Blue Biofuels, Inc.: Form 10-Q for the period ended Sep 30, 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 reactor technology with a higher yield and a continuous throughput in the Cellulose-to-Sugar process, or CTS, and the Company filed a process patent application for this technology. Mr. Slager has since further developed the system with the technical staff of the Company. The CTS patent was awarded in 2021 in the United States (U.S. Patent No. 10,994,255) and also in Japan and El Salvador. The Company also filed this patent in other major jurisdictions of the world including the European Patent Organization, Australia, Brazil, China, 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 in all the above-mentioned jurisdictions). Further, the company has filed for 4 other patents which 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 breaking down cellulosic material for conversion into biofuels. CTS can break down any cellulosic material – including grasses and agricultural waste. 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.

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.

CTS is environmentally friendly in that it recycles the water and catalyst, and it has a low 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 when our biofuels are burned. This is to be distinguished from fossil fuels because new CO2 is released when fossil fuels are burned.

The Company believes a significant difference between CTS cellulosic 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.

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.

In 2023, the Company completed the build-out of a pilot plant based on a modified Komarek machine and is in the process of further testing and optimizing the plant.

The Company believes that it can optimize the pre and post processing elements at this pilot scale plant to finalize design and operational parameters to provide operating cost estimates of a full-scale commercial volume system. Due to its mechanical nature and modularity, we anticipate that one plant would have multiple modular CTS systems.

In addition, the Company has licensed the Vertimass Process to convert ethanol into sustainable aviation fuel (SAF) and other renewable biofuels including bio-gasoline. The license agreement with Vertimass is the subject to a confidentiality agreement between the parties.

Plan of Operation

The total process from cellulosic feedstock to SAF consists basically of three steps:

4) Conversion from feedstock to fermentable cellulosic sugars (CTS)

5) Ferment the cellulosic sugars into cellulosic ethanol.

6) Covert the ethanol into SAF and related products. This third step happens with the Vertimass technology which the Company has licensed.

Given the fact that the Vertimass technology is mature and ready for production, the Company is reviewing whether to start executing on SAF production on a 10 million gallon per year level, and then add the first two steps on to it in a later phase when CTS is fully commercialized. The Company intends to build commercial CTS and ethanol facilities on the front-end to produce cellulosic SAF and generate the large D7 RIN and other government credits. Commencing commercial production will require project financing.

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 ethanol industry is competitive with over 200 ethanol plants in the United States alone. Currently, the vast majority use corn as 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 feedstock suppliers, we anticipate that our profitability will be more consistent. Further, cellulosic biofuels yield much higher incentives than non-cellulosic biofuels.

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 final D3 RIN volume mandates for cellulosic biofuel include 840 million gallons for 2023, 1.09 billion gallons for 2024, and 1.38 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 and larger quantities. The RFS mandate for 2023 calls for 20.94 billion gallons of total renewable fuel, 15 billion from conventional biofuels (corn ethanol) and 5.94 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 have make 15% blending available year around in some states. The value of the D3 RIN fluctuates, but as of this filing, it is approximately $3.53 per gallon of ethanol. For comparison, the D6 RIN for corn ethanol is $0.79. To profit from these incentives, the Company plans to apply for these D3 RIN credits as it brings its first plant into commercial operation.

Section 45Z of the Inflation Reduction Act passed on August 16, 2022, offers a Clean Fuel Production Credit (CFPC) per gallon of transportation fuel produced with a base amount of 20 cents per gallon or up to $1 per gallon for a qualified facility (depending on its carbon index) that was built while paying at least prevailing wages and which met apprenticeship requirements. For sustainable aviation fuel, those figures are 35 cents and $1.75 per gallon respectively. The Company plans to apply for CFPC credits when it begins building its commercial facilities. The CFPC currently does not apply to transportation fuel sold after December 31, 2027.

A Low Carbon Fuel Standard Credit (LCFS) is offered by various states (primarily California) for any amount of reduced CO2 in the production lifecycle of transportation fuels as compared to the amount of CO2 emitted in the production lifecycle of fossil fuels. The production lifecycle includes transportation costs to the point of use. California is currently offering around $67.00 per metric ton of CO2 reduction. When it is closer to commercial production, the Company plans to analyze the cost effectiveness of applying for these LCFS credits to determine in which state it could earn the most credits.

At commercial scale, management expects to be able to earn substantial renewable fuel credits and produce sustainable ethanol, sustainable aviation fuel, and other sustainable biofuels more profitably than they could be from existing commercial corn ethanol producers. Cellulosic ethanol comes with a much more valuable D3 RIN credit as compared to the D6 RIN allocated to corn ethanol; cellulosic SAF comes with a very valuable D7 RIN, and cellulosic bio-gasoline comes with a valuable D3 RIN. The Company also expects to receive Clean Fuel Production Credits related to section 45Z of the Inflation Reduction Act, whereas these credits are so far not available for corn ethanol producers; and the Company also plans to pursue Low Carbon Fuel Standard Credits.

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 CTS technology or forming joint ventures with foreign domestic partners to build plants.

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.

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 714,000 warrants for services valued at $78,438.

From January 1, 2023, through the date of filing, the Company issued an aggregate of 6,684,998 shares of its common stock for capital of $1,002,772.

From January 1, 2023, through the date of filing, 5,950,148 warrants were exercised for $97,250.

From January 1, 2023, through the date of filing, the Company issued unvested options to its managers and employees to purchase 17,150,000 shares of its common stock for a period of ten years at the exercise price of 16 to 20 cents per share. Using a Black-Scholes asset-pricing model, these agreements were valued at $2,835,613. None of those have vested. 1,000,000 vested options were issued at exercise prices between 16 and 19 cents. 3,385,000 previously issued options have vested. Using a Black-Scholes option pricing model, these vested options have a valuation of $637,028.

From January 1, 2023, through the date of filing, 7,175,000 options expired or were cancelled and 2,067,999 warrants expired.

Going Concern

The Company has incurred losses since inception, has a working capital deficiency, and may be unable to raise further capital. As of September 30, 2023, the Company had a working capital deficit of $1,066,285 and had incurred accumulated losses of $55,331,869 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 nine month period ended September 30, 2023 (unaudited) to September 30, 2022

For the three and nine months ended September 30, 2023, the Company recognized $0 in revenue as opposed to $0 in 2022.

For the three months ended September 30, 2023, the Company’s general and administrative expenses increased by $40,648 to $219,160 from $178,512 in 2022. This increase is primarily the result of a $119,600 employee retention credit issued in 2022 related to COVID, versus $0 in 2023.

For the nine months ended September 30, 2023, the Company’s general and administrative expenses decreased by $279,131 to $943,953 from $1,223,083 in 2022. This decrease is primarily the result of $169,382 in equity-based compensation versus $506,975 in 2022.

Interest expense decreased in the quarter ended September 30, 2023 by $10,362 to $25,661 from $36,024 in 2022. Interest expense increased in the nine months ended September 30, 2023 by $20,075 to $71,144 from $51,069 in 2022.

For the nine months ended September 30, 2023 the Company recorded non-cash impairments of assets of $369 as compared to $40,099 in 2022. This was the result of disposing and/or selling of laboratory assets no longer in use in each year.

Research and development (R&D) costs for the quarter ended September 30, 2023 were $293,674, a decrease of $110,483 from $404,157 in 2022. The decrease in R&D expenses is primarily the result of equity based compensation of $0 versus $99,479 in 2022.

Research and development (R&D) costs for the nine months ended September 30, 2023 were $1,741,318, a decrease of $329,471 from $2,070,789 in 2022. The decrease in R&D expenses is primarily the result of a decrease in equity based compensation to $467,646 from $1,019,330 in 2022 due to the vesting of more options in 2022.

Liquidity and Capital Resources

Liquidity

As of September 30, 2023, the Company had $84,663 in cash, and total stockholders’ equity on September 30, 2023, was negative $3,092,403. 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 September 30, 2023, together with interest payable thereon and contingent liabilities, was $4,341,916 an increase of $879,080 from December 31, 2022, where it stood at $3,462,836. This increase is primarily attributable to new convertible notes due to related parties. $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 nine months ended September 30, 2023, the Company’s net cash used in operating activities decreased by $91,776 to $1,494,477 from $1,586,253 in the nine months ending September 30, 2022.

During the nine months ended September 30, 2023, the Company’s investing activities used $307,782 in cash, as compared to $104,301 in the first nine months of 2022. This can be primarily attributed to capitalizing $25,744 in patent costs and $282,038 used to purchase machinery and equipment, as compared to $42,501 in patent costs and $61,800 in net purchases of equipment in the first nine months of 2022.

During the nine months ended September 30, 2023, the Company generated an aggregate of $1,675,022 through its financing activities versus $1,030,900 in the nine months ended September 30, 2022, which is an increase of $644,122. This increase from the prior year can primarily be attributed to the issuance of $625,000 in convertible notes to related parties in 2023.

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 additional funds for G&A expenses and will seek project financing for a commercial ethanol to SAF facility in addition to funds needed to complete the commercialization of its CTS system. There is no guarantee that the Company will achieve all of the additional funding that is needed.

As of the date of this filing, the Company has raised $1,100,022 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 including $625,000 raised through convertible notes in 2023. 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 September 30, 2023, shareholders’ equity was negative $3,092,403.

There were 302,750,963 shares of common stock issued and outstanding as of September 30, 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, 2022. 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, 2022, that occurred during our first three fiscal quarters pf 2023 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.