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Back on September 11, 2021, we wrote an article for our Google blog which spoke about how we felt that Blue Biofuels (OTCQB:BIOF) investors missed something very important, that we believed to be of great significance.
Our bullish perspective on this company emanates not only from the opportunities that lie ahead for BIOF in the field of biofuels, but also in the exciting area of bioplastics.
The global Bioplastics market is expected to register a significant CAGR 26.03% during the forecast period 2022-2028. According to Market growth reports latest research Bioplastics Industry Know-how optimization stages are solutions which deliver an organization the ability to know the requirement of every individual customer and suggestion the best possible experience for them across all touch points.
The global Bioplastics market was estimated at 3,123.24 kilo tons in 2022, and is expected to register an estimated CAGR of 26.03%, during the forecast period (2022 - 2028). One of the major drivers for the increasing demand in this market is the increasing environmental concerns, globally, and governments of the developed and developing nations encouraging environment friendly products.
CAGR For Global Bioplastics Market 2022-2028 (Market Watch)
That blog article focused on two very important developments that were taking place at Blue Biofuels, Inc., which were subsequently communicated to shareholders, by the company, through two separate press releases:
Blue Biofuels Hires Expert in Plastics and Polymers to Accelerate the Development of Biodegradable Bioplastics and Nanocellulose Products
Blue Biofuels Files Two New Patents on the Production of Lignin and Nanocellulose from its CTS Technology
One filed patent pertains to the production of lignin from the CTS process; the second filed patent pertains to the production of nanocellulose from the CTS process.
These are important developments because our no-sulfur lignin can be used for the production of bio-originated and biodegradable plastics as well as in ion-exchange resins. Further, the Company believes both lignin and nano-cellulose have the potential of becoming very high value co-products of our process. The Company is working on separating and purifying these products for future sale. The global nanocellulose market is expected to exceed $1 billion by 2027, according to reportlinker.com.
Source: Blue Biofuels CEO Ben Slager
This about sums up the response from investors.
Investors Yawn at Important Blue Biofuels News (The Guardian)
While we sounded a wake-up call, many investors chose to ignore it and instead chose to hit the snooze button.
Our initial discussion of the bioplastics opportunity appeared in our Seeking Alpha article: Blue Biofuels: Our Absolute Best And Number One Micro-cap Idea For 2021.
In that article, we laid out the opportunity in bioplastics, for the company, in the section titled Biofuels & Bioplastics - Market Size And Opportunities.
We highly recommend investors take another look at that article. It provides an excellent overview of Blue Biofuels and why we think that this company could be one of the biggest micro-cap sleepers in today's market.
Some of you may have seen the television commercial for the KIA Sportage, named The Beachcomber, which features a young man driving along a deserted beach gathering plastic bottles and other plastic waste that have washed ashore so that sea turtles can nest and begin laying their eggs.
There are mixed feelings about this commercial, with both sides debating on YouTube, where the commercial has been viewed over 17.2 million times.
No matter what side of the issue you fall on, there is no doubt that the impact of plastic pollutants to the environment is real.
There are billions of non-biodegradable plastic water bottles that have been used and discarded by people, over the years. The problem is that many of them wind up in landfills and waterways where they create an unsightly and ugly environmental eye sore. Many of these plastics are recycled to be used again to make new containers and other plastic items.
With the advent of new technologies, there are now plastics being produced that are biodegradable, meaning that over time they will simply breakdown and become an innocuous part of the environment.
How long it takes to biodegrade depends on the materials used to produce the plastic. The graphic below shows the timetable for degradation of various types of plastics.
Time Table For Biodegradation of Various Plastics (University of Florida)
Significant progress has been made in developing biodegradable plastics, primarily from renewable natural resources, to produce biodegradable materials with similar functionality to oil-based polymers. Law [3] estimated that 8.3 billion tons of plastic had been produced worldwide from the 1950s to 2015. However, only 21% of this amount has been recycled or incinerated, while the rest (79% or) is accumulated in landfills or surroundings. Most conventionally used plastics are not biodegradable; thus, it remains in the environment for years. Although plastic materials physically break or tire into smaller particles in landfills or marine environments, they enter into food chains or animal bodies, causing various diseases [[4], [5], [6]]. With acceleration in the production, consumption, and disposal of plastic-based materials worldwide, the future for our planet appears bleak. This phenomenon places an overwhelming burden on Earth because of the accumulation of non-renewable natural resource-based plastics in the biosphere, impacting humans, wildlife, and their natural environments [7,8].
The cleaner technology approach using biodegradable resources has been aggressively encouraged to control worldwide pollution [9]. Hence, numerous research has been conducted to develop natural alternatives, with safer, cleaner, and biodegradable, renewable resources as precursor material instead of petroleum [10,11]. Cleaner production technologies using safe, sustainable and natural resources help reduce the adverse impact on the earth, water and air by processes and products of conventional manufacturing industries. Natural alternatives such as starch, cellulose, plants proteins, polylactic acid (PLA), polyhydroxy butyrate (PHB), and bio-based polyamide all possess unique advantages which are utilized in different applications [12,13]. Biopolymer based materials have been extensively evaluated and used in many applications [14,15]. Still, their commercialization has been restricted due to the poor properties, yet they need to be improved to reach or exceed the petroleum-based ones. The poor mechanical strength and water barrier properties, as an example, have always been a challenge associated with bioplastics and natural packaging materials [16,17]. However, the use of reinforcement material/s has been proposed to overcome this challenge. Different organic fillers, which are hydrophobic or hydrophilic reinforcement materials, have been used to improve the properties of biopolymers for industrial applications [[18], [19], [20]]. Lignocellulosic biomass is the primary source for organic fillers, mainly cellulose, hemicellulose and lignin [21].
Lignin is the second most abundant bioorganic polymer on earth after cellulose [22]. Lignin is not naturally available in its isolated form, but it is physically combined with cellulose and hemicellulose. Currently, lignin is being extensively used as a reinforcement material for biopolymer composite production [23]. It is an abundantly available, sustainable, and inexpensive polymeric material that enhances polymer composites' strength. Lignin polymer is a by-product available in comparatively large amounts, meaning that the valorisation of lignin in composite materials for any high-value application could result in large economic gains. It has been used in various sectors as a main component or additive for the production of new innovative bioplastics products for different applications [24]. The valorisation of lignin as a reinforcement material in biopolymers is a comparatively new and emerging research field. Extensive ranges of polymers reinforced with lignin have been classified and investigated. As displayed in Fig. 1, the number of studies on lignin increases with a rising number of scientific articles published on lignin-based polymers. The increasing number of researches is motivated by the desire to overcome all the barriers and challenges associated with biopolymers composites. This has resulted in the production of biopolymers reinforced with various types of lignin for novel biocomposite applications.
Source: Journal of Materials Research and Technology Volume 15, November–December 2021, Pages 2287-2316
The demand for sustainable functional materials with an eco-friendly preparation process is on the rise. Lignocellulosics has been attributed as the most sustainable bioresource on earth which can meet the stringent requirements of functionalization. However, cellulose nanomaterials obtained from lignocellulosics which has reached advanced stages as a sustainable functional material is challenged by its preparation procedures. These procedures can not best be described as sustainable and eco-friendly owning to lots of energy and chemicals spent in the pre-treatment and purification processes. These processes are intended to aid fractionation into the major components in order to remove lignin and hemicellulose for the production of cellulose nanomaterials. This work is thus centered on reviewing the progress achieved in introducing a new cellulose nanomaterial containing lignin. The preparation processes, properties and applications of this new lignin-containing cellulose nanomaterial will be discussed in order to chart a sustainable preparation route for cellulose nanomaterials.
Over the past decades, cellulose nanomaterials have been established as source material for various applications (Salas et al., 2014; Peng et al., 2016; Sabo et al., 2016; Stark, 2016; Mondal, 2017; Wang et al., 2018). The extent of its application is too numerous that various new possibilities are regularly being discovered by scientists. This is occasioned by its abundant hydroxyl groups that are readily available for surface modifications. Additionally, the continuous demand for sustainable functional materials and the increasing environmental challenges posed by petroleum based products also contribute to the constantly increasing research on cellulose nanomaterials. They are basically categorized as cellulose nanofibers (CNFs) and cellulose nanocrystals (CNCs) and are predominately sourced from plant fibres (both wood and non-wood components) through various chemical and mechanical processes.
However, the production of these nanomaterials is being challenged by several factors which continue limiting its rapid industrialization to its full potentials. These challenges involving cost of energy and chemicals and environmental concerns of these chemicals for the pre-treatment process are currently being investigated by researchers. These concerns have given rise to a new category of nanocellulose materials which are the lignin-containing cellulose nanofibers (LCNFs) and nanocrystals (LCNCs).
Multiple Revenue Sources from By-Products Generated by CTS 2.0 (Blue Biofuels Corporate Presentation)
Unlike lignin produced from other industry competitors, which use other methods of extraction, Blue Biofuel's sulfur-free lignin remains pure and unmodified, since there are no caustic chemicals, costly enzymes or high temperatures used in the CTS 2.0 process.
This becomes an attractive advantage to potential future customers who purchase this virgin lignin to use in the food and beverage related items that they produce.
The advantage for Blue Biofuels, Inc, is that this lignin by-product becomes another important source of revenue for the company.
Blue Biofuel's revenues are not just from selling sugars to produce ethanol.
Our bullish thesis on BIOF is predicated on the fact that this company is in the unique position of having a patented technology that can produce not one, not two, but three highly prized sources of revenue.
Those three sources of revenue are the sale of cellulosic sugars to produce jet fuel and other important biofuels, the sale of lignin and nanocellulose to produce environmentally friendly bioplastics, and the all-important FDA RIN credits that have essentially no cost, resulting in 100% profit margins.
Think about that for a minute.
Ethanol producers generate three primary sources of revenue. The first comes from the margins on the sale of sugars that are extracted from the processing of the feedstock. Another comes from the D6 RIN credits for corn ethanol, recently pegged at roughly $1.13 per gallon. This compares to a RIN price of approximately $3.23 a gallon for D3, the EPA category for corn ethanol.
RIn Trades & Price Information (EPA)
Mountain Chart of D6 RIN Prices 2016-2022 (Growth Energy)
Bar Chart of Yearly D6 RIN Prices 2015-2022 (Growth Energy )
Mountain Chart of D3 RIN Prices 2016-2022 (Growth Energy)
Bar Chart of Yearly D3 RIN Prices 2015-2022 (Growth Energy)
The final revenue source for corn-based ethanol producers comes from the sale of DDGS (Distiller Dried Grains with Soluables). They are a by-product of the process of converting corn into sugars to be used in ethanol production.
These grains are primarily use as fodder for livestock (especially ruminants). Corn-based distillers grains from the ethanol industry are commonly sold as a high protein livestock feed that increases efficiency and lowers the risk of subacute acidosis in beef cattle.
It's not very common to see a business that derives its revenues from three sources, but in the ethanol industry it's standard practice.
The biggest differences between producers of corn-based ethanol and cellulosic biomass ethanol are three-fold.
1. The cost of producing a gallon of ethanol, which is primarily determined by which feedstocks are used in the sugar extraction process.
2. The value of the EPA (Environmental Protection Agency) RIN credits. In this case a D3 credit for cellulosic ethanol and a D6 credit for corn-based ethanol.
3. The sale of by-products that are result from the manufacturing process.
Imagine, for a minute, that you had a business selling widgets. There is a cost for your company to build those widgets, and a price at which you sell them to your customers. The difference represents your gross profit margin.
You have costs associated with making each widget, which include things like the cost of procuring the raw materials used.
Now, what if the United States Government told you, that if you were to build your widgets out of a particular material (let's call it "Material A"), they would pay you a monetary incentive of $1.13 for each widget that your company manufactures.
This $1.13 would supplement your profits by $1.13 per widget. Since there are no costs to your company whatsoever, the entire $1.13 that you would receive from the U.S. Government is yours to keep.
Let's say, that you sell your widgets to customers at a price of $3.00 each. You have costs, all-in, to produce those widgets of $1.50, thus providing you with a profit margin of 100% on each widget that you can sell.
However, there is also the additional amount that you receive from the government; in this case $1.13.
Since there are no costs incurred, on your part, to obtain this additional amount, you will add it to the $1.50 profit that you have made from the sale of each widget.
Taking the $3.00 sale price of each widget and adding the $1.13 credit from the government provides a total of $4.13 in revenue, versus the prior $3.00.
Subtracting the cost to produce each widget of $1.50, gives you a net profit of $2.63 per widget. In other words your net margins have just gone from 100% to 175%, by virtue of the U.S. Government credit.
While that certainly sounds good, the next scenario sounds even better.
The U.S. Government will provide you with an even greater credit, of $3.23 per widget, if you use a different material (we'll call this one Material "B") to manufacture your widgets.
In this scenario, your net profit margin would amount to 315% instead of 175%.
It is calculated this way: If we take $3.00, the sale price of a widget and add to that the $3.23 received from the government we come to a total of $6.23 in revenues. Then taking the $6.23 in total revenues, and subtracting the $1.50 net cost to produce a widget, gives us a net profit of $4.73 for each widget.
We then divide the $4.73 in net profit, by the $1.50 cost of each widget to come up with a profit margin of 315%.
Now, we get to the $64,000 question:
Why would you use Material "A" to produce your widgets, at a profit margin of 175%, instead of using Material "B", thereby increasing your overall profit margins from 175% to 315%. The answer is simple: You probably wouldn't.
In the above example, Material "A" is field corn, while Material "B" is cellulosic biomass.
The only reason why you would choose to use Material "A" over Material "B", is because you have not found a way to efficiently and effectively use Material "B" as part of your manufacturing process.
This is where the biofuel industry finds itself today. Most ethanol producers use field corn versus cellulosic biomass, because up until now, no one has found an economically viable way to "crack the code", so to speak, as it pertains to the calcitrant properties of cellulose.
The major challenges, in the past, associated with using cellulosic biomass to create sugars for fermentation into ethanol are widely known. In most previous cellulosic conversion technologies, the use of caustic chemicals or expensive enzymes were required.
This adds substantially, not only to the cost of the process, but also to the amount of time for conversion to the final product; sugars.
Blue Biofuel's patented CTS 2.0 conversion process requires no costly chemicals or enzymes for pre-treatment of the cellulosic biomass before processing, to produce sugars for ethanol. Due to the efficiency of the CTS 2.0 process, it also takes very little time to complete to process of conversion and results in a 99% conversion rate of the biomass material, meaning that there is very little residual waste.
Advantages of CTS 2.0 vs. other conversion methods (Blue Biofuels)
Using their patented, mechanical-chemical extraction method, called CTS (Cellulose-to-Sugar) 2.0, Blue Biofuels has created a cost-effective and efficient method of producing sugars from cellulosic biomass.
Blue Biofuels [has] developed a new and improved technology system that converts virtually any plant material — grasses, wood, paper, farm waste, yard waste, forestry products, fruit casings, nut shells, and the cellulosic portion of municipal solid waste — into sugars and subsequently into biofuels without the use of enzymes or liquid acids. We call this the CTS process, where CTS stands for Cellulose to Sugar. The cellulose is converted into sugar and lignin. The sugar is further converted into bio-ethanol and other biofuels.
Blue Biofuels CTS process is a mechanical-chemical process that, unlike other cellulosic conversion processes, does not use any expensive and slow converting enzymes in the conversion of cellulose into its components of sugar and lignin. We use a very inexpensive catalyst that is recycled.
CTS process is environmentally friendly: 100% renewable, 100% recycled water, no toxic chemicals, and an almost zero carbon footprint.
Blue Biofuels expects to be able to produce cellulosic ethanol using CTS process at a significantly lower cost than any other cellulosic process and even at a lower cost than ethanol from corn due to the fact that our feedstock (either tall grasses or waste product) is much less expensive than corn.
This last paragraph brings up another very important point, which is a major advantage over traditional corn-based ethanol. Blue Biofuel's patented CTS 2.0 technology uses a very abundant and inexpensive feedstock, which can be harvested multiple times throughout the calendar year.
Let's use an example to illustrate.
What if the cost of Material "A" (cellulosic biomass) was approximately 1/6th the cost of Material "B" (field corn)?
Now, instead of your raw material (feedstock) costs being $1.50, they would be approximately $0.25 cents.
This dramatically changes the profit margin numbers above to reflect the lower cost of cellulosic feedstocks versus traditional corn-based feedstock.
Material "A" (Field Corn) produces a net profit margin of 175%
Material "B" (Cellulosic Biomass) produces a net profit margin of 315%
Adjusting for the difference in cellulosic feedstock costs to represent 1/6th the cost of using corn as a feedstock, results in net profit margins of almost 2,400%.
The 1/6th differential is not just a random number.
Currently, the cost of one ton of corn is approximately $275.00, while the cost of a ton of king grass is between $35 and $55 a ton. Using the mean price of $45 per ton, king grass is roughly 1/6th the cost of field corn.
A bushel of corn weighs roughly 56 pounds. There are 39.4 bushels of corn per ton which produces approximately 2.85 gallons of ethanol per corn bushel, or between 90 and 112.29 gallons of ethanol per corn ton.
Compare that to the use of cellulosic biomass as a feedstock for producing ethanol, which is estimated to be between 172.5 and 206 gallons per ton.
As expected, increases in the conversion yield improve cost metrics,” the Sandia/GM study states. “As a point of reference, corn grain ethanol yields average approximately 90 gallons/ton. The theoretical biochemical yield from cellulose and hemicellulose is 172.5 gallons/dry ton, while the maximum yield from the thermochemical process is 206 gallons/dry ton. However, the practical maximum yields for conversion processes using cellulose are estimated to be 120 gallons/dry ton, due to losses from non-converted feedstock material and external energy inputs. There are no data on production-scale cellulosic processes, as there are no such processes in existence, but the current estimates based on laboratory yields are in the range of 63-72 gallons/dry ton (Hsu, 2008). Our reference case has an overall average yield (2006-2030) of 95 gallons/dry ton and thus assumes significant technical advances over time. Sensitivity analysis showed that the cost difference between achieving a moderate improvement of yield (75 gallons/dry ton) and achieving the maximum practical yield corresponds to approximately a $0.20/gallon impact on cost of ethanol.
U.S. House Chambers (House Press Gallery)
Just this past week, we saw the passage of H.R. 7356, also known as the Inflation Reduction Act. This was milestone legislation for the "Green Energy", or alternative energy industry. Included in the bill is financial assistance for companies that are producing the next generation of alternative energy technologies, which will be used to slowly de-carbonize the atmosphere and the environment.
Included in the Inflation Reduction Act are several key priorities for the biofuels industry:
This legislation is a game-changer for companies which are focused on producing ethanol and SAF (Sustainable Aviation Fuel).
We published an article on Seeking Alpha, back on May 12, 2022, which indicated that Blue Biofuels was inching closer to the commercialization of its revolutionary CTS 2.0 technology.
The current inflationary environment and its impact on commodity prices will likely enhance the value of using cellulosic biomass as an alternative feedstock to corn.
We believe that Blue Biofuels is in a sweet spot and an enviable position when it comes to producing biofuels and Sustainable Aviation Fuel. Our investment thesis for BIOF is predicated on several important factors which are at play, including:
1. A low-cost method of extracting sugars from cellulosic biomass, that eliminates the expensive enzymes and chemicals previously used in other methods of sugar extraction.
2. A conversion rate of 99%, with little or no residual waste.
3. An EPA D6 RIN credit that is substantially higher than the D3 RIN credit for corn-based ethanol.
4. A cellulosic feedstock that is roughly 1/6th the cost of traditional field corn, producing much higher margins and potentially greater profits.
5. A window of entry into the fast-growing bioplastics industry, by virtue of having an attractive lignin by-product which is purer than other sources of lignin. This purity results from eliminating the use of enzymes and chemicals in the CTS 2.0 process.
6. A potential shift away from traditional corn-based ethanol, resulting from the inflationary impact on commodity prices, including wheat, soybeans, and corn.
7. The company is working in collaboration with the USDA to enhance the potential yields from crops that will be used as biomass feedstock.
8. The fact that Blue Biofuels has produced a series of four prototypes, each with significantly higher output numbers than predecessor units, shows that they have been successful at optimizing each new generation of the CTS 2.0 reactor.
9. The company has hired an engineering firm to assist with the development and subsequent production of a commercial-scale reactor, which should be nearing completion by late 2022 or early 2023.
10. The recent passage of H.R. 5376, which should clear the way for grants, and other forms of financial assistance to aid in the development of new alternative energy technologies.
We should also note that on May 2nd of this year, the CEO, Ben Slager and CFO, Anthony Santelli each put $75,000 in a Private Placement, which the company was conducting to raise a small amount of working capital to continue with the optimization of the existing prototype. We interpret that as a show of confidence in the progress of the prototype development and the results that were achieved.
Remember, that Blue Biofuels is a developmental stage company and will likely need to raise additional capital towards the finalization of the commercial scale unit.
If you are a micro-cap investor, you may want to consider adding BIOF to the speculative portion of your equity portfolio. We believe that the company is extremely well positioned in two future mega-trends, biofuels and bioplastics.
If Blue Biofuels can achieve the level of success in their strategic business plan, to meaningfully participate in these two industries, the stock could see significant appreciation in the coming years.
However, in addition to significant rewards, there are also significant risks.
We ask that you please read the disclosures and disclaimers, that appear at the end of each of our articles, for a better understanding of the unique risks of micro-cap investing.
Micro-cap stocks carry additional risks beyond those of higher classes of securities including, but not limited to trading outside of a listed exchange, potential liquidity issues, dealing with penny-stock rules, lack of margin eligibility, a possible absence of transparency regarding BBBO quotes, a limited number of Market Makers willing to provide depth to the order book, potential issues regarding financing activities, inadequate capital to execute on the company’s business plan, going concern caveats, and the potential inability to compete with larger companies due to limited financial and personnel resources. Please invest responsibly. We encourage individuals to only invest what they can afford to lose, up to a maximum of 100% of their investment.
We highly recommend that you perform your own due diligence before investing in any equity security and consult with your own financial advisor before making a decision.
This article was written by
Disclosure: I/we have a beneficial long position in the shares of BIOF either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Disclaimer: We are not responsible for updating this article, or our opinion on any of the stock(s) that are mentioned in our articles. We are not in the business of giving investment advice and ask that readers refrain from asking us for it. Please do your own due diligence before investing. We are not responsible for any actions that you take based on the opinions that we express on Seeking Alpha, or our Google blog. Additional Disclaimer: Please remember that this article reflects our current opinion on BIOF. It is based on information that was publicly available at the time that we authored this article. Additional public information might have been available but was not brought to our attention at the time we began preparing this report. We provide sources and links to information that we include in our reports but take no responsibility for the accuracy of their content. An investor should consider that new information may become available regarding the company's business activities, financial condition, or corporate governance. It is the responsibility of each investor to make sure that they stay abreast of any new developments that could have an impact, either negative or positive, on their investment. BIOF may need to raise additional capital in the future, to continue with its strategic business plan. There, however, can be no assurance that they will be successful in obtaining such financing, on favorable terms. If the company is successful in raising capital, it could result in dilution to existing shareholders, by increasing the total number of common shares outstanding. The company's financials are available to investors through publication in the company's quarterly and annual reports and SEC filings. 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Micro-cap stocks carry additional risks beyond those of higher classes of securities including, but not limited to trading outside of a listed exchange, potential liquidity issues, dealing with penny-stock rules, lack of margin eligibility, a possible absence of transparency regarding BBBO quotes, a limited number of Market Makers willing to provide depth to the order book, potential issues regarding financing activities, inadequate capital to execute on the company’s business plan, going concern caveats, and the potential inability to compete with larger companies due to limited financial and personnel resources. Please invest responsibly. We encourage individuals to only invest what they can afford to lose, up to a maximum of 100% of their investment.