Blue Biofuels, Inc.: Form 10-Q for the period ended Mar 31, 2022

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, the Company’s Chief Executive Officer (“CEO”) 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. The patent on the CTS 2.0 was awarded in 2021 in the United States (US10994255) and also in El Salvador. The Company also filed an application for this patent in other major jurisdictions of the world including the European Patent Organization, Australia, Brazil, China, Japan, the African Regional Intellectual Property Organization, and the Russian Federation. The patent applications are currently pending in all of these international jurisdictions. The Company has filed six more patents in the United States, all of which are currently pending. These patents pertain to the CTS process, the “fingerprint” of our sugars coming from the process, and the lignin and nanocellulose coming from the process.

Mr. Slager has since further developed the system with 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 was a batch mechanical/chemical dry process previously used by our Company. The CTS 2.0 creates molecular contact between two reactive solid components instead of a more conventional reaction where the reaction takes place between two liquid or gas components in a batch process. 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 in the market from regular suppliers, and separated from reactor components and reused. The CTS 2.0 mechanical/chemical process 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.

CTS 2.0 differs from other commercial processes that are used to convert cellulose into sugar. Other processes use expensive enzymes, or expensive and harmful 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 expensive enzymes or harmful liquid acids or bases. CTS 2.0 has a near zero carbon footprint in that the amount of added atmospheric carbon created by burning the biofuels produced by CTS 2.0 is reabsorbed by the plant-based seed stock used in the CTS 2.0 system, and recycles the water and catalyst.

At a commercial scale, our management expects to be able to produce ethanol more profitably per gallon than existing commercial corn or cellulosic ethanol producers due to the fact that the CTS 2.0 process is uncomplicated and efficient, and is expected to have high value by-products and a highly valued D3 RIN that the Company expects to potentially receive for each gallon of ethanol. We believe a 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 2.0 feedstocks are not food and have much lower costs than corn. In addition, while in corn ethanol only the corn is used, the CTS 2.0 uses the whole plant or its waste products.

The Company has built several prototypes of the CTS 2.0 system to solidify and further develop the process. The Company decided to complete all the parameter optimizations possible with its 4th generation system before scaling up to a 5th generation system because the parameter optimizations lead to design improvements that have been done more cost effectively at that scale. The Company finalized its 4th generation testing with great success as it was able to generate a 99%+ conversion of the cellulosic material into soluble sugars suitable for further processing into cellulosic ethanol. The Company has begun to develop its 5th generation system and anticipates having it completed in the summer of 2022.

The goal of the 5th generation system is to prove larger volume production, and to be an intermediate step to the final commercial-scale system. The Company expects that the 5th generation system will be of sufficient size and handle sufficient capacity of feedstock to produce approximately one ton per day of the combination of sugar and lignin, which the Company believes will be sufficient to prove the commercial viability of the CTS 2.0 technology. Due to its mechanical nature and modularity, we anticipate that one plant would have multiple modular CTS systems. The Company expects to have a CTS 2.0 modular system ready for commercial production in 12-18 months.

The CTS 2.0 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. Sugar can be used to make specialty chemicals and/or biofuels such as ethanol and sustainable aviation fuel; and (2) Lignin can potentially 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 sustainable aviation fuel and the like; (2) selling sulfur-free lignin to ion exchange resin producers; (3) making specialty chemicals and/or bioplastics from lignin; and, (4) making nanocellulose. We believe these, and other markets, could potentially provide for 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 sustainable aviation 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 its patented 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 ethanol industry is highly competitive with over 200 ethanol plants in the United States alone. Currently, the vast majority use corn as the feedstock. Their profitability depends highly on the fluctuations between the price of corn and the price of ethanol. Since the Company does not plan to use corn, and plans on having long-term purchase agreements with cellulosic suppliers, we expect that our profitability will potentially be more consistent.

Any new biofuels plant that is built would require various government permits. In particular, renewable fuels are subject to rigorous testing and premarket approval requirements by the EPA’s Office of Transportation and Air Quality and regulatory authorities in other countries. In the U.S., various federal, and, in some cases, state statutes and regulations also govern or impact the manufacturing, safety, storage and use of renewable fuels. The process of seeking required approvals and the continuing need for compliance with applicable statutes and regulations requires the expenditure of resources. The Company anticipates raising the necessary capital for this as a part of its project-based financing. The Company would also need various government permits before commercializing products for the plastics industry.

The Energy Policy Act of 2005, which included the Renewable Fuel Standard Program enforced by the US Environmental Protection Agency (“EPA”), 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. The EPA’s newly proposed revised mandate for cellulosic ethanol is for 620 million gallons for 2021, and 770 million gallons for 2022 (the D3 mandate). This mandate has increased every year and is statutorily mandated to increase in the future and become a larger portion of the full renewable fuels mandate, if and when cellulosic biofuels can be produced profitably in larger quantities than they are now. The RFS mandate for 2022 calls for 20.77 billion gallons of total renewable fuel, 15 billion from conventional biofuels (corn ethanol) and 5.77 billion from advanced biofuels, including cellulosic biofuels. The “blend wall” (or upper limit to the amount of ethanol that can be blended into U.S. gasoline and automobile performance and comply with the Clean Air Act) of limiting ethanol content in gasoline to 10%, limits the total amount of ethanol consumed in the United States. Recent proposals may make 15% blending available year around. The value of the D3 RIN fluctuates, but as of this filing, it is approximately $3.40 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.

The Company has also licensed the Vertimass Process to convert ethanol (from the CTS 2.0 process) into sustainable aviation fuel. There is no up-front or annual fee until we are converting ethanol into SAF. The license agreement with Vertimass is the subject of a confidentiality agreement between the parties. Since we are not yet producing ethanol on a commercial scale, it is too preliminary to discuss details.

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

From January 1, 2022, through the date of filing, the Company issued an aggregate of 476,381 shares of its common stock for services valued at $78,450.

From January 1, 2022, through the date of filing, the Company issued an aggregate of 3,833,333 shares of its common stock for capital of $575,000.

From January 1, 2022, through the date of filing, the Company issued unvested options to its managers and employees to purchase 2,000,000 shares of its common stock for a period between five and ten years at the exercise price of 17 cents per share. Using a Black-Scholes asset-pricing model, these agreements were valued at $319,327. None of those have vested, but 11,360,000 other options have vested, with a valuation of $1,415,383.

From January 1, 2022, through the date of filing, 2,604,466 options expired and 587,500 warrants expired.

From January 1, 2022, through the date of filing, 150,000 previously issued options were exercised for proceeds of $7,500.

Going Concern

The Company has incurred losses since inception, has a working capital deficiency, and may be unable to raise further capital. At March 31, 2022, the Company had a working capital surplus of $82,866 and had incurred accumulated losses of $50,862,360 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 month period ended March 31, 2022 (unaudited) to March 31, 2021

For the three months ended March 31, 2022, the Company recognized $0 in revenue as opposed to $0 in 2021.

For the three months ended March 31, 2022, the Company’s general and administrative expenses increased by $496,787 to $803,064 from $306,277 in 2021. This increase is primarily the result of a $495,532 increase in equity-based compensation from $0 in 2021.

Interest expense decreased in the quarter ended March 31, 2022 by $1,008 to $7,741 from $8,749 in 2021.

For the three months ended March 31, 2022 the Company recorded non-cash impairments of assets of $0, as compared to $33,484 in 2021. This was the result of disposing of laboratory assets no longer in use in 2021 and no such disposal in the first quarter of 2022.

Research and development (R&D) costs for the quarter ended March 31, 2022 were $1,230,152, an increase of $965,078 from $265,074 in 2020. The increase in R&D expenses is primarily the result of an increase in payroll of $137,619 from the hiring of additional personnel, and $820,745 in equity-based compensation from $0 in 2021 due to the vesting of options in 2022.

Liquidity and Capital Resources

Liquidity

As of March 31, 2022, the Company had $620,260 in cash, and total stockholders’ equity on March 31, 2022, was negative $2,041,926. As of December 31, 2021, the Company had $1,164,664 in cash, and total stockholders’ equity at December 31, 2021, was negative $1,396,046. Total debt, including advances, accounts payable and other notes payable at March 31, 2022, together with interest payable thereon and contingent liabilities, was $3,358,414 an increase of $124,122 from December 31, 2021, where it stood at $3,234,293. This increase is attributable to the increases in deferred wages due to management. $1,820,630 of the remaining debt has been renegotiated to be payable out of future revenue and $917,502 out of future profits and otherwise does not come due.

During the three months ended March 31, 2022, the Company’s net cash used in operating activities decreased by $522,135 to $530,048 from $1,052,181 in the three months ending March 31, 2021. This decrease can primarily be attributed to an increase in accounts payable of $138,736 versus a reduction in accounts payable of $521,677 in 2021 attributed to paying off back-pay due.

During the three months ended March 31, 2022, the Company’s investing activities used $21,856 in cash. This can be primarily attributed to capitalizing $18,272 in patent costs and $3,584 used to purchase machinery and equipment. During the three months ended March 31, 2021, the Company’s investing activities used $45,462. This is primarily due to the purchase of equipment of $40,624 and $4,838 in patent costs.

During the three months ended March 31, 2022, the Company generated an aggregate of $7,500 through its financing activities, which is a decrease of $3,243,967 from $3,251,467 during the three months ended March 31, 2021. This decrease from the prior year can primarily be attributed to the lack of an equity raise in the first quarter of 2022 as compared to $1,935,750 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 $7.5 to $10 million to optimize and scale up its CTS 2.0 system to be commercially ready. The Company anticipates reaching this stage around 12 months. There is no guarantee that we will achieve all of the additional funding that is needed.

As of the date of this filing, the Company has raised $582,500 in 2022, through the exercise of options, in addition to $14,289,701, 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 March 31, 2022, shareholders’ equity was negative $2,041,926.

There were 274,601,664 shares of common stock issued and outstanding as of March 31, 2022.

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 December 31, 2021. Based upon, and as of the date of this evaluation, our chief executive officer and chief financial officer determined that our disclosure controls and procedures were sufficient.

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, 2021, that occurred during our first fiscal quarter that has materially affected, or is reasonably likely to materially affect, our 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.