Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Statement Regarding Forward-Looking Information
From time to time, we make written or oral statements that are “forward-looking,” including statements contained in this report and other filings with the Securities and Exchange Commission (“SEC”) and in our reports to stockholders. The Private Securities Litigation Reform Act of 1995 and Section 21E of the Securities Exchange Act of 1934, as amended, provide a safe harbor for such forward-looking statements. All statements, other than statements of historical facts, included herein regarding our strategy, future operations, financial position, future revenues, projected costs, prospects, plans, objectives and other future events and circumstances are forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “anticipates,” “believes,” “estimates,” “expects,” “intends,” “may,” “plans,” “projects,” “would,” “should” and similar expressions or negative expressions of these terms. Such statements are only predictions and, accordingly, are subject to substantial risks, uncertainties and assumptions.
Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. We caution you that any forward-looking statement reflects only our belief at the time the statement is made. Although we believe that the expectations reflected in our forward-looking statements are reasonable, we cannot guarantee our future results, levels of activity, performance or achievements. Refer to our Risk Factors section of our annual report on Form 10-K for the year ended December 31, 2017, filed with the SEC on April 2, 2018, for a full description of factors we believe could cause actual results or events to differ materially from the forward-looking statements that we make. These factors include:
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our ability to raise additional capital on favorable terms or identify another source of outside liquidity,
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our ability to continue operating and to implement our business plan,
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the commercial viability of our technologies,
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our ability to maintain and enforce our exclusive rights to our technologies,
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the demand for and production costs of various energy products that could be made from our biomass,
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competition from other alternative energy technologies, and
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other risks and uncertainties detailed from time to time in our filings with the SEC.
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Although we believe the expectations reflected in our forward-looking statements are based upon reasonable assumptions, it is not possible to foresee or identify all factors that could have a material and negative impact on our future performance. The forward-looking statements in this report are made on the basis of management’s assumptions and analyses as of the time the statements are made, in light of their experience and perception of historical conditions, expected future developments and other factors believed to be appropriate under the circumstances.
Company Overview
The following discussion of our Company Overview, Recent Developments and Plan of Operation should be read in conjunction with the consolidated financial statements and related notes to the consolidated financial statements included elsewhere in this report. This discussion contains forward-looking statements that relate to future events or our future financial performance. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity or performance to be materially different from any future results, levels of activity or performance. These risks and other factors include, among others, those listed under “Statement Regarding Forward-Looking Information.”
The Company is in its development stage and is focused on being a provider of: (i) cellulosic biomass derived from municipal solid waste, also known as MSW, as a feedstock for producing energy and other chemical products and (ii) recyclables (metals, plastics, glass) from the MSW. We are the exclusive licensee in the United States and Canada of patented technology, which we refer to as our Biomass Recovery Process, that cleans and separates MSW and generates a clean, homogeneous biomass feedstock that we believe can be converted into various energy products. Our license permits us to use the biomass we derive from MSW to produce all energy products. In addition, we own the patent for a pressurized steam classification technology originally developed by the University of Alabama in Huntsville that we refer to as our PSC technology. The PSC technology is the underlying technology upon which the Biomass Recovery Process is based. Prior to March 2011, we had licensed the PSC technology to Bio-Products International, Inc. (“Bio-Products”). However, pursuant to a settlement agreement with Bio-Products in March 2009, we had the right to use the Biomass Recovery Process technology worldwide, for any product that we desired and with no royalty due to Bio-Products. We terminated the license to Bio-Products in March 2011 as further described in the section entitled “Intellectual Property Terms.” The Company has spent $-0- on research and development activities for the three months ended March 31, 2018 and 2017.
We are a Delaware corporation. We were originally incorporated in 1996 as Long Road Entertainment, Inc., and were formed to operate as a holding company for businesses in the theater, motion picture and entertainment industries. We ceased conducting that business in 2005 and were dormant until the fall of 2006, at which time our founder and then controlling stockholder decided to pursue the sale of the company. In anticipation of that sale, we changed our name to Alternative Ethanol Technologies, Inc.
On March 27, 2007, we entered into an Agreement and Plan of Merger and Reorganization in which we agreed to acquire SRS Energy, Inc., a Delaware corporation that at that time was seeking to commercialize various technologies for the processing of waste materials into usable products. We consummated the merger on May 31, 2007 resulting in SRS Energy becoming our wholly-owned subsidiary. Effective August 2, 2007, we changed our name to CleanTech Biofuels, Inc.
We have no operating history as a producer of biomass feedstocks or any energy products and have not constructed any operating plants to date. We have not earned any revenues to date and our current capital and other existing resources are not sufficient to fund the implementation of our business plan or our required working capital. We will require substantial additional capital to implement our business plan and we may be unable to immediately obtain the capital required to continue operating.
Recent Developments
Acquisition of 25 Van Keuren LLC
On June 23, 2016, CleanTech entered into an Acquisition Agreement with 25 Van Keuren LLC, a New Jersey Limited Liability Company (“Van Keuren”) pursuant to which the Company acquired 99% of the outstanding membership interests in Van Keuren and the former members of Van Keuren retained a 1% interest.
The New Jersey Sports and Exposition Authority has received certification of an amendment to the Solid Waste Management Plan from the New Jersey Department of Environmental Protection (“DEP”) to include the proposed operation of a municipal solid waste transfer station and material recovery facility (“TS/MRF”) at a site located in Jersey City, New Jersey. CleanTech and Van Keuren intend to seek the necessary permits and approvals from the New Jersey DEP to build, own and operate the TS/MRF. As part of the acquisition, CleanTech acquired an option to lease the property located in Jersey City within 30 days after the final permit issues from the New Jersey DEP. The Company intends to: (1) install its Biomass Recovery Process on the site, and (2) operate the TS/MRF.
Van Keuren has had no operations or revenue since inception and has solely been working towards obtaining the permits required to operate the TS/MRF. As payment for the acquisition, the Company issued in the aggregate 1,000,000 shares of restricted Common Stock of the Company (par value $0.001) to certain holders of membership interests in Van Keuren. As of the close of business on June 23, 2016, the Company stock quote was $0.05. The total assets of Van Keuren at the time of the acquisition were $51,000 (2.3% of the Company’s assets). The liabilities and equity consisted of accounts payable of $27,000 and member equity of $24,000. The assets consist solely of costs incurred towards obtaining the required permits and have been recorded as an intangible asset on our consolidated financial statements. This intangible will be expensed if and when the Company and Van Keuren complete the permit process and begin operations.
Investments
In August 2013, the Company commenced an offering of units, under a Subscription Agreement, at a purchase price of $1,000 per unit (Equity Offering 8/13). Each unit consists of: (i) 10,000 shares of the Company’s authorized but unissued restricted common stock, par value $0.001 (“Common Stock”) and (ii) warrants to purchase 30,000 additional shares of Common Stock for a three-year period from the date of issuance of the units at an initial exercise price of $0.15 per share. As of May 14, 2018, the Company has issued 7,635,000 restricted shares of our Common Stock in exchange for $763,500 in investment in this offering.
All of the promissory notes in our 2009, 5/12, 11/10, 2/14 and 2015 Offerings are now due. As of May 14, 2018, approximately $4.0 million is currently due, including interest. We will work with each remaining note holder to exchange, or convert, these promissory notes. There can be no assurance that we will reach agreements with any or all of these note holders and we may be required to repay such amounts.
In September 2015, the Company commenced a convertible note payable offering (2015 Offering). As of November 9, 2017, the Company has raised $85,000 of investment proceeds.
In June and October 2016, the Company issued two notes payable, with no conversion feature, to a current Board of Directors member, in the amounts of $50,000 and $35,000, respectively. In March of 2018, both notes were replaced with a convertible note payable with a face value of $97,599, and a 6% interest rate, due March 2019.
In January 2017, the Company issued a note payable, with no conversion feature, to William Meyer in the amount of $15,000, with a 6% interest rate, due March 20, 2017.
In October of 2017, the Company issued a note payable, with no conversion feature, to a current Board of Directors member, in the amount of $25,000. As of March 31, 2018, the note was outstanding.
In March of 2018, the Company issued two convertible notes payabl, to a current Board of Directors member in the amounts of $50,000 and $17,000, respectively, with a 6% interest rate, due March 2019. As of March 31, 2018, the notes were outstanding.
Plan of
Operation
Our focus is to secure sufficient capital to fund our current working capital requirements and the construction of a commercial plant as described further in this section. We have had an ongoing lack of liquidity, and currently do not have sufficient capital to continue to fund our proposed operations and are relying on the minimal assets on hand to fund our limited operations and corporate existence. All of our on-going and proposed developments/projects require a significant amount of capital that we currently do not have. While we continue to pursue outside sources of funding, we have not had success securing meaningful amounts of outside capital in recent years. As a result, we can provide no assurance that we will secure any source of funding in the immediate time frame required and the failure to do so will likely result in an inability to continue operations.
Our company was initially conceived as a fully-integrated producer of cellulosic ethanol from MSW. Based on our investigation and acquisition of new technologies and research and development of our existing technologies in 2008, we re-focused our business to the commercialization of our Biomass Recovery Process technology for cleaning and separating MSW into its component parts and initiated a plan to consolidate the ownership and/or rights to use intellectual property around this technology. The technology is currently in commercial use in Coffs Harbor, Australia by an operator not owned by the Company (the “Third-Party Operator”). As a result, we believe this technology could be implemented commercially in the United States and elsewhere. In furtherance of our focus, we are continuing our ongoing search for an outside source of financing that will provide the capital for us to design, build, and operate a commercial biomass recovery plant that will allow us to produce biomass feedstock for customer evaluation, trial purchases, and/or be used in equipment selection for power generation and possibly combined heat and power (CHP) production. Initially, the biomass feedstock output is expected to be sold or provided to electric utilities, power and steam producers, power and ("CHP") equipment suppliers, and biofuel research firms for evaluation. In addition to seeking a source of funding for plant development, the Company hopes to license and/or develop potential commercial projects as they present themselves. All of our developments plan to focus on cleaning and separating MSW into its component parts in order to obtain: (i) a homogenous feedstock of cellulosic biomass for producing energy and other chemical products and (ii) recyclable products (metals, plastics). Our plans may also include the possibility of operating a MSW transfer station where we could install our technology.
Jersey City
With our acquisition of Van Keuren, as described earlier under Recent Developments, the Company’s primary focus is to seek the capital required to obtain the necessary permits and approvals from the New Jersey DEP and to build, own and operate the TS/MRF in Jersey City, NJ. As part of the acquisition, CleanTech acquired an option to lease the property located in Jersey City and intends to: (1) install its Biomass Recovery Process on the site, and (2) operate the TS/MRF. The Company may initially operate this location as a transfer station (after receiving the required permits and approvals) while designing and installing our Biomass Recovery Process equipment on the site. The biomass feedstock output would then be expected to be sold or provided to electric utilities, power and steam producers, power and CHP equipment suppliers, and biofuel and chemical research firms for evaluation.
Biomass Feedstock Production
We are working to develop one or more other locations where waste collected would be processed using our technology and the biomass produced used to create heat and/or power. Initially, the biomass feedstock output is expected to be sold or provided to electric utilities, power and steam producers, power and CHP equipment suppliers, and biofuel and chemical research firms for evaluation. In addition to research and development, the Company also plans to license and/or develop potential commercial projects.
In addition to the developments we are currently contemplating, from time to time other development opportunities are presented to us and we evaluate those potential developments. If we are able to operate a plant, and thereafter refine our know-how with respect to implementation of the technology, we intend to seek to partner with waste haulers, landfill owners and municipalities to implement the technology across the United States and internationally.
Any development of commercial plants and/or implementation of the licensing of our technology described above will require significant additional capital, which we currently do not have. To date, we have not been successful in raising the amount of capital necessary to implement our business plan and we cannot provide any assurance that we will be able to raise sufficient additional capital. While we anticipate that financing for the commercial biomass recovery plant and these other potential projects could also be provided in part via tax exempt bond financing or through the use of loan guarantees from local, state and federal authorities, we have not secured any such financing and there can be no assurance that we will be able to secure any such financing.
Bio-Fuel and Bio-Chemical Joint Testing/Research
If we are able to process MSW into biomass through our potential future biomass recovery plant and/or in future commercial vessels, we hope to enter into joint research agreements with companies looking to process biomass in their system(s) for various types of energy and chemical production. We believe that this testing and research could provide possible revenue streams, projects and additional opportunities for use of our biomass.
In February 2012, we entered into a Confidentiality Agreement and Material Transfer Agreement with Sweetwater Energy, Inc. (“Sweetwater”), a renewable energy company with patent-pending technology to produce sugars from several types of biomass for use in the biofuel, biochemical and bioplastics markets. We agreed and coordinated with the Third-Party Operator in Australia to ship 10 pounds of biomass produced at the Third-Party Operator’s facility to the Sweetwater lab for testing. The shipment arrived in May 2012 and Sweetwater has completed their initial testing. In June 2011, we entered into a Confidential Disclosure and Sampling Agreement with Novozymes North America, Inc., a developer of industrial enzymes, microorganisms, and biopharmaceutical ingredients for conversion into a variety of energy and chemical products. In July 2011, we supplied a sample of our biomass product for testing in their enzymatic hydrolysis process. Some initial testing was completed during the 3
rd
Quarter of 2011. We expect further testing to occur for both of these companies and for possible additional companies upon securing the requisite financing to build a biomass recovery plant to process MSW.
New Technologies; Commercializing Existing Technologies
Because of our ability to produce a clean, homogenous biomass feedstock, we may be presented with the opportunity to partner with or acquire new technologies once we become operational. In addition to developing our current technologies, we intend to continue to add technologies to our suite of solutions that complement our core operations. We believe that our current technologies and aspects of technologies in development or contemplation will enable us to eventually expand our business to use organic material from other waste streams such as municipal bio-solids from waste water facilities and animal waste for fuel production.
To commercialize our technology, we anticipate we will need to:
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construct and operate a commercial plant that: (i) processes MSW into cellulosic biomass for conversion into energy or chemical products and (ii) separates recyclables (metals, plastics, glass) for single-stream recycling;
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identify and partner with landfill owners, waste haulers and municipalities to identify locations suitable for our technology; and
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pursue additional opportunities to implement our technology in commercial settings at transfer stations and landfills in our licensed territories.
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Our ability to implement this strategy is heavily dependent on our ability to raise significant amounts of additional capital and to hire appropriate managers and staff. Our success will also depend on a variety of market forces and other developments beyond our control.
Results of Operations
The following tables set forth the amounts of expenses and changes in our consolidated statements of operations for the three months ended March 31, 2018 and 2017. The Company’s activities and related primary expenses are in the following categories: General and administrative – payroll (including share-based compensation, stock grants, and payroll taxes), general office expenses, travel, and business insurance; Professional fees - consulting, accounting and legal fees; Other expense (income) – interest expense on convertible notes payable and interest income on notes receivable related to restricted stock grants.
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Three months ended March 31,
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2018
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2017
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Change
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Costs and expenses:
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General and administrative
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$
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53,971
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$
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56,975
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$
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(3,004
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)
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Professional fees
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65,516
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42,823
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22,693
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119,487
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99,798
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19,689
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Other expense (income):
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Interest expense
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61,387
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52,298
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9,089
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Interest income, net of accrued interest written-off
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(886
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)
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(1,236
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)
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350
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Net loss applicable to common stockholders
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$
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179,988
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$
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150,860
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$
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29,128
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General and Administrative
– The decrease in 2018 was due to a decrease in insurance of $7,000, partially offset by a restricted stock grant to a consultant of $4,000.
Professional Fees
– The increase in professional fees was due to legal fees regarding a lawsuit with the Company. See Part II. Other Information: - Item 1. Legal Proceedings for further discussion.
Interest Expense
– The increase was due to the compounding effect of interest on our notes payable.
Liquidity and Capital Resources
As a development-stage company, we have no revenues and will be required to obtain an outside source of capital in order to execute our business plan and commercialize our products. Beginning in September 2008 and as of May 14, 2018, we raised an aggregate of: (i) approximately $3.4 million in separate offerings of units comprised of notes payable and warrants in separate offerings from 2008 through 2018 and (ii) $763,500 in an equity offering of restricted Common Stock through our Subscription Agreements (our Equity Offering 8/13). We are continuing to explore opportunities to raise cash through the issuance of these units and other financing opportunities, however to date we have not been successful in doing so. As of May 14, 2018, our current cash and other assets are not sufficient to fund our operations. As of March 31, 2018, we had a significant working capital deficit. Our liabilities are substantially greater than our current assets. Our only significant assets are our intellectual property rights, which are intangible and not readily convertible into liquid assets.
We are attempting to identify one or more potential sources of additional financing, such as through the sale of additional equity, various government funding opportunities and/or possibly through strategic alliances with larger energy or waste management companies. The Company will continue to explore and if identified, evaluate financing alternatives and/or other transactions, including potentially retaining a financial advisor. However, we may not be successful in securing additional financing. If we are not able to obtain additional financing in the immediate future, we will be required to further delay our development until such financing becomes available. Further, even assuming that we secure additional funds, we may never achieve profitability or positive cash flow. If we are not able to timely and successfully raise additional capital and/or achieve profitability or positive cash flow, we will not have sufficient capital resources to implement our business plan or to continue our operations.
Debt
Convertible Notes
Payable
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Since September 2008, the Company has conducted six offerings of units comprised of a convertible promissory note and a warrant, and one offering of a convertible note (with no warrant), having the terms set forth below:
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Offering
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Note Interest
Rate
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Note Conversion
Price
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Warrant
Exercise Price
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Term
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Closed or
Open
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2008 Offering
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6.0%
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$
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0.25
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$
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0.45
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One-year
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Closed
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2009 Offering
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6.0%
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$
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0.08
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$
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0.30
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One-year
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Closed
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6/10 Offering
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12.0%
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$
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0.08
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$
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0.30
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One-year
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Closed
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11/10 Offering
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6.0%
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$
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0.06
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$
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0.30
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One-year
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Closed
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5/12 Offering
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6.0%
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$
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0.10
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$
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0.35
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18 months
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Closed
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2/14 Offering
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6.0%
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$
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0.10
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n/a
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18 months
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Closed
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2015 Offering
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6.0%
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$
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0.10
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$
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0.15
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18 months
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Closed
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Each note holder retains the option of cash repayment of the note plus interest, or can convert the note at any time during the term of the note or prior to the closing of any Qualifying Equity Financing (minimum capital received of $5 million) into shares of Common Stock at the conversion price noted above. All notes have been recorded as debt (notes payable) in the consolidated financial statements, net of discounts for the conversion and warrant features (except for the 11/10, 5/12, 2/14, and 2015 Offerings which carried no discounts). The discounts have been amortized on a straight-line basis over the term of each note and were fully amortized as of December 31, 2011.
2008 Offering
- During September 2008, the Company commenced an offering of units and raised a total of $642,000 of investment proceeds through March 31, 2009. As of March 31, 2010, all of these notes had either been converted to shares of our common stock or exchanged into our 2009 Offering (resulting in new notes with a total face value of $539,829, which included the original principal and interest through the date of exchange).
2009 Offering
- During April 2009, the Company commenced an offering of units and raised a total of $1,198,500 of investment proceeds through August 2010. Four notes have been converted to shares of Common Stock (one each in 2009, 2010, 2014 and 2017). Beginning in March 2011, certain notes were exchanged into our 11/10 Offering. As a result, as of March 31, 2018, we had $189,185 face value of notes outstanding, which includes the exchanged notes from our 2008 Offering. All of these notes have matured. We plan to work with each remaining note holder to exchange, convert or repay these notes.
6/10 Offering
- During June 2010, the Company commenced an offering of units and raised a total of $75,000 of investment proceeds in one note. Upon maturity in June 2011, this note was exchanged into our 11/10 Offering. As a result, the balance due on this offering is $-0-.
11/10 Offering
- During November 2010, the Company commenced an offering of units and raised a total of $451,713 of investment proceeds. Three notes were converted to shares of Common Stock during 2011 and four notes were converted to shares of Common Stock in 2012. As of March 31, 2018, we had $1,877,162 face value of notes outstanding, which includes exchanged notes from our 2009 Offering. As of March 31, 2018, all of the notes have matured. We plan to work with each remaining note holder to exchange, convert or repay these notes.
5/12 Offering
- During May 2012, the Company commenced an offering of units and raised a total of $583,510 of investment proceeds. As of March 31, 2018, all of these notes were outstanding and matured. We plan to work with each remaining note holder to exchange, convert or repay these notes.
2/14 Offering
- During February 2014, the Company commenced an offering of units and raised a total of $100,000 of investment proceeds in one note. As of March 31, 2018, this note is outstanding and has matured. We plan to work with the note holder to exchange, convert or repay this note.
2015 Offering
- During September 2015, the Company commenced an offering of units and raised a total of $85,000 of investment proceeds in one note. As of September 31, 2018, this note is outstanding and matured. We plan to work with the note holder to exchange, convert or repay this note.
WL Meyer Legacy Trust (formerly CMS Acquisition, LLC) Note Payable
- In September 2010, the Company issued a note in the amount of $100,000 (interest at 6.0% per annum through May 15, 2011 and 10.0% thereafter and secured by a security interest in the PSC Patent) and issued warrants to purchase 2,000,000 shares of Common Stock at a price of $0.05 per share. The note is due the earlier of: (i) April 26, 2018 pursuant to an amendment on April 26, 2017 or (ii) the date on which $500,000 or more in the aggregate is raised by the Company in future offerings. The warrants are exercisable at any time for five years from the date of issuance or reissuance. The value of these warrants has been recorded as a contra-balance amount discount with the note and was fully amortized (interest expense) as of February 28, 2011 (the original due date). As consideration in these amendments, the Company has: (i) paid $30,000 towards accrued interest to date and principal on the note, (ii) increased the interest rate to 10% as of May 15, 2011, (iii) re-dated the original warrants to April 26, 2017, (iv) issued new warrants for 300,000 shares of Common Stock with an exercise price of $0.05 and exercisable at any time until April 26, 2022, (v) issued new warrants for 150,000 shares of Common Stock with an exercise price of $0.10 and exercisable at any time until April 26, 2022, and (vi) the Company has approved the assignment of the note by CMS Acquisition LLC to the WL Meyer Legacy Trust per the March 17, 2015 amendment. As of March 31, 2018, $72,696 face value of this note is outstanding. We plan to work with the note holder to renew or repay the note.
June and October 2016 Note Payable
–The Company issued notes payable, with no conversion feature, to a current Board of Directors member, in the amounts of $50,000 and $35,000, respectively. In March of 2018, both notes were replaced with a convertible note payable with a face value of $97,599, and a 6% interest rate, due March 2019.
January 2017 Note Payable
– The Company issued a note payable, with no conversion feature, to William Meyer in the amount of $15,000, with a 6% interest rate, was due March 20, 2017. We are currently working with the note holder to renew or repay the note.
In October of 2017, the Company issued a note payable, with no conversion feature, to a current Board of Directors member, in the amount of $25,000, with a 6% interest rate, due October 2018. As of March 31, 2018, the note was outstanding.
In March of 2018, the Company issued two convertible notes payable to a current Board of Directors member in the amounts of $50,000 and $17,000, respectively, with a 6% interest rate, due March 2019. As of March 31, 2018, the notes were outstanding.
For more information regarding these notes, see Part II - Other Information: Item 4 - Default on Senior Securities.
The following is a summary of warrants issued and outstanding as of the dates below, at the exercise price and the number of shares of Common Stock (these warrants have not been exercised or converted to common shares):
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|
|
Exercise
|
|
|
March 31,
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|
|
December 31,
|
|
|
Warrants issued to:
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|
Price
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|
|
2018
|
|
|
2017
|
|
|
Noteholders, 11/10 Offering
|
|
$
|
0.30
|
|
|
|
-
|
|
|
|
398,221
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Noteholder in 2015 Offering
|
|
$
|
0.15
|
|
|
|
2,550,000
|
|
|
|
2,550,000
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|
|
Investors in Subscription Agreements (a)
|
|
$
|
0.15
|
|
|
|
7,800,000
|
|
|
|
9,300,000
|
|
|
WL Meyer Legacy Trust
|
|
$
|
0.05
|
|
|
|
2,300,000
|
|
|
|
2,300,000
|
|
|
WL Meyer Legacy Trust
|
|
$
|
0.10
|
|
|
|
150,000
|
|
|
|
150,000
|
|
|
|
|
|
|
|
|
|
12,800,000
|
|
|
|
14,698,221
|
|
|
(a)
|
Warrants issued to investors under these Subscription Agreements can be exercised anytime within three years from date of Agreement. These warrants currently expire at various dates from May 2018 to April 2022.
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