Blue Biofuels, Inc.: Form 10-Q for the period ended Jun 30, 2018

The following discussion should be read in conjunction with our unaudited financial statements and the notes thereto.

Forward-Looking Statements

This quarterly report contains forward-looking statements and information relating to the Company that are based on the beliefs of its management as well as assumptions made by, and information currently available to, its management. When used in this report, the words “believe,” “anticipate,” “expect,” “estimate,” “intend”, “plan” and similar expressions, as they relate to the Company or its management, are intended to identify forward-looking statements. These statements reflect management’s current view of the Company concerning future events and are subject to certain risks, uncertainties and assumptions, including among many others: a general economic downturn; a downturn in the securities markets; federal or state laws or regulations having an adverse effect on proposed transactions that the Company desires to effect; Securities and Exchange Commission regulations which affect trading in the securities of “penny stocks”; and other risks and uncertainties. Should any of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described in this report as anticipated, estimated or expected. The accompanying information contained in this registration statement, including, without limitation, the information set forth under the heading “Management’s Discussion and Analysis and Plan of Operation — Risk Factors” identifies important additional factors that could materially adversely affect actual results and performance. You are urged to carefully consider these factors. All forward-looking statements attributable to the Company are expressly qualified in their entirety by the foregoing cautionary statement.

Business Overview

Alliance Bioenergy Plus, Inc (the “Company”) is a technology company focused on emerging technologies in the renewable energy, biofuels and new technologies sectors. In December 2013, a wholly owned subsidiary of the Company, AMG Renewables, LLC (“AMG Renewables”), acquired the controlling interest (51%) in AMG Energy Group, LLC (“AMG Energy”) and the remaining 49% was then acquired in 2016. AMG Energy Group owns a 50% interest of Carbolosic, LLC (“Carbolosic”), which holds an exclusive worldwide license to the University of Central Florida’s patented technology (U.S. Patent 8,062,428) known as “CTS™.” The CTS technology is a mechanical/chemical, dry process for converting cellulose material into sugar for use in the biofuels industry as well as other fine chemical manufacturing. The Company’s goal in acquiring the interest in AMG Energy is to develop the CTS technology to a commercial scale and then seek to license the technology to prospective licensees.

Plan of Operation

The Company is focused on the development and commercialization of the licensed technology it controls through its affiliate Carbolosic, LLC. Through its wholly owned subsidiary, AMG Energy, the Company owns Ek Laboratories, Inc. and a 50% interest in Carbolosic (which includes certain licensing rights in North America and Africa). The Company has a strategy that includes mergers and acquisitions of existing businesses in the renewable energy and sustainable products industries as well as sublicensing its patented technologies that it controls through a master license with the University of Central Florida under affiliate Carbolosic and start-up activities which are focused on development of an increasing revenue stream, secure market share and enhancement of shareholder value.

AMG ENERGY GROUP, LLC

AMG Energy, a wholly owned subsidiary of the Company, was created for the purpose of holding, managing, and developing the Company’s renewable energy technology enterprises. These interests comprise ownership of: (i) 100% of EK Laboratories, Inc., a Florida corporation (“EK”) (formerly known as Central Florida Institute of Science and Technology, Inc.); and (ii) a 50% interest in Carbolosic, LLC, a Delaware limited liability company (“Carbolosic”), which holds an exclusive worldwide license to the University of Central Florida’s patented technology (U.S. Patent 8,062,428) known as “CTS™.” The CTS technology is a mechanical/chemical, dry process for converting cellulose material into sugar for use in the biofuels industry as well as other fine chemical manufacturing. The Company’s goal is to develop this CTS technology to a commercial scale and then seek to acquire existing bioenergy and ethanol plants to install the CTS technology as well as license the technology to prospective licensees. EK was formed to serve as a pilot plant and research facility to further develop the CTS process, its uses, and develop new technologies.

ALLIANCE BIO-PRODUCTS, INC.

Alliance Bio-Products, a wholly owned subsidiary of the Company, was created for the purpose of acquiring and operating a plant for the installation of the Company’s patented CTS process.

The Company believes that its management and consultants have significant experience in the bio-fuels, renewable energy and chemical manufacturing industries. As of this date, the Company has not generated any revenues from its core business.

Capital Formation

In January 2018, the Company commenced a new offering of units valued at $0.03 per share. Each unit consists of one share of common stock. Through the date of filing, the Company has sold 22,706,666 units for aggregate proceeds of $681,200. The offering is ongoing.

From January 1, 2018 through the date of filing, the Company issued an aggregate of 60,000 shares of its common stock for services valued at $2,435.

From January 1, 2018 through the date of filing, the Company issued an aggregate of 110,000 warrants for services. Using a Black-Scholes asset-pricing model, these warrants were valued at $3,194. These warrant agreements have terms of five years with exercise prices of $0.25 per share.

From January 1, 2018 through the date of filing, the Company issued options to its independent directors to purchase an aggregate of 11,404,942 shares of common stock for a period of five years at exercise prices between $0.03 and $0.05, mostly at $0.05. Using a Black-Scholes asset-pricing model, these agreements were valued at $494,315. In addition, during this same period, 168,184 previously issued options issued to previous board members expired and 781,098 were cancelled.

From January 1, 2018, through the date of filing, the Company issued options to its managers and employees to purchase 11,200,000 shares of common stock for a period of five years at the exercise price of $0.05, of which 3,000,000 are unvested. Using a Black-Scholes asset-pricing mode, these options were valued at $474,081. Another 1,500,000 options vested that were previously issued. In addition, during this same period, 42,253,422 previously issued options to management and employees were cancelled, and 12,839,976 warrants were cancelled.

From January 1, 2018, through the date of filing, the Company issued 250,000 shares to Daniel de Liege in accord with his separation agreement.

From January 1, 2018 through the date of filing, principal and interest in the amount of $283,075 was converted into 20,046,649 shares of common stock. The company assesses the value of the beneficial conversion feature of its convertible debt by determining the intrinsic value of such conversion, under ASC 470, at the time of issuance. At the time of issuance of the convertible debt instruments set out above, the fair value of the stock was greater than the conversion price, and therefore a total value of $457,582 was attributed to the beneficial conversion features.

From January 1, 2018 through the date of filing, a combined aggregate 3,510,202 Class A and Class B and other warrants expired. Also, 168,184 options under the Employee & Director Stock Option Plan expired.

On August, 23,2018, The Company issued 150,000 shares to Charles Sills, a Director, in lieu of $5,100 of compensation.

Going Concern

The Company has incurred losses since inception, has a working capital deficiency, and may be unable to raise further equity. At June 30, 2018, the Company had a working capital deficit of $3,256,005 and had incurred accumulated losses of $38,225,783 of which approximately $25,222,460 is non-cash since its inception. The Company expects to incur significant additional losses in connection with its continued start-up activities. As a result, the report of the Company’s independent registered public accounting firm on the Company’s financial statements for the period ended December 31, 2017 contains an emphasis of matter paragraph regarding the Company’s ability to continue as a going concern based upon recurring operating losses and its need to obtain additional financing to sustain operations. The Company’s ability to continue as a going concern is dependent upon its ability to obtain the necessary financing to meet its obligations and repay its liabilities when they become due and to generate sufficient revenues from its operations to pay its operating expenses. Furthermore, these financial statements do not include any adjustments related to the recoverability and classifications of recorded asset amounts, or amounts and classifications of liabilities that might result from this uncertainty.

Through its private offerings, the Company raised $7,816,894 through the year ended December 31, 2017, and an additional $681,200 through the date of filing.

During this quarter the company has gone through a restructuring of its executive management. Effective June 1, 2018 the company entered into a separation agreement removing Daniel di Liege as its CEO. Ben Slager, the Company’s President, at the request of the Board of Directors, became the acting CEO upon the separation with Mr. di Liege. On July 9, 2018 the Board of directors ratified the decision for Mr. Slager to be officially appointed as the Company’s CEO.

Additionally, Dennis Lenaburg, the Company’s Controller was terminated with cause on June 15, 2018.

Results of Operations

Comparison of the three and six month periods ended June 30, 2018 to June 30, 2017

For the three months ended June 30, 2018, the Company’s general and administrative expenses decreased by approximately $595,925 to $384,393 from $980,318 in the three months ended June 30, 2017. This decrease is primarily the result of the decrease in payroll, bonus and professional fees.

During the six months ended June 30, 2018, the Company’s general and administrative expenses decreased by approximately $673,079 to $1,042,798 from $1,715,877 in the six months ended June 30, 2017. This decrease is primarily the result of a decline in payroll bonus expense.

Interest expense increased in the three months ended June 30, 2018 by approximately $28,370 to $168,171 from $139,801 during the three months ended June 30, 2017. See NOTE 6.

During the six months ended June 30, 2018, the Company’s interest expense increased by approximately $197,078 to $462,120 from $265,042. The increase was the result of the Increased debt. See NOTE 6.

For the three months ended June 30, 2018, the Company’s equity loss in its unconsolidated affiliate decreased $33,837 to $13,751 from $47,588 during the three months ended June 30, 2017. This is due to a reduction in payroll and professional fees.

During the six months ended June 30, 2018, the Company’s equity loss in its unconsolidated affiliate decreased by $63,585 to $33,104 from $96,689 during the six months ended June 30, 2017. This is due to a reduction in payroll and professional fees.

Research and development (R&D) expenses for the three months ended June 30, 2018 were $80,531 as opposed to $81,531 for the three months ended June 30, 2017. For the six months ended June 30, 2018, the Company expensed $164,601 compared with $160,153 expensed during the six months ended June 30, 2017.

Liquidity and Capital Resources

Liquidity

As of June 30, 2018, the Company had $3,398 in cash and total stockholders’ equity was $241,999. Total debt from continuing operations, including advances, accounts payable and other notes payable at June 30, 2018, together with interest payable thereon, was $4,161,890 an increase of $352,297 from $3,773,445 at December 31, 2017. This increase is attributable to the addition of approximately $631,556 in convertible debt.

During the six months ended June 30, 2018, the Company’s continuing operating activities used $655,255 in cash. This use can be attributed to payroll, professional and legal fees.

During the six months ended June 30, 2018 the Company’s investing activities used $121,252 in cash, which $122,266 was advanced to Carbolosic, LLC for payment of the minimum annual royalty and patent legal fees.

During the six months ended June 30, 2018, the Company generated $724,829 through its financing activities. This can primarily be attributed to the addition of an aggregate net amount of $575,629 in convertible debt and simultaneously raising $400,200 through its ongoing offerings.

Capital Resources

At this time, the Company has limited liquidity and capital resources. To continue funding its operations, the Company will need to generate revenue or obtain additional financing for current and future operations. As of the date of filing, the Company has raised $681,200, in addition to $7,816,894 raised through December 31, 2017 for a total capital raise of $8,398,894 through its private placement offerings. However, there is no guarantee that the company will be able to raise any additional capital on terms acceptable to the Company.

The inability to obtain this funding either in the near term and/or longer term will materially affect the ability of the Company to implement its business plan of operations and jeopardize the viability of the Company. In that case, the Company may need to reevaluate and revise its operations.

Critical Accounting Policies

Off-Balance Sheet Arrangements

The Company does not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on its financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

Seasonality

The Company’s operating results are not affected by seasonality.

Inflation

The Company’s business and operating results are not affected in any material way by inflation.

Contractual Obligations

As a “smaller reporting company” as defined by Item 10 of Regulation S-K, the Company is not required to provide this information.

As a “smaller reporting company” as defined by Item 10 of Regulation S-K, the Company is not required to provide information required by this Item.

(a) Disclosure Controls and Procedures

The Company is required to maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in its reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its chief executive officer (also its principal executive officer) and its chief financial officer (also its principal financial and accounting officer) to allow for timely decisions regarding required disclosure.

Pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934 (“Exchange Act”), the Company’s management, including the Company’s President (“President”), the Company’s principal executive officer (“CEO”) and Chief Financial Officer (“CFO”) (the Company’s principal financial and accounting officer), have evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined under Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation the Company’s CEO, President and CFO concluded that the Company’s disclosure controls and procedures were not effective as of June 30, 2018 to a reasonable assurance level to enable the Company to record, process, summarize and report information required under the Securities and Exchange Commission’s rules in a timely fashion. This conclusion resulted from the lack of separation of duties within the Company.

(b) Management’s Report on Internal Control over Financial Reporting

The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Securities Exchange Act of 1934 as a process designed by, or under the supervision of, the company’s principal executive and principal financial officers and effected by the company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America and includes those policies and procedures that:

• Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company;
• Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and
• Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Because of the inherent limitations of internal control, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.

As of June 30, 2018, management assessed the effectiveness of the Company’s internal control over financial reporting using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated Framework (2013) and SEC guidance on conducting such assessments. Based on that evaluation, the Company concluded that, during the period covered by this report, such internal controls and procedures were not effective to detect the inappropriate application of US GAAP rules as more fully described below. This was due to deficiencies that existed in the design or operation of its internal controls over financial reporting that adversely affected its internal controls and that may be considered to be material weaknesses.

The matters involving internal controls and procedures that the Company’s management considered to be material weaknesses under the standards of the Public Company Accounting Oversight Board were: (i) the lack of a functioning audit committee; (ii) insufficient written policies and procedures for accounting and financial reporting with respect to the requirements and application of US GAAP and SEC disclosure requirements; (iii) a lack of expertise with US GAAP and SEC rules and regulations for review of critical accounting areas and disclosures and material non-standard transactions; and (iv) lack of effective oversight during the financial close process resulting in ineffective oversight in the establishment and monitoring of required internal controls and procedures. The aforementioned material weaknesses were identified by the Company’s management in connection with the review of its financial statements for the three months ended June 30, 2018.

Management believes that the material weakness set forth above did not have an effect on its financial results. However, management believes that the lack of a functioning audit committee coupled with not having individuals on staff or retainer with a thorough knowledge of US GAAP and SEC rules and regulations and lack of effective oversight on the financial close process results in ineffective oversight in the establishment and monitoring of required internal controls and procedures, which could result in a material misstatement in its financial statements in future periods.

This quarterly report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by its registered public accounting firm pursuant to temporary rules of the SEC that permit the Company to provide only management’s report in this quarterly report.

Remediation Plan

Management is sensitive to the issues presented. As such, the Board of Directors created an Audit Committee of independent board members on May 11, 2018. The Audit Committee will provide better oversight and governance while assessing the Company’s internal controls over financial reporting. Additionally, the Company’s Controller, Dennis Lenaburg was terminated for cause on June 15, 2018 and the Company has secured an independent consultant to address the deficiencies noted above.

(c) Reclassification of Prior Period Financial Statements

There have been not reclassifications of items previously reported.

(d) Changes in Internal Control over Financial Reporting

There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) under the Exchange Act) during the fiscal period to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

As a “smaller reporting company” as defined by Item 10 of Regulation S-K, the Company is not required to provide information required by this Item.