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 patent application for this technology. The CTS patent 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. In addition to this patent, the Company has
two filed patents pending and one provisional patent application for a total of
three additional patents that are currently in process. These patents broaden
the scope and protection of the CTS technology. The CTS process and related
patent and patent applications represent the results of our continued
development of the CTS process towards commercialization.
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
weeks to convert cellulose to sugars. CTS can convert any cellulosic material -
including grasses and agricultural waste - into sugars in less than a minute.
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 has a near zero carbon footprint in that the amount of added
atmospheric carbon created by burning the biofuels produced by CTS is reabsorbed
by the plant-based feedstock used in the CTS system in the next harvest.
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 uncomplicated and efficient,
and is expected to use low-cost feedstocks and have high value by-products. We
believe a significant difference between CTS and corn ethanol is the wide range
of abundantly available feedstocks that CTS 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 corn kernels are used, CTS uses the whole plant
or its waste products, meaning it could obtain 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.
19
The then new CTS technology made it worthwhile to financially restructure the
Company through Chapter 11 in 2018. 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 begun successful testing on Komarek machines at a
throughput processing rate of 2.5 tons per day, and anticipates having early
volume testing completed in Q1 2023.
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 pilot
plant will have the capacity to produce sugar at a rate sufficient to make
around 500,000 - 1,000,000 gallons of ethanol per year. The goal of the pilot
plant is to show successful volume production and scalability, and to provide
operating cost estimates of a full commercial volume system.
The CTS system converts plant-based feedstock into two product streams, soluble
sugars and lignin, each of which can be converted into multiple products as
follows: (1) sugars can be further processed into cellulosic ethanol and other
biofuels like jet fuel, and potentially into bio chemicals; and (2) Lignin can
be used in ion exchange resins, specialty chemicals, or to create bioplastics.
Lignin can also be burned as a renewable fuel.
Plan of Operation
The Company expects to have the CTS pilot plant built and functioning in the
second half of 2023. The plan is to run sufficient testing to prove the
viability of producing a commercial size CTS system. However, commencing
commercial production will require project financing of a full-scale CTS
commercial system. The project financing will either be for bolting on our CTS
system into an existing ethanol facility of a future potential joint venture
partner, 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.
The Company has licensed the Vertimass Process to convert ethanol (from the CTS
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'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 from lignin; and, (4) potentially making nanocellulose. We
believe these, and other markets, could potentially provide for highly
profitable products.
Management believes that retrofitting existing plants with the CTS 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.
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 expect that
our profitability will potentially be more consistent.
20
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
mandate for cellulosic ethanol is for 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. Converting our cellulosic ethanol to sustainable aviation
fuel avoids the blend wall. The value of the D3 RIN fluctuates, but as of this
filing, it is approximately $2.19 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 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 778,028 shares of its common stock for services valued at $131,300.
On April 29, 2022, the Company commenced a new offering of shares of its common
stock valued at $0.15 per share. The Company sold an aggregate of 6,099,998
shares of its common stock for capital of $915,000. This offering was closed on
October 3, 2022.
On October 21, 2022, the Company commended another offering of shares of its
common stock valued at $0.15 per share. Through the date of filing, the Company
has sold an aggregate of 1,036,666 shares of its common stock for capital of
$155,500.
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 12,185,000 other options have
vested, with a valuation of $1,526,305.
From January 1, 2022, through the date of filing, the Company issued unvested
warrants to purchase 2,000,000 shares of its common stock for a period of 5
years at an exercise price of 18 cents per share. Using a Black-Scholes
asset-pricing model, these were valued at $291,768.
From January 1, 2022, through the date of filing, 2,604,466 options expired and
837,500 warrants expired.
From January 1, 2022, through the date of filing, 350,000 previously issued
options were exercised for proceeds of $15,900.
21
Going Concern
The Company has incurred losses since inception, has a working capital
deficiency, and may be unable to raise further capital. At September 30, 2022,
the Company had a working capital deficit of $7,267 and had incurred accumulated
losses of $52,206,443 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, 2022
(unaudited) to September 30, 2021
For the three and nine months ended September 30, 2022, the Company recognized
$0 in revenue as opposed to $0 in 2021.
For the three months ended September 30, 2022, the Company's general and
administrative expenses decreased by $37,454 to $178,512 from $215,966 in 2021.
This decrease is primarily the result of a $119,600 employee retention credit
issued by the government in 2022.
For the nine months ended September 30, 2022, the Company's general and
administrative expenses increased by $407,469 to $1,223,083 from $815,614 in
2021. This increase is primarily the result of a $495,532 increase in
equity-based compensation to $506,975 from $11,443 in 2021.
Interest expense increased in the quarter ended September 30, 2022 by $27,715 to
$36,024 from $8,309 in 2021. Interest expense increased in the nine months ended
September 30, 2022 by $25,303 to $51,069 from $25,766 in 2021. The increase is
primarily related to the renewal of a lease in Q3 2022 that led to a calculatory
interest of $31,631 in Q3 2022.
For the nine months ended September 30, 2022 the Company recorded non-cash
impairments of assets of $40,099, as compared to $33,484 in 2021. 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, 2022
were $404,157, an increase of $174,234 from $229,923 in 2021. The increase in
R&D expenses is primarily the result of an increase in payroll of $52,933 from
the hiring of additional personnel, and $99,478 in equity-based compensation
from $0 in 2021 due to the vesting of options in 2022.
Research and development (R&D) costs for the nine months ended September 30,
2022 were $2,070,789, an increase of $1,326,006 from $744,783 in 2021. The
increase in R&D expenses is primarily the result of an increase in payroll of
$211,681 from the hiring of additional personnel, and $1,019,330 in equity-based
compensation from $0 in 2021 due to the vesting of options in 2022.
Liquidity and Capital Resources
Liquidity
As of September 30, 2022, the Company had $505,010 in cash, and total
stockholders' equity on September 30, 2022, was negative $2,101,964. 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 September 30, 2022,
together with interest payable thereon and contingent liabilities, was
$3,447,886 an increase of $213,593 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 those liabilities has been renegotiated to be
payable out of future revenue and $917,502 out of future profits and otherwise
does not come due.
22
During the nine months ended September 30, 2022, the Company's net cash used in
operating activities decreased by $437,073 to $1,586,253 from $2,023,326 in the
nine months ending September 30, 2021. This decrease can primarily be attributed
to an increase in accounts payable of $62,998 in 2022, versus a reduction in
accounts payable of $529,335 in 2021 mostly attributed to paying off back-pay
due.
During the nine months ended September 30, 2022, the Company's investing
activities used $104,301 in cash. This can be primarily attributed to
capitalizing $42,501 in patent costs and $61,800 used to purchase machinery and
equipment. During the nine months ended September 30, 2021, the Company's
investing activities used $195,545. This is primarily due to the purchase of
equipment of $178,803 and $16,742 in patent costs.
During the nine months ended September 30, 2022, the Company generated an
aggregate of $1,030,900 through its financing activities, which is a decrease of
$2,260,567 from $3,291,467 during the nine months ended September 30, 2021. This
decrease from the prior year can primarily be attributed to raising $915,000, as
compared to $1,975,750 raised from the sale of common stock through the
Company's private offerings in 2021, and $15,900 versus $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 build and test a semi-commercial scale
pilot plant of its CTS system that is expected to prove the commercial viability
of the technology. The Company anticipates reaching this stage by the end of
2023. 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 $1,086,400 in 2022,
through the sale of stock and the exercise of options, in addition to
$14,574,702 previously raised, 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 September 30, 2022, shareholders' equity was negative $2,101,964.
There were 281,815,770 shares of common stock issued and outstanding as of
September 30, 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.
23
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.
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BLUE BIOFUELS, INC. 
