Blue Biofuels, Inc.: Form 10-Q/A for the period ended Jun 30, 2021

The following discussion should be read in conjunction with the Company’s audited 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

Blue Biofuels, Inc (the “Company”) is a technology company focused on emerging technologies in the renewable energy, biofuels, and bioplastics technologies sectors.

In early 2018, our chief executive officer Ben Slager invented a new technology system we call Cellulose-to-Sugar or CTS 2.0, and the Company filed a patent application for this technology. Mr. Slager has since further developed the system with the laboratory personnel. The CTS 2.0 process is a continuous mechanical/chemical dry process for converting cellulose material into sugar and lignin, as compared to the CTS 1.0 which is a batch process. The CTS 2.0 creates molecular contact between two reactive solid components instead of a more conventional reaction which uses liquid or gas components. The reactants are (1) the cellulose, which is broken down into its components being sugars and lignin; (2) a catalyst, which is cheap and abundantly available, and recycled in the process. The CTS 2.0 machine allows for exact process control to ensure that all the material passing through it does so on the optimum reaction parameters through which optimal efficiency is achieved. The patent on the CTS 2.0 was awarded in 2021 (US10994255). In addition to this patent the Company has filed three additional patents that are currently pending. The CTS 2.0 technology and related patents represent the results of our continued development of CTS 2.0 towards commercialization.

CTS differs from other processes that seek to convert cellulose into sugar. Other processes use enzymes, or expensive chemicals like strong acids or bases. Some use high temperature or high pressure steam. CTS 2.0 can convert any cellulosic material – including grasses, wood, paper, farm waste, yard waste, forestry products, energy crops like hemp or king grass, and the cellulosic portion of municipal solid waste – into sugars and subsequently into biofuels and bioplastics without the use of enzymes or liquid acids. CTS 2.0 has a near zero carbon footprint, and recycles the water and catalyst.

At commercial scale, management expects to be able to produce ethanol at a lower cost than any competitor due to the fact that the CTS 2.0 process is uncomplicated and efficient, and has high value by-products. We believe an additional significant difference between CTS 2.0 and corn ethanol is the wide range of feedstocks that CTS 2.0 can process compared to corn. The CTS feedstocks are not food and have much lower costs than corn. In addition, while in corn ethanol only the corncobs are used, the CTS 2.0 uses the whole plant or its waste products. In the case of king grass vs corn, king grass grows so prolifically that processing king grass with the CTS 2.0 could potentially yield 3000 gallons per acre per year whereas corn only yields 600 gallons per acre per year.

The Company has proceeded with engineering and development of its technology towards commercialization. The Company built a second generation prototype in 2018, and a third generation prototype in 2019. The Company completed its 4th generation CTS 2.0 prototype system in July 2020, and upgraded it in 2021. The Company is currently testing the 4th generation CTS 2.0 to optimize various parameters towards the engineering and scale up of a commercial size reactor. The Company expects to have its 5th generation CTS prototype, along with auxiliary equipment, completed by the beginning of 2022. The Company expects that the 5th generation CTS 2.0 prototype will have around 10 times the capacity of the 4th generation system.

The CTS system converts plant-based feedstock into two product streams, cellulose and lignin, each of which can be converted into multiple products. 1. Cellulose is broken down into sugars and nanocellulose. Nanocellulose has various uses in various industries including the pharmaceutical industry. Sugar leads to specialty chemicals and biofuels: ethanol & jet fuel. 2. Lignin can be used in ion exchange resins, specialty chemicals, or to create bioplastics. It can also be burned as a renewable fuel.

Plan of Operation

The Company’s strategy is to diversify its product portfolio to include a number of product lines. These potentially include (1) biofuels – such as ethanol, or converting ethanol into higher biofuels like jet-fuel and the like; (The Company has a license agreement in place with Vertimass, LLC, on a non-exclusive basis, to use the patented Verimass Process to convert ethanol into jet-fuel, bio-diesel, bio gasoline and further green chemical components) (2) selling sulfur-free lignin to ion exchange resin producers; (3) making bioplastics from lignin; (4) making nanocellulose. We believe these, and other markets, could potentially be highly profitable co-products.

Our goal is to develop our CTS 2.0 technology to a commercial scale and then seek to either enter into a joint venture or acquire existing corn ethanol plants to install the CTS 2.0 technology. The Company is also looking into converting ethanol to jet fuel. To minimize dilution to shareholders, we will seek project-based financing to build (or acquire and retrofit) or joint venture with existing ethanol producers to produce cellulosic ethanol and lignin/bioplastics and other specialty chemicals from our CTS 2.0 system. We believe retrofitting existing plants with the CTS 2.0 technology may achieve more rapid commercialization than building new plants. After its first plant is profitable, the Company intends to grow with additional plants in the United States and explore international growth by either licensing the technology or forming joint ventures with foreign domestic partners to build plants ourselves.

The Energy Policy Act of 2005, which included the Renewable Fuel Standard Program enforced by the US Environmental Protection Agency, mandates a certain amount of renewable fuel be blended into the transportation fuel used by all vehicles in the country. This Program provides monetary incentives to companies that produce renewable transportation fuel, and establishes Renewable Identification Numbers (RINs) or credits for each gallon of renewable transportation fuel produced in the United States, and breaks down those fuels into different D-codes depending on the source of the renewable fuel. D3 is the code for renewable ethanol that comes from cellulosic materials. (D6 is for corn ethanol). The value of the D3 RIN fluctuates, but as of this filing, it is approximately $3.13 per gallon of ethanol. To profit from these incentives, the Company plans to apply for these D3 RIN credits as it brings its first plant into commercial operation.

We believe that our CTS 2.0 process can potentially produce ethanol profitably at the market price, particularly if we include anticipated potential revenue streams from by-products, and in conjunction with the D3 RIN that we expect to potentially receive for each gallon of ethanol.

The Company believes that its management and consultants have significant experience in the development of technologies from concept to commercialization. As of this date, the Company has generated $194,319 in revenue, however it has not generated any revenues from its core business.

Capital Formation

On January 5, 2021, the Company closed a financing at 7.5 cents per share having sold 2,143,332 shares and raised $160,750 from the beginning of the year until January 5th.

In January 2021, the company commenced a new offering of shares of its common stock valued at $0.25 per share. Through the date of filing, the Company has sold 7,160,000 shares for aggregate proceeds of $1,790,000.

From January 1, 2021, through the date of filing, the Company issued an aggregate of 223,000 shares of its common stock for services valued at $46,930.

From January 1, 2021, through the date of filing, the Company issued an aggregate of 1,166,667 warrants for services. Using a Black-Scholes asset-pricing model, these warrants were valued at $72,090. They have a 6-month term with exercise prices of 15 cents per share.

From January 1, 2021, through the date of filing, the Company issued options to its managers and employees to purchase 20,730,000 shares of its common stock for a period between five and ten years at the exercise price of 15 to 30 cents per share. Using a Black-Scholes asset-pricing model, these agreements were valued at $2,600,409. Only 210,000 of these options have vested, with a valuation of $12,658.

From January 1, 2021, through the date of filing, 350,000 previously issued options were exercised for proceeds of $12,900. In addition, 250,000 options were exercised on a cashless basis for 177,778 shares.

From January 1, 2021, through the date of filing, warrants were exercised, for the purchase of 13,455,009 shares of common stock, at prices ranging from $0.005 to $0.25 per share for total proceeds of $1,302,817.

From January 1, 2021, through the date of filing, $279,000 of debt issued during Chapter 11 was exchange for 7,080,000 shares of stock.

Going Concern

The Company has incurred losses since inception, has a working capital deficiency, and may be unable to raise further capital. At June 30, 2021, the Company had a working capital surplus of $1,465,475 and had incurred accumulated losses of $47,781,212 since its inception. The Company expects to incur significant additional losses in connection with its continued start-up activities. As a result, there is substantial doubt about 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.

Results of Operations

Comparison of the three and six month period ended June 30, 2021(unaudited) to June 30, 2020

For the three and six months ended June 30, 2021, the Company recognized $0 in revenue as opposed to $0 in 2020.

For the three months ended June 30, 2021, the Company’s general and administrative expenses decreased by $384,734 to $293,372 from $678,106 in 2020. This decrease is primarily the result of a $414,850 decrease in equity-based compensation and a $24,600 increase in accounting fees, partially offset by an increase in legal fees of $37,902.

For the six months ended June 30, 2021, the Company’s general and administrative expenses decreased by $278,491 to $599,649 from $878,140 in 2020. This decrease is primarily the result of a $421,281 decrease in equity-based compensation and a $31,900 decrease in accounting fees, partially offset by an increase in legal fees of $42,942 and an increase in consulting fees of $46,268 related to financings.

Interest expense decreased in the quarter ended June 30, 2021 by $27,329 to $8,708 from $36,037 in 2020. The decrease in 2021 was primarily the result of the Company’s decision in 2021 of having paid most of its back pay due, which carries an interest rate of 10% per annum.

Interest expense decreased in the six months ended June 30, 2021 by $125,785 to $17,457 from $143,242 in 2020. The decrease in 2021 was primarily the result of the Company’s decision in 2020 to pay interest on back pay due, and in 2021 of having paid most of that back pay off.

For the three and six months ended June 30, 2021 the Company recorded non-cash impairments of assets of $33,484, as compared to zero in 2020. This was the result of disposing of laboratory assets no longer in use.

Research and development (R&D) costs for the quarter ended June 30, 2021 were $249,786, a decrease of $242,331 from $492,117 in 2020. The decrease in R&D expenses is primarily the result of a reduction of $414,850 in equity-based compensation offset by an increase in payroll of $115,950 from the hiring of additional personnel to accelerate the process of commercializing the CTS 2.0 system.

Research and development (R&D) costs for the six months ended June 30, 2021 were $514,860, a decrease of $67,873 from $582,733 in 2020. The decrease in R&D expenses is primarily the result of a reduction in $414,850 in equity based compensation offset by an increase in payroll of $220,142.

Liquidity and Capital Resources

Liquidity

As of June 30, 2021, the Company had $1,863,097 in cash, and total stockholders’ equity on June 30, 2021, was negative $758,738. As of December 31, 2020, the Company had $286,579 in cash and total stockholders’ equity at December 31, 2020 was negative $3,336,764. Total debt, including advances, accounts payable and other notes payable at June 30, 2021, together with interest payable thereon and contingent liabilities, was $3,293,541 a decrease of $935,725 from December 31, 2020, where it stood at $4,229,266. This decrease is attributable to the conversion of convertible notes, the forgiveness of the Paycheck Protection Program SBA loan, and the repayment of the majority of deferred wages. $1,820,630 of the remaining debt was renegotiated to be payable out of future revenue and $917,502 out of future profits and otherwise does not come due.

During the six months ended June 30, 2021, the Company’s operating activities decreased by $313,064 to $1,147,809 from $1,460,873. This decrease can primarily be attributed to a decrease in equity based compensation of $836,131 offset by an increase salaries and bonuses of $297,811 and an increase in professional fees of $67,843.

During the six months ended June 30, 2021, the Company’s investing activities used $129,177 in cash. This can be primarily attributed to capitalizing $14,504 in patent costs and $114,673 used to purchase machinery and equipment. During the six months ended June 30, 2020, the Company’s investing activities used $135,818. This is primarily due to the purchase of equipment of $134,718.

During the six months ended June 30, 2021, the Company generated an aggregate of $3,266,467 through its financing activities, which is an increase of $2,652,757 from $613,710 during the six months ended June 30, 2020. This increase from the prior year can primarily be attributed to $1,950,750 in the sale of common stock through the Company’s private offerings in 2021, and $1,315,717 in proceeds from the exercise of warrants and options.

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. The Company anticipates needing around $10 million to optimize and scale up its CTS 2.0 system to be commercially ready. The Company anticipates reaching this stage around 18 months after financing. There is no guarantee that we will achieve this additional funding.

As of the date of filing, the Company has raised $3,266,467 in 2021, through the issuance of common stock and the exercise of warrants and options, in addition to $10,998,234 through the end of 2020, for a total of $14,254,701, in addition to capital raised through debt or convertible notes. 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.

Equity

As of June 30, 2021, shareholders’ equity was negative $758,738.

There were 272,311,065 shares of common stock issued and outstanding as of June 30, 2021.

There were no preferred shares outstanding.

The Company has paid no dividends.

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.

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). Disclosure controls and procedures refer to controls and other procedures designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.

As required by Rule 13a-15(e) of the Exchange Act, our management has carried out an evaluation, with the participation and under the supervision of our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as of the end of the period covered by this report. Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were not effective as of June 30, 2021 to a reasonable assurance level because of the material weaknesses described below.

Management’s Annual Report on Internal Controls over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)). The Company’s internal control over financial reporting is a process designed 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. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, 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. Under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, the Company conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting as of June 30, 2021 using the criteria established in “Internal Control - Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).

A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. In its assessment of the effectiveness of internal control over financial reporting as of June 30, 2021, the Company determined that there were control deficiencies that constituted material weaknesses, as described below.

1. We have inadequate cash controls. Although we have separated cash handling and accounting functions, we do not currently require dual signature on the Company’s bank accounts.

2. The Company has insufficient written policies and procedures for accounting and financial reporting with respect to the requirements and application of US GAAP and SEC disclosure requirements.

3. Although the Company retains copies of all financial data and material agreements and backs them up in the cloud, the rest of the Company’s material agreements may not be. In the event of theft, misplacement, or loss due to fire or other unmitigated factors, it may not be possible for the Company to retain all of its material financial data and agreements.

Accordingly, the Company concluded that these control deficiencies resulted in a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis by the company’s internal controls.

As a result of the material weaknesses described above, management has concluded that the Company did not maintain effective internal control over financial reporting as of June 30, 2021, based on criteria established in Internal Control—Integrated Framework issued by COSO.

We intend to address the material weaknesses discussed above as soon as practicable but we can give no assurance that we will be able to do so. Designing and implementing an effective disclosure controls and procedures is a continuous effort that requires us to anticipate and react to changes in our business and the economic and regulatory environments and to devote significant resources to maintain a financial reporting system that adequately satisfies our reporting obligations. The remedial measures that we have taken and plan to take may not fully address the material weaknesses that we have identified, and material weaknesses in our disclosure controls and procedures may be identified in the future. Should we discover such conditions, we intend to remediate them as soon as practicable. We are committed to taking appropriate steps for remediation, as needed.

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. Also, 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.

Changes in Internal Control over Financial Reporting

There has been no change in our internal control over financial reporting identified in connection with our evaluation we conducted of the effectiveness of our internal control over financial reporting as of December 31, 2020, that occurred during our fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

This annual 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 the Company’s registered public accounting firm pursuant to temporary rules of the SEC that permit the Company to provide only management’s report in this annual report.

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.