Blue Biofuels, Inc.: Form 10-Q for the period ended Mar 31, 2023

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 renewable energy, biofuels, and lignin.

In early 2018, the Company’s chief executive officer (“CEO”) Ben Slager invented a new technology system referred to as Cellulose-to-Sugar or CTS, and the Company filed a process patent application for this technology. Mr. Slager has since further developed the system with laboratory personnel. The CTS patent was awarded in 2021 in the United States (U.S. Patent No. 10,994,255) 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. In addition to this patent, the Company has received one additional patent (for which it has also applied for in all the above mentioned jurisdictions), one continuation patent pending, and provisional patent applications for two additional patents that are currently pending.

Mr. Slager has since further developed the system with the technical staff of the Company. The patented CTS process is a continuous mechanical/chemical dry process for converting cellulose material into sugar and lignin, as compared to the prior batch process that the Company previously licensed. The CTS process creates molecular contact between two reactive solid components instead of other systems where the reaction takes place between two liquid or gas components in a batch process. The reactants are (1) the feedstock, which is broken down into its components being sugars and lignin; (2) a catalyst, which is cost effective and abundantly available in the market from regular suppliers; it is separated from reactor components and reused. The CTS 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 is different from other commercial processes that are used to convert cellulose into sugar. Other processes use enzymatic batch reactors that take up to weeks to convert cellulose to sugars. CTS can convert any cellulosic material – including grasses and agricultural waste – into sugars in less than a minute of conversion time. The sugars are subsequently processed into biofuels using off-the-shelf technologies. CTS is environmentally friendly in that it recycles the water and catalyst, and it has a near zero carbon footprint: the amount of added atmospheric carbon created by burning the biofuels produced by the CTS system was absorbed by the plant-based feedstock while growing and is merely released back into the atmosphere. No extra CO2 is released into the atmosphere in our system. This is to be distinguished from fossil fuels because new CO2 is released when fossil fuels are burned.

The CTS system converts plant-based feedstock into one primary product, soluble sugars, which can be further processed into cellulosic ethanol and other biofuels like jet fuel, and potentially into bio chemicals.

CTS has different co-products than other processes. Our primary co-product is pure lignin. Other industries like the paper industry produce lignin that is contaminated by chemicals like sulfur. Other cellulosic ethanol processes do not yield chemically clean high purity lignin because their processes chemically alter or contaminate the lignin. Most ethanol producers use corn, not cellulose, and the co-products of corn ethanol production are distillers grains animal feed and corn oil. Our lignin can potentially be used in ion exchange resins or specialty chemicals. Lignin can also be burned as a renewable fuel.

At a commercial scale, our management expects to be able to produce ethanol at a lower cost per gallon than existing commercial corn or cellulosic ethanol producers due to the fact that the CTS process is robust, uncomplicated and efficient, and is expected to use low-cost feedstocks and have a potentially high value by-product. We believe a significant difference between CTS ethanol and corn ethanol is the wide range of abundantly available feedstocks that CTS can process compared to just corn as the feedstock. The CTS feedstocks are nonfood and have much lower costs than corn. In addition, while in corn ethanol only the corn kernels are used, CTS uses the whole plant or its waste products, meaning it could obtain much higher yields per acre. Estimated yields for corn are about 400-600 gallons of ethanol per acre per year and for king grass in conjunction with our CTS process it could be up to 3000-3500 gallons per acre per year. The Company also expects to potentially receive a highly valued D3 RIN for each gallon of ethanol it produces.

The new technology made it worthwhile to financially restructure the Company through Chapter 11. The Company voluntarily filed for Chapter 11 on October 22, 2018, in the U.S. Bankruptcy Court in the Southern District of Florida. The Company exited Chapter 11 on September 18, 2019, while keeping all classes, including shareholders, unimpaired. The bankruptcy case was closed on October 25, 2019.

The Company has built several prototypes of the CTS system to further develop the process. The Company finalized its parameter optimization when it was able to convert 99% of the cellulosic material into soluble sugars suitable for further processing into cellulosic ethanol. In 2022, the Company partnered with K.R. Komarek to build its CTS machines going forward. Komarek is an industry leading manufacturing company that builds briquetting machines and compaction/granulation systems with throughput capacities up to 50 tons per hour.

The Company has recently completed the build out of a pilot plant and has begun successfully testing and optimizing the plant. Initial tests have shown good results. This pilot plant is designed to show successful volume production and scalability.

The Company expects to engage an engineering firm to design a semi-commercial scale pilot plant that integrates a larger CTS system into the pre-processing and post-processing elements of the plant. It is anticipated that the semi-commercial plant will have the capacity to produce sugar at a rate sufficient to make up to 500,000 gallons of ethanol per year. The goal of the semi-commercial plant is to finalize design and operational parameters at this volume level and to provide operating cost estimates of a full commercial volume system. Due to its mechanical nature and modularity, we anticipate that one plant would have multiple modular CTS systems. The Company expects to have the semi-commercial system ready in 2024.

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; and (3) making specialty chemicals from lignin. We believe these, and other markets, could potentially provide for highly profitable products.

Commencing commercial production will require project financing. The project financing will either be for bolting on our CTS system into an existing ethanol facility of a future potential joint venture partner, or for acquiring an ethanol facility and converting that to cellulosic ethanol production using our CTS system, or for setting up a production facility for converting ethanol into jet fuel using the Vertimass Process that the Company has licensed.

Management believes that retrofitting existing plants with the CTS technology or delivering cellulosic sugar to existing ethanol plants to enable them to make cellulosic ethanol, 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.

The ethanol industry is 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 anticipate that our profitability will 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 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 current RIN volume targets for cellulosic ethanol include 720 million gallons for 2023, 1.42 billion gallons for 2024, and 2.13 billion gallons for 2025 (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 called 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 $2.11 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 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 not generated any material revenues from its business.

The Company has licensed the Vertimass Process to convert ethanol (from the CTS process) into sustainable aviation fuel (SAF). 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. The Company aims to start engineering of a first pilot plant to convert up to 500,000 gallons of ethanol into jet fuel and other fuels.

Capital Formation

From January 1, 2023, through the date of filing, the Company issued an aggregate of 174,194 shares of its common stock for services valued at $29,300.

From January 1, 2023, through the date of filing, the Company issued an aggregate of 4,518,332 shares of its common stock for capital of $677,772.

From January 1, 2023, through the date of filing, 5,450,148 warrants were exercised for $72,251.

From January 1, 2023, through the date of filing, the Company issued unvested options to its managers and employees to purchase 15,950,000 shares of its common stock for a period of ten years at the exercise price of 19 to 20 cents per share. Using a Black-Scholes asset-pricing model, these agreements were valued at $2,675,116. None of those have vested. 1,000,000 vested options were issued at exercise prices between 16 and 19 cents. Using a Black-Scholes asset-pricing model, these agreements were valued at $157,939. 2,685,000 previously issued options have vested, with a valuation of $405,705.

From January 1, 2023, through the date of filing, 2,300,000 options expired and 2,059,999 warrants expired.

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, 2023, the Company had a working capital deficit of $642,961 and had incurred accumulated losses of $53,845,676 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, 2023 (unaudited) to March 31, 2022

For the three months ended March 31, 2023, the Company recognized $0 in revenue as opposed to $0 in 2022.

For the three months ended March 31, 2023, the Company’s general and administrative expenses decreased by $433,219 to $369,845 from $803,064 in 2022. This decrease is primarily the result of $84,698 in equity-based compensation in 2023 versus $495,532 in 2022.

Interest expense increased in the quarter ended March 31, 2023 by $1,573 to $9,314 from $7,741 in 2022.

For the three months ended March 31, 2023 the Company recorded non-cash impairments of assets of $369, as compared to $0 in 2022. This was the result of disposing of laboratory assets no longer in use in 2023 and no such disposal in the first quarter of 2022.

Research and development (R&D) costs for the quarter ended March 31, 2023 were $684,562, a decrease of $545,590 from $1,230,152 in 2022. The decrease in R&D expenses is primarily the result of a decrease in equity-based compensation to $306,599 from $820,745 in 2022.

Liquidity and Capital Resources

Liquidity

As of March 31, 2023, the Company had $163,123 in cash, and total stockholders’ equity on March 31, 2023, was negative $2,350,710. As of December 31, 2022, the Company had $211,901 in cash, and total stockholders’ equity at December 31, 2022, was negative $2,356,917. Total debt, including advances, accounts payable and other notes payable at March 31, 2023, together with interest payable thereon and contingent liabilities, was $3,665,971 an increase of $203,135 from December 31, 2022, where it stood at $3,462,836. This increase is primarily attributable to a new convertible note due to a related party. $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, 2023, the Company’s net cash used in operating activities increased by $79,071 to $609,119 from $530,048 in the three months ending March 31, 2022. This increase can primarily be attributed to a decrease in deferred payroll to zero from $125,440 in 2022.

During the three months ended March 31, 2023, the Company’s investing activities used $294,659 in cash, as compared to $21,856 in the first quarter of 2022. This can be primarily attributed to capitalizing $12,621 in patent costs and $282,038 used to purchase machinery and equipment, as compared to $18,272 in patent costs and $3,584 in purchasing equipment in the first quarter of 2022.

During the three months ended March 31, 2023, the Company generated an aggregate of $855,000 through its financing activities versus $7,500 in the three months ended March 31, 2022, which is an increase of $847,500. This increase from the prior year can primarily be attributed to the lack of an equity raise in the first quarter of 2022 as compared to $582,750 raised in the sale of common stock through the Company’s private offerings in the first quarter of 2023, $72,250 in proceeds from the exercise of warrants and options, and $250,000 in net proceeds from the issuance of convertible notes.

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 $15 million to build and optimize a semi-commercial scale CTS system, and then will seek project financing for a commercial system. 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 $725,001 in 2023, through the issuance of shares and the exercise of warrants, plus $15,863,601 raised previously, 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, 2023, shareholders’ equity was negative $2,350,710.

There were 299,416,769 shares of common stock issued and outstanding as of March 31, 2023.

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.