
Selling, General and Administrative Expense (BLEST)
BLEST’s SG&A expenses were $134,000 in the three months ended March 31, 2022, compared to $100,000 in the same period in 2021. We expect these expenses to remain flat in 2022; increases in engineering staff are included in cost of services.
BLEST generated $357,000 in revenue from third parties, a gross margin of $207,000, and had total costs and expenses of $242,000, resulting in an operating loss of $35,000, compared with an operating loss of $183,000 in 2021.
BLEST provides substantial support to BioLargo’s other operations, including BioLargo Water and Odor-No-More. While we are unable to record revenues generated from services by the engineering group to other BioLargo operating divisions for important project such as the development of the AOS and AEC technologies, it is important to note that its net loss would be eliminated if it were selling these services to a third party at fair market value.
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 2022 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 given the uncertainties in the market, and our limited resources, 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 (for example, stock option compensation expense) expenses. Our consolidated SG&A increased in the aggregate by 4% ($75,000) in the three months ended March 31, 2022, to $1,839,000. Our non-cash expenses (through the issuance of stock and stock options) were relatively flat 2022 compared with 2021 ($818,000 compared to $696,000). The largest components of our SG&A expenses included (in thousands):
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In the three months ended March 31, 2022, we spent $392,000 in the research and development of our technologies and products. This was an increase of 20% (+$65,000) compared to 2021.
Our interest expense for the three months ended March 31, 2022, was $13,000, a decrease of 86% compared with 2021. The significant decrease in interest expense is related to the significant decrease of our debt obligations and a reduction of debt issued during 2022 versus 2021. Of our total interest expense in 2022, $7,000 was paid in cash, and the remainder, comprised primarily of non-cash debt discounts related to warrants issued in conjunction with debt instruments being amortized over the life of the debt instrument; for the three months ended March 31, 2022, non-cash interest expense totaled $4,000.
Our outstanding debt as of March 31, 2022, was lower than as of December 31, 2021. We expect our interest expense in the year ending December 31, 2022, to be in line with the prior year, provided we do not issue debt with attached warrants during the remainder of the year. Additionally, we record the relative fair value of the warrants and the intrinsic value of the beneficial conversion feature sold with the convertible notes payable which typically results in a full discount on the proceeds from the convertible notes. This discount is amortized as interest expense over the term of the convertible notes. We also are currently selling units of common stock and warrants instead of using convertible debt for financing our working capital needs, which if continued, will continue to reduce our ongoing interest expense as compared with prior years.
ONM Environmental’s total net income of $187,000 for the three months ended March 31, 2022, includes a one-time recognition of $174,000 in income attributed to the cancellation (forgiveness) of a portion of its Paycheck Protection Program (“PPP”) loan.
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 Canadian National Research Institute – Industrial Research Assistance Program (NRC-IRAP), the National Science and Engineering Research Council of Canada (NSERC), and the Metropolitan Water District of Southern California’s Innovative Conservation Program “ICP”. The research grants received are considered reimbursement grants related to costs we incur and therefore are included as Other Income. The amount of grant income decreased $25,000 in the three months ended March 31, 2022, to $5,000. Grant funds paid directly to third parties are not included as income in our financial statements.
Although we are continuing to apply for government and industry grants, and indications from the various grant agencies is highly encouraging, we cannot be certain of continuing those successes in the future. We are very active in both the US and Canada, pursuing grant support for various uses of our products.
Net loss for the three months ended March 31, 2022, was $1,544,000 a loss of $0.01 per share, compared to a net loss for the three months ended March 31, 2021, of $1,878,000 a loss of $0.01 per share. Our net loss this year declined primarily because of an increase in sales, a reduction of interest expense, and the ONM Environmental’s recognition $174,000 in income attributed to the cancellation (forgiveness) of a portion of a Paycheck Protection Program loan.
The net income (loss) per business segment is as follows (in thousands):
In the three months ended March 31, 2022, approximately 53% of our net loss was due to non-cash expenses, including $4,000 in interest expense, $801,000 of stock option compensation expense, and $17,000 of services paid by the issuance of stock options.
In the three months ended March 31, 2021, approximately 46% of our net loss was due to non-cash expenses, including $464,000 in interest expense, $585,000 of stock option compensation expense, and $111,000 of services paid by the issuance of common stock.
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We believe that ONM Environmental and BLEST (engineering) can achieve net income and positive cash flow from operations in the future, although predicting when that will happen is difficult given numerous uncertainties in the market, our limited capital resources, and our lack of history achieving current results. We expect the Company to continue to incur a aggregate net loss on a consolidated basis for the foreseeable future, even if these two subsidiaries show net income rather than a net loss.
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 three months ended March 31, 2022, we had a net loss of $1,544,000, used $1,140,000 cash in operations, and at March 31, 2022, we had working capital of $804,000, and current assets of $2,048,000. During the three months ended March 31, 2022, we generated revenues of $965,000. (See Note 9.) Only one of our subsidiaries – ONM Environmental – generated positive operating income. None of our other operational subsidiaries did so.
We do not believe gross profits in the year ended December 31, 2022, will be sufficient to fund our current level of operations, and therefore believe we will have to obtain further investment capital to continue to fund operations, such as through our purchase agreement with Lincoln Park Capital, and private sales of our securities. (See Note 3.) We have been, and anticipate that we will continue to be, limited in terms of our capital resources.
If we are unable to rely on our current arrangement with Lincoln Park to fund our working capital requirements, we will have to rely on other forms of financing, and there is no assurance that we will be able to do so, or if we do so, it will be on favorable terms.
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 Lincoln Park or other private financings, and in the long term, our ability to attain a reasonable threshold of operating efficiencies and achieve profitable operations by licensing or otherwise commercializing products incorporating our technologies. The consolidated financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern.
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 United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates and judgments, including those related to revenue recognition, valuation of offerings of debt with equity or derivative features which include the valuation of the warrant component, any beneficial conversion feature and potential derivative treatment, and share-based payments. We base our estimates on anticipated results and trends and on various other assumptions that we believe are reasonable under the circumstances, including assumptions as to future events. These estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. By their nature, estimates are subject to an inherent degree of uncertainty. Actual results that differ from our estimates could have a significant adverse effect on our operating results and financial position.
Note 2, “Summary of Significant Accounting Policies” in Part I, Item 1 of this Form 10-Q and in the Notes to Consolidated Financial Statements in Part II, Item 8 of the Form 10-K filed with the SEC on March 31, 2022, and “Critical Accounting Policies and Estimates” in Part II, Item 7 of the Form 10-K, describe the significant accounting policies and methods used in the preparation of the Company’s consolidated financial statements. There have been no material changes to the Company’s critical accounting policies and estimates since the filing of the Company’s Form 10-K on March 31, 2022.
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