Biolargo, Inc.: Form 10-Q for the period ended Sep 30, 2023

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 September 30, 2023, 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; and (ii) its partially or wholly-owned subsidiaries BioLargo Life Technologies, Inc., a California corporation which holds our registered patents, ONM Environmental, Inc., a California corporation which manufactures, markets, sells and distributes our odor and volatile organic compound control products, BioLargo Water Investment Group, Inc., a California corporation (which wholly owns BioLargo Water, Inc., a Canadian corporation), BioLargo Development Corp., a California corporation which employs and provides benefits to our employees, BioLargo Engineering, Science & Technologies, LLC, a Tennessee limited liability company (“BLEST”) that provides professional engineering services out of Oak Ridge Tennessee, BioLargo Energy Technologies, Inc., a California corporation (“BETI”) formed to commercialize our proprietary battery technology, BioLargo Equipment Solutions & Technologies, Inc., a California corporation, and Clyra Medical Technologies, Inc., a California corporation (“Clyra Medical”) which commercializes our technologies in the medical and dental fields. All subsidiaries are wholly owned, except for BETI, BLEST and Clyra Medical.

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 is in the business of creating new cleantech technologies to solve tough problems. We invent, develop, then commercialize disruptive technologies to tackle global challenges in air quality, water, environmental engineering, long duration energy storage, and advanced antimicrobial medical device platforms. Our model is to invent new technologies that solve specific problems, prove them out and develop them, then commercialize them with purpose-suited subsidiaries, identify and secure the right partnerships to increase their commercial reach, and potentially sell them or spin them out later.

Why do we do this work? Every member of our team – including PhD scientists, engineers, and entrepreneurs – has a passion for seeking new, never-before-seen innovations that can make life better around the world. We care about safeguarding the environment and human health for future generations. We care about making technologies that are affordable and flexible enough to be accessed around the world. And we care about being the best at what we do – creating best-in-class technologies to solve big, tough cleantech challenges.

Some of our areas of focus include environmental problems like PFAS contamination (per- and polyfluoroalkyl substances), water pollution by pharmaceuticals and micropollutants, air pollution by VOCs, hard-to-treat odors from landfills and sewage plants, and infection and wound healing.

Below you’ll read about the cleantech ventures and projects we are most excited about. Behind those, however, is a pipeline of other cleantech innovations in various stages of development associated with our expansive array of issued and pending patents, and having been funded in part by over 90 government grants.

We operate our business in distinct business segments:

• Odor and VOC control products, including consumer products, such as the Pooph branded pet-odor control product, and our flagship industrial odor control product, CupriDyne Clean, sold by our subsidiary ONM Environmental, Inc.;
• Water treatment equipment and solutions, including our PFAS removal system the AEC, our co-developed minimal liquid discharge water treatment system the AROS, and our micro-pollutant treatment solution, the AOS, all sold by our subsidiary BioLargo Equipment Solutions & Technologies, Inc.;
• Long-duration energy storage (LDES) battery solutions, being developed by our subsidiary BioLargo Energy Technologies, Inc. (97% owned by BioLargo, Inc.);
• Medical products based on our technologies, including the FDA-cleared Bioclynse surgical wound irrigation solution sold by our partially owned subsidiary Clyra Medical Technologies, Inc.; and
• Our professional engineering services division, which, in addition to serving outside clients on a fee for service basis, supports our internal business units, through our partially owned subsidiary BioLargo Engineering, Science & Technologies, LLC ("BLEST").

In addition to the foregoing, we have scientists working in a research and support facility on campus at the University of Alberta, Edmonton, Canada, and corporate offices in Westminster, California that support the operating segments with legal, accounting, human resources, and other services.

Odor Control (Consumer and Industrial)

Pooph - Consumer Private-Label Products

We sell the Pooph branded pet odor-control product to Ikigai Marketing Works, LLC, ("Ikigai") pursuant to license and manufacturing agreements. Ikigai advertises and sells Pooph to consumers and major retailers, including Walmart, Amazon, and Chewy.com, and is currently expanding to more than a dozen large retailers. Our agreement with Ikigai grants them an exclusive license to sell the Pooph pet odor-control product, and requires, in addition to purchasing product from us at an agreed-upon manufacturing margin, they pay us six percent of their sales.

During the nine months ended September 30, 2023, revenue from Ikigai comprised 77% of our company-wide revenue.

Ikigai management informs us that they are shifting focus in their advertising from direct-to-consumer to driving sales to national retailers, and that they expect to secure contracts for more than 20,000 retail stores by the end of 2023, representing an approximately ten times increase in the number of stores carrying the product as were at June 30, 2023.

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 – 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. ONM Environmental holds General Engineering, 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).

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), and are also serving municipalities. ONM Environmental continues to focus on securing more contracts with existing customers, and developing new business. ONM also onboarded two new wastewater treatment plant customers, as well as one more manufacturing facility customer, representing encouraging advancements in expanding into non-solid-waste markets.

In addition to its goal to keep 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 without being limited by our own sales and distribution infrastructure, such as through our partnership with Ikigai Marketing Works, LLC (see “Pooph - Consumer Private-Label Products” above).

South Korean Joint Venture

We are partners with a leading wastewater treatment solution provider based in South Korea in a joint venture to commercialize our CupriDyne® Clean products in South Korea. 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. While the local management team continues to market the product to industrial clients, their efforts have struggled to gain a foothold. We are not obligated to contribute additional funds to the venture, and cannot predict its future success.

Innovative Water Treatment Solutions

Over the years, we have developed multiple innovative technologies and equipment platforms that focus on challenging issues in the water treatment industry, including the AOS developed to remove micro-pollutants, the AEC developed to remove per- and polyfluoroalkyl substances (PFAS), and along with Garratt-Callahan, the AROS to allow for minimal water discharge. As a result of increase in interest from potential customers for our PFAS solutions, we believe we will be better able to serve this market with a uniform identity and operating unit called BioLargo Equipment Solutions & Technologies, Inc. (“BEST”), which will manage the sales and distribution of our water treatment products and related services. As we transition this venture from incubation to commercialization, we are focusing staff and resources we believe necessary for success. Ultimately, BEST will be reflected as a new operating segment in our consolidated financial statements. Although BEST is primarily focused on AEC, AROS and AOS, discussed below, it will offer comprehensive water treatment solutions, related equipment, and services.

AEC, a solution for the PFAS “Forever-Chemicals” crisis – and more

One of the most significant and timely innovations in our portfolio is our per- and polyfluoroalkyl substances (PFAS) removal and collection/disposal solution we call the Aqueous Electrostatic Concentrator (AEC), a novel water treatment system that removes PFAS from water at a lower operating cost and while 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.” The EPA proposed new drinking water standards on March 14, 2023, limiting certain PFAS chemicals to four parts per trillion – a standard our AEC can meet. We believe these proposed rules will continue to push the market to find and adopt commercially viable solutions to remove PFAS chemicals from water. Additionally, 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.

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, which meets new EPA standards. We have demonstrated more than 10,000 hours of continuous operation showing no materially significant degradation of the AEC system’s components or performance over time. As a modular system, we believe the AEC is scalable to small portable commercial units as well as very large commercial operations, and we believe that our engineering team has the experience to deliver systems to meet the needs of any sized commercial installation. In order to provide a full turn-key solution for our customers, we have developed an expanded offering whereby we can bundle a service package with each customer project that includes a membrane exchange program, the collection of PFAS, and transport and destruction of the PFAS.

Our strategy to market our PFAS treatment technology and related engineering services is as follows: 1) focus on demonstrating our technology’s efficacy in first demonstration projects, trials, and early customer deployments with the understanding that this early success can be leveraged to secure larger and more numerous subsequent projects, 2) market our PFAS expertise and our technology by presenting at industry events and conferences around the country, cultivating our status as “thought leaders” in the space, 3) use our network of manufacturer’s representatives and channel selling partners to maximize the number of potential opportunities with early adopters, and 4) engage in discussions with credible distribution partners at established water treatment technology companies.

The AEC’s commercial roll-out is being executed with the help of a network of sales representative organizations whose role will be to market and sell the treatment system, related equipment, and the Company’s engineering services to municipal and industrial customers across the country. We have secured channel partner agreements with several sales representative organizations ensuring coverage for most of the continental United States. We are currently in negotiations with multiple prospective industrial and municipal customers to treat PFAS contaminated water. These opportunities include small to medium sized municipalities, waste facilities, Air Force bases, remediation sites, and industrial sites. We have recently commenced work on a project to remove PFAS from a municipal drinking water supply in New Jersey using our AEC technology.

AROS Minimal Liquid Discharge Water Treatment

In association with Garratt-Callahan, a national industrial water treatment company, our engineers developed a “minimal liquid discharge” wastewater treatment system, called AROS, based on Garratt-Callahan’s patented technology that is able to reduce industrial wastewater discharge and therefore reduce wastewater discharge fees for customers. Garratt-Callahan is currently marketing the AROS 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. Garratt-Callahan has identified multiple customer prospects, as has BioLargo, through its own marketing efforts. We remain confident that this innovation and partnership will find commercial success, as we are in contract negotiations with prospective customers.

Advanced Oxidation System (AOS)

The Advanced Oxidation water treatment system (AOS) is our patented water treatment device that generates highly oxidative and energetic species of iodine and other molecules which allow it to eliminate pathogenic organisms and organic contaminants rapidly and effectively 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, including the normally hard-to-treat class of recalcitrant water contaminants called “micropollutants”, while using very little electricity and input chemicals.

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.

Our current sales and marketing efforts for the AOS focus on: 1) domestic water and wastewater treatment markets in agriculture, pharmaceutical, and small municipal where the technology’s claims of low energy usage and proven pharmaceutical/micropollutant removal is especially valuable, and 2) opportunities to treat drinking water in Europe, where pharmaceuticals/micropollutants in water and wastewater are currently regulated in many countries, focusing on cultivating partnerships with established European organizations.

The AOS has been included as a component of treatment train (comprehensive system) for a number of projects being scoped and budgeted through our engineering subsidiary. In addition, it has been included in the catalog of offerings being sold through our independent representatives as well as channel partners.

BioLargo Energy Technologies, Inc.

BioLargo acquired a proprietary sodium-sulfur battery technology and has formed and secured initial seed capital for a subsidiary – BioLargo Energy Technologies, Inc. (“BETI”) – designed to address the ongoing shift toward renewable energy production and the growth in global electricity demand, and the consequent drastic expansion in energy storage capacity in the US and world-wide that will be needed to accommodate increased demand and the intermittent nature of renewable energy sources like wind and solar.

During the nine months ended September 30, 2023, BETI raised $1,005,000 from the sale of its stock (including $100,000 from BioLargo). The capital is being used to build a pilot-scale production facility located in our Oak Ridge Tennessee engineering facility in order to construct prototype batteries. Construction is progressing as planned, and we believe the facility will be operational and producing batteries prior to year end. Prototype batteries will be tested to confirm energy efficiency, useful life expectancy, energy density, safety profile, number of charge/discharge cycles, and other technical claims that may differentiate the battery from incumbent technologies. Batteries built based on the underlying technology a decade ago demonstrated features that far surpass comparable lithium-ion batteries, the dominant incumbent technology in the market, including:

• This sodium-sulfur battery technology demonstrates increased safety, no runaway fire risks, and a more sustainable design – with no rare-earth elements – that is capable of being manufactured completely from the domestic supply chain.
• Unlike lithium-ion batteries, BioLargo’s battery can charge and discharge completely, with no degradation of performance, ensuring virtually unlimited charge/discharge cycles, without self-discharge.
• BioLargo’s battery technology also demonstrates increased energy efficiency and energy density in comparison to lithium-ion batteries, and a longer useful life expectancy of at least 10 years.

The BioLargo battery uses common, inexpensive, domestically available materials, and through its unique design and manufacturing process, creates an energy storage solution that has higher energy density than lithium virtually unlimited charge/discharge cycles, stable and secure supply chain management, and which is far safer than lithium-ion batteries, the current dominant energy storage technology. While the concept of sodium-sulfur salt batteries is not new (a concept conceived more than 80 years ago), we are not aware of any known ‘salt’ battery that can match the performance metrics of our battery.

Our battery technology operates at higher temperatures, and its casing and materials when combined, are heavier than lithium-ion, making it more suitable for stationary energy storage applications like grid-scale energy storage, electric vehicle charging stations, and commercial and residential energy storage, and believed to be less suitable for placement into electric vehicles or portable electronics.

Clyra Medical Technologies, Inc. - Bioclynse Wound Irrigation Solution

Clyra Medical Technologies, Inc. is our partially owned subsidiary creating medical products based on our technologies. Its primary product is a surgical wound irrigation solution, called Bioclynse, that can help manage patient care and outcomes. The first target market for this product is orthopedics, including hip and knee replacement surgeries. Management believes Bioclynse outperforms competing products as it has proven performance in biofilm disruption and inhibition, is non-toxic and non-cytotoxic, is non-sensitizing to tissue, and unlike competing products, does not require it to be rinsed and/or removed from a surgical cavity.

Clyra has secured manufacturing with independent third parties, has a robust quality control system for FDA compliance, has a national director of sales, has secured independent manufacturer’s representatives and is actively expanding these efforts to build out a national rep network. Simultaneously, Clyra is focused on developing partnerships with large, well-established distributors who can help rapidly accelerate the product’s access to clinicians and surgeons in hospitals around the country.

During the nine months ended September 30, 2023, Clyra sold $1,575,000 in preferred stock to support these efforts.

Full Service Environmental Engineering

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.

BLEST focuses its efforts in three areas:

• providing engineering services to third-party clients as well as affiliated BioLargo entities;
• supporting internal product development; and
• advancing their own technical innovations such as the AEC PFAS treatment technology and the battery energy storage system.

BLEST operates out of an engineering facility in Oak Ridge (a suburb of Knoxville), Tennessee), and employs a group of scientists and engineers, many of whom are owners of the entity (BioLargo owns 82%). 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. Many of the other team members are also former employees of CB&I and Shaw, with the exception of more recent staff hires. The team is highly experienced across multiple industries and we believe 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 team has decades of high-level experience in the energy industry. The engineering team has also developed an extended network of trusted engineering subcontractors that assist in serving specific client projects as needed.

BLEST engineers generate revenue through services to third party clients, as well as for internal BioLargo projects such as the AEC and battery (revenues from internal projects are eliminated in the consolidation of our financial statements and are designed “intersegment revenue”). Third party contracts include ongoing work at U.S. Air Force bases for air quality control. Efforts to expand this work as well as with other clients are consistently ongoing.

Results of Operations

Our revenues increased 78% and 107% in the three and nine months ended September 30, 2023, as compared with the same periods in 2022. Revenues from the sale of products for the nine months ended September 30, 2023, were $7,392,000, a 192% increase over the same period of 2022, primarily due to sales of a pet odor product (under the brand name “Pooph”) to our consumer-packaged goods partners at Ikigai Marketing Works, which comprised 74% and 76% of our company-wide revenues in the three and nine months ended September 30, 2023.

ONM Environmental

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, including the Pooph branded pet odor product.

Revenue (ONM Environmental)

ONM Environmental’s revenues increased 110% (to $2,513,000) and 195% (to $7,374,000) in the three and nine months ended September 30, 2023, compared with the same periods in the prior year. The increase in revenues was almost entirely due to an increase in the volume of sales of private label odor-control products, specifically the Pooph branded pet-odor product, sold to Ikigai, which comprised 81% of ONM Environmental’s total revenues for the three and nine months ended September 30, 2023. As Ikigai shifts its business model from primarily direct-to-consumer (primarily through their website and Amazon), to retailers like Walmart, we expect both continued overall growth in sales and fluctuations in the amount of product ordered from quarter-to-quarter. Although Ikigai management has expressed confidence in the continued increase of the number of retail stores nationwide carrying the Pooph product, we have no control over those efforts and cannot predict their ultimate success. Any downturn in purchases of the Pooph product from Ikigai will affect our results of operations, as it did so for the second quarter of 2023. (See also our risk factor titled “A significant portion of our revenue is concentrated with one customer” set forth in our Form 10-Q filed May 16, 2023.)

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 for the three and nine months ended September 30, 2023, were 47%, an increase of 5% and 2%, compared to the same periods in 2022. The fluctuation in cost of goods is due an increase raw material costs.

Selling, General and Administrative Expense (ONM Environmental)

ONM Environmental’s selling, general and administrative expenses increased by 19% and 14% during the three and nine months ended September 30, 2023, as compared with the same period in 2022. These expenses increased due to an increase of sales and support staff. If revenues continue to increase, we expect a need to increase support staff.

Operating Income (ONM Environmental)

ONM Environmental generated operating income of $969,000 and $2,786,000 in the three and nine months ended September 30, 2023, compared to operating income of $400,000 and $418,000 for the three and nine months ended September 30, 2022. The generation of operating income for the three and nine months ended September 30, 2023, was entirely dependent on sale of Pooph branded products to Ikigai.

BLEST (engineering division)

Revenue (BLEST)

Our engineering segment's (BLEST's) revenues decreased 49% (to $145,000) and 63% (to $466,000), net of intersegment revenue, in the three and nine months ended September 30, 2023. Revenues decreased due to an increase in activities supporting internal BioLargo projects such as the AEC PFAS treatment system and the buildout of manufacturing facilities for the battery prototype. These services are billed internally, are considered intersegment revenue, are eliminated in the consolidation of our financial statements, and have prevent BLEST from scaling up operations serving third party clients. In the three and nine months ended September 30, 2023, intersegment revenue for BLEST totaled $698,000 and $1,276,000 and for the three and nine months ended September 30, 2022, intersegment revenue for BLEST totaled $118,000 and $359,000. The decrease in BLEST’s revenue net of intersegment revenue is due to a decrease in the number of client contracts, and its focus on supporting internal projects.

Cost of Services Sold (BLEST)

BLEST’s cost of services includes employee labor as well as subcontracted costs. In the three and nine months ended September 30, 2023, cost of services were 46% and 58% of its revenues, versus 84% and 61% in the same period in 2022. These fluctuations are due to our ability to estimate the costs to perform fixed-fee service contracts. In 2023, BLEST has been able to perform per the estimates and there were no unforeseen costs that increase the costs of services.

Selling, General and Administrative Expense (BLEST)

BLEST’s SG&A expenses were $213,000 and $612,000, in the three and nine months ended September 30, 2023, compared to $123,000 and $363,000, in the three and nine months ended September 30, 2022, primarily due to increased rent, insurance and an additional employee.

Operating Loss (BLEST)

BLEST incurred an operating loss of $568,000 and $1,388,000, in the three and nine months ended September 30, 2023, compared to an operating loss of $179,000 and $158,000 in the three and nine months ended September 30, 2022. The increase in operating loss was due to lower third party-revenues, and an increase in intercompany research and development activities for both the battery and AEC projects.

Because the subsidiary had an operating 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 increased in 2023. 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 and other uncertainties in the market, and our limited resources, is difficult.

Clyra Medical

In the three and nine months ended September 30, 2023, Clyra Medical generated $14,000 and $20,000 in revenues, had $441,000 and $1,270,000 in total costs and expenses which included $68,000 and $262,000 in research and development expenses, and an operating loss of $427,000 and $1,250,000, respectively. In the same periods in 2022, it generated $17,000 and $34,000 in revenue, had $257,000 and $770,000 in total costs and expenses, including $31,000 and $73,000 in research and development expenses, and an operating loss of $240,000 and $736,000. We expect these losses to continue until Clyra can increase its sales of its Bioclynse wound irrigation solution.

BETI

Formed to develop and commercialize a sodium-sulfur battery technology, BETI raised $25,000 and $905,000 in investment capital in the three and nine months ended September 30, 2023, respectively, did not generate revenue, and incurred $559,000 and $943,000 in expenses, respectively, primarily related to the development of battery prototypes.

Selling, General and Administrative Expense – consolidated

Our Selling, General and Administrative expense (“SG&A”) include both cash (for example, salaries to employees) and non-cash expenses (for example, stock option compensation expense). Our consolidated SG&A increased in the aggregate by 60% and 20% in the three and nine months ended September 30, 2023, to $2,278,000 and $5,794,000, respectively. The largest components of our SG&A expenses included (in thousands):

In the three and nine months ended September 30, 2023, our non-cash expenses from stock for service, stock options and warrant expense total $762,000 and $1,621,000, respectively, and $434,000 and $1,640,000 in the same periods in the prior year. Office expense included $138,000 and $445,000 of insurance expenses in the three and nine months ended September 30, 2023, and $117,000 and $360,000 in the same periods in the prior year. Insurance expenses increased due to market conditions unrelated to the Company’s activities.

In general, salaries and payroll related expenses are affected by the issuance of stock options and the valuation of the common stock at the time. While this declined in the nine months ended September 30, 2023 versus 2022, due to fewer issuances of stock options, it increased in the three months ended September 30, 2023 versus 2022, due to increases in issuances and higher employment costs.

The Company has had increased professional fees and consulting costs due to the work on the salt battery in BETI and to additional capital raises, requiring more legal and investor relations work.

Research and Development

In the three and nine months ended September 30, 2023, we spent $694,000 and $1,846,000, respectively, in the research and development of our technologies and products. This was an increase of 23% and 81% compared to the three and nine months ended September 30, 2022. The increase is primarily due to work related to (i) the battery project, and (ii) the AEC. In future periods, we expect research and development work to decrease related to both projects, especially the AEC.

Interest expense

Our interest expense for the three and nine months ended September 30, 2023, was $12,000 and $72,000, respectively, compared with $14,000 and $42,000, respectively, in the same periods in 2022. Of our total interest expense in 2023, $39,000 was paid in cash, and the remainder was 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 nine months ended September 30, 2023, non-cash interest expense totaled $33,000.

Other Income and Expense

During the three months ended September 30, 2023, our subsidiary, Clyra, received $41,000 of Employer Retention Tax Credits. There was no grant income received in the three months ended September 30, 2023. For the nine months ended September 30, 2023, grant income totaled $32,000, compared to $51,000 for the same period prior year. Grant income is primarily generated 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. Grant funds paid directly to third parties are not included as income in our financial statements.

During the three and nine months ended September 30, 2022, we recorded $174,000 in income related to the forgiveness of Paycheck Protection Act loan received by ONM Environmental.

Net Loss

Net loss for the three and nine months ended September 30, 2023, was $1,508,000 and $3,628,000, a loss of $0.01 per share, compared to a net loss for the three and nine months ended September 30, 2022, of $847,000 and $3,724,000, a loss of $0.01 per share, an increase of 78% and decrease of 3%, respectively. Our net loss for the three months ended September 30, 2023, increased because of the decrease in engineering service revenue and an increase in total costs and expenses, offset by the increase in product revenue. Our net loss decreased during the nine months ended September 30, 2023, primarily due to the increase of product revenue, offset by a decrease of engineering service revenue and increase in total costs and expenses.

The net income (loss) per business segment is as follows (in thousands):

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 nine months ended September 30, 2023, we generated revenues of $7,860,000 through our business segments (see Note 11), had a net loss of $3,628,000, used $2,363,000 cash in operations, and at September 30, 2023, we had working capital of $2,951,000, and current assets of $4,691,000.

During the nine months ended September 30, 2023, we (i) sold $502,000 of our common stock to Lincoln Park Capital Fund, LLC (“Lincoln Park”) (see Note 3), (ii) sold $995,000 of our common stock and warrants to accredited investors (see Notes 3 and 6), (iii) sold $905,000 of Clyra Medical Series A Preferred Stock (see Note 8), and (iv) sold $1,575,000 of BETI common stock (see Note 10). Subsequent to September 30, 2023, we continued these financing activities (see Note 13). As of September 30, 2023, our cash and cash equivalents totaled $3,042,000. Our total liabilities included a $71,000 vehicle loan, $140,000 due in U.S. Small Business Administration (SBA) loans issued pursuant to the Paycheck Protection Program (see Note 4), $148,000 due to the SBA issued pursuant to the Economic Injury Disaster program (see Note 4), and $234,000 owed by Clyra Medical due in 2024 (see Note 8). We have been, and anticipate that we will continue to be, limited in terms of our capital resources, and expect to continue to need further investment capital to fund operations. Such activities have continued subsequent to September 30, 2023.

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, or attain a reasonable threshold of operating efficiencies and achieve profitable operations. 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.

Our significant accounting policies and methods used in the preparation of the Company’s consolidated financial statements are described in (i) in Part I, Item 1 of this Form 10-Q, Note 2, “Summary of Significant Accounting Policies” and (ii) in the Form 10-K for the year ended December 31, 2022, filed with the SEC on March 31, 2023, in the Notes to Consolidated Financial Statements in Part II, Item 8, and “Critical Accounting Policies and Estimates” in Part II, Item 7. There have been no material changes to the Company’s critical accounting policies and estimates since the filing of its Form 10-K.

We conducted an evaluation, under the supervision and with the participation of management, including our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended – the “Exchange Act”) as of the end of the period covered by this Report. There were no changes in our internal control over financial reporting during the quarter ended September 30, 2023, which were identified in connection with management’s evaluation required by paragraph (d) of Rules 13a-15 and 15d-15 under the Exchange Act, that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

Our procedures have been designed to ensure that the information relating to our company, including our consolidated subsidiaries, required to be disclosed in our SEC reports is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow for timely decisions regarding required disclosure. However, our Company is continuing to grow and evolve, as our product and services sales continues to grow, and as we diversify our clients to include municipalities, increasing strain on our accounting systems. These activities put stress on our overall controls and procedures. As our operations do not yet generate enough cash to fund operations, and we rely on financing activities to maintain our level of operations and fund our anticipated growth, we do not yet have the ability to implement the more sophisticated control systems used by larger companies. Although we have made some improvements, our chief executive officer and chief financial officer have concluded that, as of the evaluation date, our disclosure controls and procedures were not effective, due to the material weakness identified below.

It should be noted that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Our internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements.

Under the supervision and with the participation of our management, including our chief executive officer and the chief financial officer, we have established internal control procedures in accordance with the guidelines established in the 2013 Framework —Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Management evaluated the effectiveness of our internal controls, and concluded that due to our limited financial and personnel resources, the fact that we operate our business in three distinct locations in the U.S. and Canada, and the lack of sophisticated reporting systems, we continue to have a material weakness in our internal controls with respect to the closing our financial statements. Until the Company has the financial resources to implement more robust automated systems, or to hire additional dedicated accounting personnel, we expect this material weakness to continue.

Our management, including our chief executive officer and chief financial officer, does not expect that our disclosure controls or our internal control over financial reporting, or any system we design or implement in the future, will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

PART II

OTHER INFORMATION