As filed with the United States Securities and Exchange Commission on January 27, 2015
Registration No.: 333-201356
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-1/A
(Amendment No. 1)
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
BlueFire Renewables, Inc.
(Exact name of registrant as specified in its charter)
| Nevada | 2860 | 20-4590982 | ||
(State or other jurisdiction of incorporation or organization) |
(Primary Standard Industrial Classification Code Number) |
(I.R.S. Employer Identification Number) |
31 Musick
Irvine, CA 92618
Telephone: (949) 588-3767
(Address, including zip code, and telephone number, Including area code, of registrant’s principal executive offices)
The Corporation Trust Company of Nevada
311 S Division St
Carson City, NV 89703
Telephone: (608) 827-5300
(Name, address, including zip code, and telephone number, including area code, of agent for service)
Copies to:
Joseph Lucosky, Esq.
Lucosky Brookman LLP
101 Wood Avenue South, 5th Floor
Woodbridge, New Jersey 08830
Fax: (732) 395-4401
Approximate date of commencement of proposed sale to the public: From time to time after the effective date of this registration statement.
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [X]
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act of 1933, please check the following box and list the Securities Act registration Statement number of the earlier effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act of 1933, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act of 1933, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | [ ] | Accelerated filer | [ ] |
| Non-accelerated filer | [ ] | Smaller reporting company | [X] |
CALCULATION OF REGISTRATION FEE
| Title
of Each Class Of Securities to be Registered | Amount to be Registered (1) | Proposed Maximum Aggregate Offering Price per share (2) | Proposed Maximum Aggregate Offering Price | Amount of Registration Fee (3) | ||||||||||||
| Common Stock, $0.001 par value per share | 50,000,000 | $ | 0.047 | $ | 1,500,000 | $ | 1,743.00 | |||||||||
| (1) | Consists of (i) up to 50,000,000 shares of common stock to be sold by Kodiak Capital Group, LLC (“Kodiak” or the “Selling Security Holder”) pursuant to an Equity Purchase Agreement dated December 17, 2014 (the “Equity Purchase Agreement”). In accordance with Rule 416(a), this registration statement shall also cover an indeterminate number of shares that may be issued and resold resulting from stock splits, stock dividends or similar transactions. | |
| (2) | Based on the average of the high and low transactions prices on December 30, 2014. The shares offered hereunder may be sold by the selling stockholders from time to time in the open market, through privately negotiated transactions, or a combination of these methods at market prices prevailing at the time of sale or at negotiated prices. | |
(3) |
Calculated under Section 6(b) of the Securities Act of 1933 as the aggregate offering price multiplied by 0.00011620. |
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SUCH SECTION 8(a), MAY DETERMINE.
The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the U.S. Securities and Exchange Commission (“SEC”) is effective. This preliminary prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.
PRELIMINARY PROSPECTUS SUBJECT TO COMPLETION, DATED JANUARY 27, 2015
BLUEFIRE RENEWABLES, INC.
50,000,000 SHARES OF COMMON STOCK
The Selling Security Holder identified in this prospectus may offer and sell up to 50,000,000 shares of our common stock, which will consist of up to 50,000,000 shares of common stock to be sold by Kodiak Capital Group, LLC (“Kodiak” or the “Selling Security Holder”) pursuant to an Equity Purchase Agreement dated December 17, 2014 (the “Equity Purchase Agreement”). If issued presently, the 50,000,000 shares of common stock registered for resale by Kodiak would represent 18.06% of our issued and outstanding shares of common stock as of December 30, 2014.
The Selling Security Holder may sell all or a portion of the shares being offered pursuant to this prospectus at fixed prices, at prevailing market prices at the time of sale, at varying prices, or at negotiated prices.
We will not receive any proceeds from the sale of the shares of our common stock by Kodiak. However, we will receive proceeds from our initial sale of shares to Kodiak pursuant to the Equity Purchase Agreement. We will sell shares to Kodiak at a price equal to 75% of the lowest closing bid price for our common stock during the five consecutive trading day period beginning on the date on which we deliver a put notice to Kodiak. We will pay for expenses of this offering, except that the selling stockholders will pay any broker discounts or commissions or equivalent expenses applicable to the sale of their shares.
Kodiak is an underwriter within the meaning of the Securities Act of 1933, and any broker-dealers or agents that are involved in selling the shares are “underwriters” within the meaning of the Securities Act of 1933 in connection with such sales. In such event, any commissions received by such broker-dealers or agents and any profit on the resale of the shares purchased by them may be deemed to be underwriting commissions or discounts under the Securities Act of 1933.
Our common stock is traded on OTC Markets under the symbol “BFRE”. On December 30, 2014, the last reported sale price for our common stock was $0.047 per share.
Prior to this offering, there has been a very limited market for our securities. While our common stock is on the OTC Bulletin Board, there has been negligible trading volume. There is no guarantee that an active trading market will develop in our securities.
Investing in our common stock involves a high degree of risk. See “Risk Factors” beginning on page 7 to read about factors you should consider before purchasing any of the shares offered by this prospectus.
We may amend or supplement this prospectus from time to time by filing amendments or supplements as required. You should read the entire prospectus and any amendments or supplements carefully before you make your investment decision.
NEITHER THE SEC NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The Date of This Prospectus is , 2015
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TABLE OF CONTENTS
You may only rely on the information contained in this prospectus or that we have referred you to. We have not authorized anyone to provide you with different information. This prospectus does not constitute an offer to sell or a solicitation of an offer to buy any securities other than the common stock offered by this prospectus. This prospectus does not constitute an offer to sell or a solicitation of an offer to buy any common stock in any circumstances in which such offer or solicitation is unlawful. Neither the delivery of this prospectus nor any sale made in connection with this prospectus shall, under any circumstances, create any implication that there has been no change in our affairs since the date of this prospectus is correct as of any time after its date.
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The following summary highlights selected information contained in this prospectus. This summary does not contain all the information you should consider before investing in the securities. Before making an investment decision, you should read the entire prospectus carefully, including the “risk factors” section, the financial statements and the notes to the financial statements. References to the “Company,” “we,” “us,” “our” and similar words refer to BlueFire Renewables, Inc.
Our Company
We are BlueFire Renewables, Inc., a Nevada corporation (“BlueFire” or the “Company”). Our goal is to develop, own and operate high-value carbohydrate-based transportation fuel plants, or bio-refineries, to produce ethanol, a viable alternative to fossil fuels, and to provide professional services to bio-refineries worldwide. Our bio-refineries will convert widely available, inexpensive, organic materials such as agricultural residues, high-content biomass crops, wood residues and cellulose from municipal solid wastes into ethanol. This versatility enables us to consider a wide variety of feedstocks and locations in which to develop facilities to become a low cost producer of ethanol. We have licensed for use a patented process from Arkenol, Inc., a Nevada corporation (“Arkenol”), to produce ethanol from cellulose (the “Arkenol Technology”). We are the exclusive North America licensee of the Arkenol Technology to produce ethanol and will evaluate purchasing a broader license as opportunities arise.
Company History
We are a Nevada corporation that was initially organized as Atlanta Technology Group, Inc., a Delaware corporation, on October 12, 1993. The Company was re-named Docplus.net Corporation on December 31, 1998, and further re-named Sucre Agricultural Corp. (“Sucre”) and re-domiciled as a Nevada corporation on March 6, 2006 (“Inception”). Finally, on May 24, 2006, in anticipation of the reverse merger by which it would acquire BlueFire Ethanol, Inc., a privately held Nevada corporation organized on March 28, 2006, as described below, the Company was re-named to BlueFire Ethanol Fuels, Inc.
On June 27, 2006, the Company completed a reverse merger (the “Reverse Merger”) with BlueFire Ethanol, Inc. (“BlueFire Ethanol”). At the time of Reverse Merger, the Company was a blank-check company and had no operations, revenues or liabilities. The only asset possessed by the Company was $690,000 in cash which continued to be owned by the Company at the time of the Reverse Merger. In connection with the Reverse Merger, the Company issued BlueFire Ethanol 17,000,000 shares of common stock, approximately 85% of all of the outstanding common stock of the Company, for all the issued and outstanding BlueFire Ethanol common stock. The Company stockholders retained 4,028,264 shares of Company common stock. As a result of the Reverse Merger, BlueFire Ethanol became our wholly-owned subsidiary. On June 21, 2006, prior to and in anticipation of the Reverse Merger, Sucre sold 3,000,000 shares of common stock to two related investors in a private offering of shares pursuant to Rule 504 for proceeds of $1,000,000.
On July 20, 2010, the Company changed its name to BlueFire Renewables, Inc. to more accurately reflect our primary business plan expanding the focus from just building cellulosic ethanol projects to include other advanced biofuels, biodiesel, and other drop-in biofuels as well as synthetic lubricants as opportunities arise.
The Company’s shares of common stock began trading under the symbol “BFRE.PK” on the Pink Sheets of the National Quotation Bureau on July 11, 2006 and later began trading on the OTCBB under the symbol “BFRE.OB” on June 19, 2007. On December 30, 2014, the closing price of our Common Stock was $0.047 per share.
Our executive offices are located at 31 Musick, Irvine, California 92618 and our telephone number at such office is (949) 588-3767.
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Kodiak Equity Purchase Agreement and Registration Rights Agreement
This prospectus includes the resale of up to 50,000,000 shares of our common stock by Kodiak. Kodiak will obtain our common stock pursuant to the Equity Purchase Agreement entered into by Kodiak and us, dated December 17, 2014 (the “Equity Purchase Agreement”). In December 2014, Kodiak received a one-time issuance of a $60,000 non-convertible Promissory Note as a commitment fee for the Equity Purchase Agreement.
The purchase price of the common stock will be set at seventy-five percent (75%) of the lowest closing bid price of the common stock during the pricing period. The pricing period will be the five consecutive trading days immediately after the put notice date. On the put notice date, we are required to deliver Put Shares to Kodiak in an amount (the “Estimated Put Shares”) determined by dividing the closing bid price on the trading day immediately preceding the Put Notice date multiplied by 75%. At the end of the pricing period when the purchase price is established and the number of Put Shares for a particular Put is definitely determined, Kodiak must return to us any excess Put Shares provided as Estimated Put Shares or alternatively, we must deliver to Kodiak any additional Put Shares required to cover the shortfall between the amount of Estimated Put Shares and the amount of Put Shares. At the end of the pricing period we must also return to Kodiak any excess related to the investment amount previously delivered to us.
Kodiak is not permitted to engage in short sales involving our common stock during the commitment period ending December 31, 2016. In accordance with Regulation SHO, however, sales of our common stock by Kodiak after delivery of a Put Notice of such number of shares reasonably expected to be purchased by Kodiak under a Put will not be deemed a short sale.
In addition, we must deliver the other required documents, instruments and writings required. Kodiak is not required to purchase the Put Shares unless:
| ● | Our registration statement with respect to the resale of the shares of common stock delivered in connection with the applicable Put shall have been declared effective. | |
| ● | We shall have obtained all material permits and qualifications required by any applicable state for the offer and sale of the registrable securities. | |
| ● | We shall in a timely manner have filed with the SEC all reports, notices, and other documents required. |
We believe that we will be able to meet all of the above obligations mandated in the Equity Purchase Agreement set forth above.
Where You Can Find Us
Our executive offices are located at 31 Musick, Irvine, California 92618 and our telephone number is (949) 588-3767.
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Summary of The Offering
| Common Stock Offered by the Selling Security Holder | 50,000,000 shares of common stock. | |
| Common Stock Outstanding Before the Offering | 226,890,278 as of December 30, 2014 | |
| Common Stock Outstanding After the Offering | 276,890,324 shares, assuming the sale of all of the shares being registered in this Registration Statement. | |
| Terms of the Offering | The Selling Security Holder will determine when and how it will sell the common stock offered in this prospectus. | |
| Termination of the Offering | Pursuant to the Equity Purchase Agreement, this offering will terminate on the earlier of (i) on the date on which Kodiak shall have purchased Put Shares pursuant to this Agreement for an aggregate Purchase Price of the Maximum Commitment Amount or (ii) December 31, 2016. | |
| Use of Proceeds | We will not receive any proceeds from the sale of the shares of common stock offered by the Selling Security Holder. However, we will receive proceeds from the sale of our common stock under the Equity Purchase Agreement. | |
| Risk Factors | The common stock offered hereby involves a high degree of risk and should not be purchased by investors who cannot afford the loss of their entire investment. See “Risk Factors” beginning on page 7. | |
| OTC Markets Symbol | BFRE |
The following selected financial information is derived from the Company’s Financial Statements appearing elsewhere in this Prospectus and should be read in conjunction with the Company’s Financial Statements, including the notes thereto, appearing elsewhere in this Prospectus.
Summary of Operations
For the Years Ended December 31,
| 2013 | 2012 | |||||||
| Total Revenue | $ | 1,338,469 | $ | 782,941 | ||||
| Loss from operations | $ | 1,131,162 | $ | 1,036,093 | ||||
| Net loss | $ | 1,364,626 | $ | 1,759,805 | ||||
| Net loss per common share (basic and diluted) | $ | 0.03 | $ | 0.05 | ||||
| Weighted average common shares outstanding | 44,651,379 | 32,750,207 | ||||||
Statement of Financial Position
For the Years Ended December 31,
| 2013 | 2012 | |||||||
| Cash and cash equivalents | $ | 46,992 | $ | 59,603 | ||||
| Total assets | $ | 163,899 | $ | 1,316,051 | ||||
| Working Capital | $ | (1,984,859 | ) | $ | (2,212,756 | ) | ||
| Long term debt | $ | 0 | $ | 0 | ||||
| Stockholders’ equity (deficit) | $ | (2,729,721 | ) | $ | (1,866,987 | ) | ||
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An investment in the Company’s common stock involves a high degree of risk. You should carefully consider the risks described below as well as other information provided to you in this prospectus, including information in the section of this document entitled “Forward Looking Statements.” If any of the following risks actually occur, our business, financial condition or results of operations could be materially adversely affected, the value of our common stock could decline, and you may lose all or part of your investment.
Risks Related to Our Business and Industry
WE HAVE HAD LIMITED OPERATIONS AND HAVE INCURRED NET LOSSES OF $34,644,044 AND WE NEED ADDITIONAL CAPITAL TO EXECUTE OUR BUSINESS PLAN.
We have had limited operations and have incurred net losses of approximately $34,644,000 for the period from Inception through September 30, 2014, of which approximately $17,259,000 was cash used in our operating activities. We have generated revenues from consulting of approximately $549,000 and approximately $9,119,000 in grant revenue from the DOE for total revenues of approximately $9,668,000, and no revenues from ethanol fuel production. We have yet to begin ethanol production or construction of ethanol producing plants, other than the site preparation at the Fulton Project, as discussed herein. Since the Reverse Merger, we have been engaged in developmental activities, including developing a strategic operating plan, plant engineering and development activities, entering into contracts, hiring personnel, developing processing technology, and raising private capital. Our continued existence is dependent upon our ability to obtain additional debt and/or equity financing. We are uncertain given the economic landscape when to anticipate the beginning construction of a plant given the availability of capital. We estimate the engineering, procurement, and construction (“EPC”) cost including contingencies to be in the range of approximately $100 million to $125 million for our Lancaster Bio-refinery, and approximately $300 million for our Fulton Project. We plan to raise additional funds through project financings, grants and/or loan guarantees, or through future sales of our common stock, until such time as our revenues are sufficient to meet our cost structure, and ultimately achieve profitable operations. There is no assurance we will be successful in raising additional capital or achieving profitable operations. Wherever possible, the Company’s Board of Directors (the “Board of Directors”) will attempt to use non-cash consideration to satisfy obligations. In many instances, we believe that the non-cash consideration will consist of restricted shares of our common stock. These actions will result in dilution of the ownership interests of existing shareholders may further dilute common stock book value, and that dilution may be material.
WE HAVE A LIMITED OPERATING HISTORY WITH SIGNIFICANT LOSSES AND EXPECT LOSSES TO CONTINUE FOR THE FORESEEABLE FUTURE.
We have yet to establish any history of profitable operations. In the last two years we have incurred annual operating losses. Operating losses were $1,131,000 and $1,036,000 for fiscal years ended 2013 and 2012, respectively. As a result, at December 31, 2013, we had net losses of approximately $34,499,000 since Inception. In 2013, we had a net loss of $1,365,000, which was partially a result of an impairment of assets. Our revenues have not been sufficient to sustain our operations. We expect that our revenues will not be sufficient to sustain our operations for the foreseeable future. Our profitability will require the successful commercialization of at least one commercial scale cellulose to ethanol facility. No assurances can be given when this will occur or that we will ever be profitable.
AS OF SEPTEMBER 30, 2014, THE COMPANY HAS A NEGATIVE WORKING CAPITAL OF APPROXIMATELY $1,533,000.
Management has estimated that operating expenses for the next 12 months will be approximately $1,700,000, excluding engineering costs related to the development of bio-refinery projects. These matters raise substantial doubt about the Company’s ability to continue as a going concern. Throughout the remainder of 2014, the Company intends to fund its operations with remaining reimbursements under the Department of Energy contract as available, as well as seek additional funding in the form of equity or debt. The Company’s ability to get reimbursed under the DOE contract is dependent on the availability of cash to pay for the related costs and the availability of funds remaining under the contract after the discontinuance of the Department of Energy contract further disclosed in Note 3 to the consolidated financial statements contained herein. As of December 30, 2014, the Company expects the current resources available to them will only be sufficient for a period of approximately one month unless significant additional financing is received. Management has determined that the general expenditures must be reduced and additional capital will be required in the form of equity or debt securities. In addition, if we cannot raise additional short term capital we may consume all of our cash reserved for operations. There are no assurances that management will be able to raise capital on terms acceptable to the Company. If we are unable to obtain sufficient amounts of additional capital, we may be required to reduce the scope of our planned development, which could harm our business, financial condition and operating results.
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OUR CELLULOSE-TO-ETHANOL TECHNOLOGIES ARE UNPROVEN ON A LARGE-SCALE COMMERCIAL BASIS AND PERFORMANCE COULD FAIL TO MEET PROJECTIONS, WHICH COULD HAVE A DETRIMENTAL EFFECT ON THE LONG-TERM CAPITAL APPRECIATION OF OUR STOCK.
While production of ethanol from corn, sugars and starches is a mature technology, newer technologies for production of ethanol from cellulose biomass have not been built at large commercial scales. The technologies being utilized by us for ethanol production from biomass have not been demonstrated on a commercial scale. All of the tests conducted to date by us with respect to the Arkenol Technology have been performed on limited quantities of feedstocks, and we cannot assure you that the same or similar results could be obtained at competitive costs on a large-scale commercial basis. We have never utilized these technologies under the conditions or in the volumes that will be required to be profitable and cannot predict all of the difficulties that may arise. It is possible that the technologies, when used, may require further research, development, design and testing prior to larger-scale commercialization. Accordingly, we cannot assure you that these technologies will perform successfully on a large-scale commercial basis or at all.
OUR BUSINESS EMPLOYS LICENSED ARKENOL TECHNOLOGY WHICH MAY BE DIFFICULT TO PROTECT AND MAY INFRINGE ON THE INTELLECTUAL PROPERTY RIGHTS OF THIRD PARTIES.
We currently license our technology from Arkenol. Arkenol owns 11 U.S. patents, 21 foreign patents, and has one foreign patent pending and may file more patent applications in the future. Our success depends, in part, on our ability to use the Arkenol Technology, and for Arkenol to obtain patents, maintain trade secrecy and not infringe the proprietary rights of third parties. We cannot assure you that the patents of others will not have an adverse effect on our ability to conduct our business, that we will develop additional proprietary technology that is patentable or that any patents issued to us or Arkenol will provide us with competitive advantages or will not be challenged by third parties. Further, we cannot assure you that others will not independently develop similar or superior technologies, duplicate elements of the Arkenol Technology or design around it.
It is possible that we may need to acquire other licenses to, or to contest the validity of, issued or pending patents or claims of third parties. We cannot assure you that any license would be made available to us on acceptable terms, if at all, or that we would prevail in any such contest. In addition, we could incur substantial costs in defending ourselves in suits brought against us for alleged infringement of another party’s patents in bringing patent infringement suits against other parties based on our licensed patents.
In addition to licensed patent protection, we also rely on trade secrets, proprietary know-how and technology that we seek to protect, in part, by confidentiality agreements with our prospective joint venture partners, employees and consultants. We cannot assure you that these agreements will not be breached, that we will have adequate remedies for any breach, or that our trade secrets and proprietary know-how will not otherwise become known or be independently discovered by others.
OUR SUCCESS DEPENDS UPON ARNOLD KLANN, OUR CHAIRMAN AND CHIEF EXECUTIVE OFFICER, AND JOHN CUZENS, OUR CHIEF TECHNOLOGY OFFICER AND SENIOR VICE PRESIDENT.
We believe that our success will depend to a significant extent upon the efforts and abilities of (i) Arnold Klann, our Chairman and Chief Executive Officer, due to his contacts in the ethanol and cellulose industries and his overall insight into our business, and (ii) John Cuzens, our Chief Technology Officer and Senior Vice President for his technical and engineering expertise, including his familiarity with the Arkenol Technology. Our failure to retain Mr. Klann or Mr. Cuzens, or to attract and retain additional qualified personnel, could adversely affect our operations. We do not currently carry key-man life insurance on any of our officers.
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COMPETITION FROM LARGE PRODUCERS OF PETROLEUM-BASED GASOLINE ADDITIVES AND OTHER COMPETITIVE PRODUCTS MAY IMPACT OUR PROFITABILITY.
Our proposed ethanol plants will also compete with producers of other gasoline additives made from other raw materials having similar octane and oxygenate values as ethanol. The major oil companies have significantly greater resources than we have to develop alternative products and to influence legislation and public perception of ethanol. These other companies also have significant resources to begin production of ethanol should they choose to do so.
We will also compete with producers of other gasoline additives having similar octane and oxygenate values as ethanol. An example of such other additives is MTBE, a petrochemical derived from methanol. MTBE costs less to produce than ethanol. Many major oil companies produce MTBE and because it is petroleum-based, its use is strongly supported by major oil companies. Alternative fuels, gasoline oxygenates and alternative ethanol production methods are also continually under development. The major oil companies have significantly greater resources than we have to market MTBE, to develop alternative products, and to influence legislation and public perception of MTBE and ethanol.
OUR BUSINESS PROSPECTS WILL BE IMPACTED BY CORN SUPPLY.
Our ethanol will be produced from cellulose, however currently most ethanol is produced from corn, which is affected by weather, governmental policy, disease and other conditions. A significant increase in the availability of corn and resulting reduction in the price of corn may decrease the price of ethanol and harm our business.
IF ETHANOL AND GASOLINE PRICES DROP SIGNIFICANTLY, WE WILL ALSO BE FORCED TO REDUCE OUR PRICES, WHICH POTENTIALLY MAY LEAD TO FURTHER LOSSES.
Prices for ethanol products can vary significantly over time and decreases in price levels could adversely affect our profitability and viability. The price of ethanol has some relation to the price of gasoline. The price of ethanol tends to increase as the price of gasoline increases, and the price of ethanol tends to decrease as the price of gasoline decreases. Any lowering of gasoline prices will likely also lead to lower prices for ethanol and adversely affect our operating results. We cannot assure you that we will be able to sell our ethanol profitably, or at all.
INCREASED ETHANOL PRODUCTION FROM CELLULOSE IN THE UNITED STATES COULD INCREASE THE DEMAND AND PRICE OF FEEDSTOCKS, REDUCING OUR PROFITABILITY.
New ethanol plants that utilize cellulose as their feedstock may be under construction or in the planning stages throughout the United States. This increased ethanol production could increase cellulose demand and prices, resulting in higher production costs and lower profits.
PRICE INCREASES OR INTERRUPTIONS IN NEEDED ENERGY SUPPLIES COULD CAUSE LOSS OF CUSTOMERS AND IMPAIR OUR PROFITABILITY.
Ethanol production requires a constant and consistent supply of energy. If there is any interruption in our supply of energy for whatever reason, such as availability, delivery or mechanical problems, we may be required to halt production. If we halt production for any extended period of time, it will have a material adverse effect on our business. Natural gas and electricity prices have historically fluctuated significantly. We purchase significant amounts of these resources as part of our ethanol production. Increases in the price of natural gas or electricity would harm our business and financial results by increasing our energy costs.
OUR BUSINESS PLAN CALLS FOR EXTENSIVE AMOUNTS OF FUNDING TO CONSTRUCT AND OPERATE OUR BIOREFINERY PROJECTS AND WE MAY NOT BE ABLE TO OBTAIN SUCH FUNDING WHICH COULD ADVERSELY AFFECT OUR BUSINESS, OPERATIONS AND FINANCIAL CONDITION.
Our business plan depends on the completion of up to 19 bio-refinery projects. Although each facility will have specific funding requirements, our proposed Lancaster Bio-refinery will require approximately $100-$125 million in EPC costs, and our proposed Fulton Project will require approximately $300 million in EPC costs. We will be relying on additional financing, and funding from such sources as Federal and State grants and loan guarantee programs. We are currently in discussions with potential sources of financing but no definitive agreements are in place. If we cannot achieve the requisite financing or complete the projects as anticipated, this could adversely affect our business, the results of our operations, prospects and financial condition.
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On December 23, 2013, the Company received notice from the DOE indicating that the DOE would no longer provide funding under Award 2 due to the Company’s inability to provide agreements related to the balance of plant financing arrangements for the Fulton Project. The Company is seeking to re-establish funding under Award 2 and has initiated the appeals process with the DOE. The Company shall exhaust all options available to it in order to reverse the DOE’s decision (See Note 3).
Risks Related to Government Regulation and Subsidization
FEDERAL REGULATIONS CONCERNING TAX INCENTIVES COULD EXPIRE OR CHANGE, WHICH COULD CAUSE AN EROSION OF THE CURRENT COMPETITIVE STRENGTH OF THE ETHANOL INDUSTRY.
Congress currently provides certain federal tax credits for ethanol producers and marketers. The current ethanol industry and our business initially depend on the continuation of these credits. The credits have supported a market for ethanol that might disappear without the credits. These credits may not continue beyond their scheduled expiration date or, if they continue, the incentives may not be at the same level. The revocation or amendment of any one or more of these tax incentives could adversely affect the future use of ethanol in a material way, and we cannot assure investors that any of these tax incentives will be continued. The elimination or reduction of federal tax incentives to the ethanol industry could have a material adverse impact on the industry as a whole.
WE RELY ON ACCESS TO FUNDING FROM THE UNITED STATES DEPARTMENT OF ENERGY. IF WE CANNOT ACCESS GOVERNMENT FUNDING WE MAY BE UNABLE TO FINANCE OUR PROJECTS AND/OR OUR OPERATIONS.
Our operations have been financed to a large degree through funding provided by the DOE. We rely on access to this funding as a source of liquidity for capital requirements not satisfied by the cash flow from our operations. If we are unable to access government funding our ability to finance our projects and/or operations and implement our strategy and business plan will be severely hampered. In 2008, the Company began to draw down on the Award 1 monies that were finalized with the DOE. As our Fulton Project developed further, the Company was able to begin drawing down on the second phase of DOE monies (“Award 2”). Although we finalized Award 1 with a total reimbursable amount of $6,425,564, and Award 2 with a total reimbursable amount of $81,134,686, through November 19, 2014, we have an unreimbursed amount of approximately $0 available to us under Award 1, and approximately $88,300 under Award 2, for costs incurred prior to September 30, 2014, but not yet paid for, which is required for reimbursement and for costs to close out the award, assuming the appeal is not successful. Due to the DOE’s discontinuance of Award 2 as stated below, we cannot guarantee that we will continue to receive grants, loan guarantees, or other funding for our projects from the DOE.
The Company estimates the amounts to be reimbursed by the DOE by applying a portion of approved indirect costs (overhead) to the direct project costs in a calculation which derives what is known as our indirect rate. This indirect rate is used to reimburse the Company for the costs incurred that are not directly related to the project. This rate calculation is estimated by the Company, and is subject to change periodically. In the event that the Company over estimates this rate or under estimates this rate, it may have an impact to our financial statements and future ability to be reimbursed under the awards.
On December 23, 2013, we received notice from the Department of Energy (the “DOE”) indicating that the DOE would no longer provide funding under the Company’s DOE grant (the “DOE Grant”) for the development of its cellulosic waste facility in Fulton, Mississippi (the “Fulton Project”), due to the Company’s inability to comply with certain deadlines related to providing certain information to the DOE with respect to the Company’s future financing arrangements for the Fulton Project. The Company is seeking to re-establish funding under the DOE Grant and has initiated the appeals process with the DOE. The Company shall exhaust all options available to it in order to reverse the DOE’s decision. Until the Company is notified of the outcome of its appeal or its requests for a reprieve, the company can no longer reimburse for new charges incurred after September 30, 2014.
The Company cannot make any assurances that the DOE’s decision will be reversed on appeal or that such an appeal will be heard at all. If the Company’s attempt to appeal the DOE’s decision is unsuccessful, we will devise a new strategy with respect to financing the Fulton Project. There can be no assurances that we will be able to devise a new strategy with respect to financing of the Fulton Project. Failure to raise additional capital would have a material adverse impact on our operations.
As of September 30, 2014, the Company has received reimbursements of approximately $13,079,839 under these awards.
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LAX ENFORCEMENT OF ENVIRONMENTAL AND ENERGY POLICY REGULATIONS MAY ADVERSELY AFFECT DEMAND FOR ETHANOL.
Our success will depend in part on effective enforcement of existing environmental and energy policy regulations. Many of our potential customers are unlikely to switch from the use of conventional fuels unless compliance with applicable regulatory requirements leads, directly or indirectly, to the use of ethanol. Both additional regulation and enforcement of such regulatory provisions are likely to be vigorously opposed by the entities affected by such requirements. If existing emissions-reducing standards are weakened, or if governments are not active and effective in enforcing such standards, our business and results of operations could be adversely affected. Even if the current trend toward more stringent emission standards continues, we will depend on the ability of ethanol to satisfy these emissions standards more efficiently than other alternative technologies. Certain standards imposed by regulatory programs may limit or preclude the use of our products to comply with environmental or energy requirements. Any decrease in the emission standards or the failure to enforce existing emission standards and other regulations could result in a reduced demand for ethanol. A significant decrease in the demand for ethanol will reduce the price of ethanol, adversely affect our profitability and decrease the value of your stock.
COSTS OF COMPLIANCE WITH BURDENSOME OR CHANGING ENVIRONMENTAL AND OPERATIONAL SAFETY REGULATIONS COULD CAUSE OUR FOCUS TO BE DIVERTED AWAY FROM OUR BUSINESS AND OUR RESULTS OF OPERATIONS TO SUFFER.
Ethanol production involves the emission of various airborne pollutants, including particulate matter, carbon monoxide, carbon dioxide, nitrous oxide, volatile organic compounds and sulfur dioxide. The production facilities that we will build will discharge water into the environment. As a result, we are subject to complicated environmental regulations of the U.S. Environmental Protection Agency and regulations and permitting requirements of the states where our plants are to be located. These regulations are subject to change and such changes may require additional capital expenditures or increased operating costs. Consequently, considerable resources may be required to comply with future environmental regulations. In addition, our ethanol plants could be subject to environmental nuisance or related claims by employees, property owners or residents near the ethanol plants arising from air or water discharges. Ethanol production has been known to produce an odor to which surrounding residents could object. Environmental and public nuisance claims, or tort claims based on emissions, or increased environmental compliance costs could significantly increase our operating costs.
OUR PROPOSED NEW ETHANOL PLANTS WILL ALSO BE SUBJECT TO FEDERAL AND STATE LAWS REGARDING OCCUPATIONAL SAFETY.
Risks of substantial compliance costs and liabilities are inherent in ethanol production. We may be subject to costs and liabilities related to worker safety and job related injuries, some of which may be significant. Possible future developments, including stricter safety laws for workers and other individuals, regulations and enforcement policies and claims for personal or property damages resulting from operation of the ethanol plants could reduce the amount of cash that would otherwise be available to further enhance our business.
Risks Related to Our Common Stock
THERE IS NO LIQUID MARKET FOR OUR COMMON STOCK.
Our shares are traded on the OTCBB and the trading volume has historically been very low. An active trading market for our shares may not develop or be sustained. We cannot predict at this time how actively our shares will trade in the public market or whether the price of our shares in the public market will reflect our actual financial performance.
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THE MARKET PRICE OF OUR COMMON STOCK IS HIGHLY VOLATILE AND STOCKHOLDERS MAY NOT BE ABLE TO RESELL THEIR SHARES AT OR ABOVE THE PRICE AT WHICH SUCH SHARES WERE PURCHASED.
The market price of our common stock may fluctuate significantly. From July 11, 2006, the day we began trading publicly as BFRE.PK, and December 31, 2013, traded as BFRE.OB, the high and low price for our common stock has been $7.90 and $0.0015 per share, respectively. Our share price has fluctuated in response to various factors, including not yet beginning construction of our first plant, needing additional time to organize engineering resources, issues relating to feedstock sources, trying to locate suitable plant locations, locating distributors, Department of Energy decommittment, and finding funding sources.
THE APPLICATION OF THE “PENNY STOCK” RULES COULD ADVERSELY AFFECT THE MARKET PRICE OF OUR COMMON SHARES AND INCREASE YOUR TRANSACTION COSTS TO SELL THOSE SHARES.
The U.S. Securities and Exchange Commission (the “SEC”) has adopted rule 3a51-1 which establishes the definition of a “penny stock,” for the purposes relevant to us, as any equity security that has a market price of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to certain exceptions. For any transaction involving a penny stock, unless exempt, Rule 15g-9 requires:
| ● | that a broker or dealer approve a person’s account for transactions in penny stocks; and | |
| ● | the broker or dealer receive from the investor a written agreement to the transaction, setting forth the identity and quantity of the penny stock to be purchased. |
In order to approve a person’s account for transactions in penny stocks, the broker or dealer must:
| ● | obtain financial information and investment experience objectives of the person; and | |
| ● | make a reasonable determination that the transactions in penny stocks are suitable for that person and the person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks. |
The broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prescribed by the SEC relating to the penny stock market, which, in highlight form:
| ● | sets forth the basis on which the broker or dealer made the suitability determination; and | |
| ● | that the broker or dealer received a signed, written agreement from the investor prior to the transaction. |
Generally, brokers may be less willing to execute transactions in securities subject to the “penny stock” rules. This may make it more difficult for investors to dispose of our common stock and cause a decline in the market value of our stock.
AS AN ISSUER OF “PENNY STOCK,” THE PROTECTION PROVIDED BY THE FEDERAL SECURITIES LAWS RELATING TO FORWARD LOOKING STATEMENTS DOES NOT APPLY TO US.
Although federal securities laws provide a safe harbor for forward-looking statements made by a public company that files reports under the federal securities laws, this safe harbor is not available to issuers of penny stocks. As a result, the Company will not have the benefit of this safe harbor protection in the event of any legal action based upon a claim that the material provided by the Company contained a material misstatement of fact or was misleading in any material respect because of the Company’s failure to include any statements necessary to make the statements not misleading. Such an action could hurt our financial condition.
| 12 |
COMPLIANCE AND CONTINUED MONITORING IN CONNECTION WITH CHANGING REGULATION OF CORPORATE GOVERNANCE AND PUBLIC DISCLOSURE MAY RESULT IN ADDITIONAL EXPENSES.
Changing laws, regulations and standards relating to corporate governance and public disclosure may create uncertainty regarding compliance matters. New or changed laws, regulations and standards are subject to varying interpretations in many cases. As a result, their application in practice may evolve over time. We are committed to maintaining high standards of corporate governance and public disclosure. Complying with evolving interpretations of new or changed legal requirements may cause us to incur higher costs as we revise current practices, policies and procedures, and may divert management time and attention from the achievement of revenue generating activities to compliance activities. If our efforts to comply with new or changed laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to uncertainties related to practice, our reputation might be harmed which would could have a significant impact on our stock price and our business. In addition, the ongoing maintenance of these procedures to be in compliance with these laws, regulations and standards could result in significant increase in costs.
YOU COULD BE DILUTED FROM THE ISSUANCE OF ADDITIONAL COMMON STOCK.
As of December 30, 2014, we had 226,890,278 shares of common stock outstanding and no shares of preferred stock outstanding. We are authorized to issue up to 500,000,000 shares of common stock and 1,000,000 shares of preferred stock. To the extent of such authorization, our Board of Directors will have the ability, without seeking stockholder approval, to issue additional shares of common stock or preferred stock in the future for such consideration as the Board of Directors may consider sufficient. The issuance of additional common stock or preferred stock in the future may reduce your proportionate ownership and voting power.
WE HAVE NOT AND DO NOT INTEND TO PAY ANY DIVIDENDS. AS A RESULT, YOU MAY ONLY BE ABLE TO OBTAIN A RETURN ON INVESTMENT IN OUR COMMON STOCK IF ITS VALUE INCREASES.
We have not paid dividends in the past and do not plan to pay dividends in the near future. We expect to retain earnings to finance and develop our business. In addition, the payment of future dividends will be directly dependent upon our earnings, our financial needs and other similarly unpredictable factors. As a result, the success of an investment in our common stock will depend upon future appreciation in its value. The price of our common stock may not appreciate in value or even maintain the price at which you purchased our shares.
THE MARKET PRICE OF OUR COMMON STOCK IS HIGHLY VOLATILE.
The market price of our common stock has been and is expected to continue to be highly volatile. Factors, including announcements of technological innovations by us or other companies, regulatory matters, new or existing products or procedures, concerns about our financial position, operating results, litigation, government regulation, developments or disputes relating to agreements, patents or proprietary rights, may have a significant impact on the market price of our stock. In addition, potential dilutive effects of future sales of shares of common stock by shareholders and by the Company, and subsequent sales of common stock by the holders of warrants and options could have an adverse effect on the market price of our shares.
Risks Related to this Offering
KODIAK WILL PAY LESS THAN THE THEN-PREVAILING MARKET PRICE FOR OUR COMMON STOCK.
The common stock to be issued to Kodiak pursuant to the Equity Purchase Agreement will be purchased at a 25% discount to the lowest closing price of the common stock during the five consecutive trading days immediately following the date of our put notice to Kodiak of our election to put shares pursuant to the Equity Purchase Agreement. Kodiak has a financial incentive to sell our common stock immediately upon receiving the shares to realize the profit equal to the difference between the discounted price and the market price. If Kodiak sells the shares, the price of our common stock could decrease.
If our stock price decreases, Kodiak may have a further incentive to sell the shares of our common stock that it holds. These sales may have a further impact on our stock price.
YOUR OWNERSHIP INTEREST MAY BE DILUTED AND THE VALUE OF OUR COMMON STOCK MAY DECLINE BY EXERCISING THE PUT RIGHT PURSUANT TO OUR EQUITY AGREEMENT.
Effective December 17, 2014, we entered into a $1,500,000 Equity Purchase Agreement with Kodiak. Pursuant to the Equity Purchase Agreement, when we deem it necessary, we may raise capital through the private sale of our common stock to Kodiak at a price equal to seventy-five percent (75%) of the lowest price of the Company’s common stock for the five trading days immediately following the date our put notice is delivered. Because the put price is lower than the prevailing market price of our common stock, to the extent that the put right is exercised, your ownership interest may be diluted.
WE ARE REGISTERING AN AGGREGATE OF 50,000,000 SHARES OF COMMON STOCK TO BE ISSUED UNDER THE EQUITY PURCHASE AGREEMENT. THE SALE OF SUCH SHARES COULD DEPRESS THE MARKET PRICE OF OUR COMMON STOCK.
We are registering an aggregate of 50,000,000 Put Shares of common stock under the registration statement of which this prospectus forms a part for issuance pursuant to the Equity Purchase Agreement. Notwithstanding Kodiak’s ownership limitation, the 50,000,000 Put Shares would represent approximately 18% of our shares of common stock outstanding immediately after our exercise of the put right under the Equity Purchase Agreement. The sale of these Put Shares into the public market by Kodiak could depress the market price of our common stock. At the assumed offering price of $0.047 per share, we will be able to receive up to $1,500,000 in gross proceeds pursuant to the Equity Purchase Agreement. In the event that we put the entire 50,000,000 Put Shares to Kodiak and fail to receive $1,500,000 in gross proceeds, we would be required to register additional shares to obtain the balance of $1,500,000 under the Equity Purchase Agreement at the assumed offering price of $0.047. Due to the floating offering price, we are not able to determine the exact number of shares that we will issue under the Equity Purchase Agreement.
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THE COMPANY MAY NOT HAVE ACCESS TO THE FULL AMOUNT AVAILABLE UNDER THE EQUITY AGREEMENT.
We have not drawn down funds and have not issued shares of our common stock under the Equity Purchase Agreement with Kodiak. Our ability to draw down funds and sell shares under the Equity Purchase Agreement requires that the registration statement, of which this prospectus is a part, be declared effective by the SEC, and that this registration statement continue to be effective. In addition, the registration statement of which this prospectus is a part registers 50,000,000 Put Shares issuable under the Equity Purchase Agreement, and our ability to access the Equity Purchase Agreement to sell any remaining shares issuable under the Equity Purchase Agreement is subject to our ability to prepare and file one or more additional registration statements registering the resale of these shares. These subsequent registration statements may be subject to review and comment by the staff of the SEC, and will require the consent of our independent registered public accounting firm. Therefore, the timing of effectiveness of these subsequent registration statements cannot be assured. The effectiveness of these subsequent registration statements is a condition precedent to our ability to sell the shares of common stock subject to these subsequent registration statements to Kodiak under the Equity Purchase Agreement. Even if we are successful in causing one or more registration statements registering the resale of some or all of the shares issuable under the Equity Purchase Agreement to be declared effective by the SEC in a timely manner, we will not be able to sell shares under the Equity Purchase Agreement unless certain other conditions are met. Accordingly, because our ability to draw down amounts under the Equity Purchase Agreement is subject to a number of conditions, there is no guarantee that we will be able to draw down any portion or all of the $1,500,000 available to us under the Equity Purchase Agreement.
CERTAIN RESTRICTIONS ON THE EXTENT OF PUTS AND THE DELIVERY OF PUT NOTICES MAY HAVE LITTLE, IF ANY, EFFECT ON THE ADVERSE IMPACT OF OUR ISSUANCE OF SHARES IN CONNECTION WITH THE EQUITY PURCHASE AGREEMENT, AND AS SUCH, KODIAK MAY SELL A LARGE NUMBER OF SHARES, RESULTING IN SUBSTANTIAL DILUTION TO THE VALUE OF SHARES HELD BY EXISTING SHAREHOLDERS.
Kodiak has agreed, subject to certain exceptions listed in the Equity Purchase Agreement, to refrain from holding an amount of shares which would result in Kodiak or its affiliates owning more than 4.99% of the then-outstanding shares of the Company’s common stock at any one time. These restrictions, however, do not prevent Kodiak from selling shares of common stock received in connection with a put, and then receiving additional shares of common stock in connection with a subsequent put. In this way, Kodiak could sell more than 4.99% of the outstanding common stock in a relatively short time frame while never holding more than 4.99% at one time.
ASSUMING WE UTILIZE THE MAXIMUM AMOUNT AVAILABLE UNDER THE EQUITY LINE OF CREDIT, EXISTING SHAREHOLDERS COULD EXPERIENCE SUBSTANTIAL DILUTION UPON THE ISSUANCE OF COMMON STOCK.
Our Equity Purchase Agreement with Kodiak contemplates the potential future issuance and sale of up to $1,500,000 of our common stock to Kodiak subject to certain restrictions and obligations. The following table is an example of the number of shares that could be issued at various prices assuming we utilize the maximum amount remaining available under the Equity Purchase Agreement. These examples assume issuances at a market price of $0.045 per share and at 10%, 25%, 50%, and 75% below $0.03375 per share, taking into account Kodiak’s 25% discount.
The following table should be read in conjunction with the footnotes immediately following the table.
| Percent below Current market price | Price per share (1) | Number of shares issuable (2) | Shares outstanding (3) | Percent of outstanding shares (4) | |||||||||||||
| 10 | % | $ | 0.030375 | 49,382,717 | 276,272,995 | 18 | % | ||||||||||
| 25 | % | $ | 0.025312 | 59,260,430 | 286,150,708 | 21 | % | ||||||||||
| 50 | % | $ | 0.016875 | 88,888,889 | 315,779,167 | 28 | % | ||||||||||
| 75 | % | $ | 0.008437 | 177,788,314 | 404,678,592 | 44 | % | ||||||||||
| (1) | Represents purchase prices equal to 75% of $0.045 and potential reductions thereof of 10%, 25%, 50% and 75%. |
| (2) | Represents the number of shares issuable if the entire $1,500,000 under the Equity Purchase Agreement were drawn down at the indicated purchase prices. Our Articles of Incorporation currently authorizes 500,000,000 shares of common stock. |
| (3) | Based on 226,890,278 shares of common stock outstanding at December 30, 2014. Our Articles of Incorporation currently authorizes 500,000,000 shares of common stock. We may in the future need to amend our Articles of Incorporation in order to increase our authorized shares of common stock. |
| (4) | Percentage of the total outstanding shares of common stock after the issuance of the shares indicated, without considering any contractual restriction on the number of shares the selling shareholder may own at any point in time or other restrictions on the number of shares we may issue. |
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Information included or incorporated by reference in this Prospectus may contain forward-looking statements. This information may involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from the future results, performance or achievements expressed or implied by any forward-looking statements. Forward-looking statements, which involve assumptions and describe our future plans, strategies and expectations, are generally identifiable by use of the words “may,” “should,” “expect,” “anticipate,” “estimate,” “believe,” “intend” or “project” or the negative of these words or other variations on these words or comparable terminology. The forward-looking statements contained in this report are based on current expectations and beliefs concerning future developments and the potential effects on the parties and the transaction. There can be no assurance that future developments actually affecting us will be those anticipated. These that may cause actual results or performance to be materially different from those expressed or implied by these forward-looking statements, including the following forward-looking statements involve a number of risks, uncertainties (some of which are beyond the parties’ control) or other assumptions.
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The Selling Security Holder is selling all of the shares of our common stock covered by this prospectus for its own account. Accordingly, we will not receive any proceeds from the resale of our common stock. However, we will receive proceeds from any sale of the common stock to Kodiak under the Equity Purchase Agreement. We intend to use the net proceeds received for working capital or general corporate needs.
DETERMINATION OF OFFERING PRICE
Our common stock currently trades on the OTC Markets under the symbol “BFRE”. The proposed offering price of the Shares is $0.047 and has been estimated solely for the purpose of computing the amount of the registration fee in accordance with Rule 457(c) of the Securities Act of 1933, on the basis of the average of the high and low transaction prices of the common stock of the Company as reported on the OTC Markets on December 30, 2014.
We are not offering any shares in this registration statement. All shares are being registered on behalf of the Selling Security Holder.
We agreed to register for resale 50,000,000 Shares that we will put to Kodiak pursuant to the Equity Purchase Agreement. The Equity Purchase Agreement with Kodiak provides that Kodiak is committed to purchase up to $1,500,000 of our common stock. We may draw on the facility from time to time, as and when we determine appropriate in accordance with the terms and conditions of the Equity Purchase Agreement.
Selling Security Holder Pursuant to the Equity Purchase Agreement
Kodiak is the potential purchaser of our common stock under the Equity Purchase Agreement. The 50,000,000 Shares offered in this prospectus are based on the Equity Purchase Agreement between Kodiak and us. Kodiak may from time to time offer and sell any or all of the Shares that are registered under this prospectus. The purchase price is seventy-five percent (75%) of the lowest closing price of the Company’s common stock for the five trading days immediately following the date on which the Company is deemed to provide a put notice under the Equity Purchase Agreement.
We are unable to determine the exact number of Shares that will actually be sold by Kodiak according to this prospectus due to:
| ● | the ability of Kodiak to determine when and whether it will sell any of the Shares under this prospectus; and | |
| ● | the uncertainty as to the number of Shares that will be issued upon exercise of our put options through the delivery of a put notice under the Equity Purchase Agreement. |
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The following information contains a description of how Kodiak acquired (or shall acquire) the shares to be sold in this offering. Kodiak has not held a position or office, or had any other material relationship with us, except as follows.
Kodiak is a limited liability company organized and existing under the laws of the Cayman Islands. Kodiak acquired, or will acquire, all shares being registered in this offering in the financing transaction with us.
Kodiak intends to sell up to 50,000,000 Shares of our common stock pursuant to the Equity Purchase Agreement under this prospectus. On December 17, 2014, the Company and Kodiak entered into the Equity Purchase Agreement pursuant to which we have the opportunity, for a twenty-four (24) month period to sell shares of our common stock for a total price of $1,500,000. For each share of our common stock purchased under the Equity Purchase Agreement, Kodiak will pay seventy-five percent (75%) of the lowest closing price of the Company’s common stock for the five trading days immediately following the date on which the Company is deemed to provide a put notice of a sale of common stock under the Equity Purchase Agreement.
We relied on an exemption from the registration requirements of the Securities Act. The transaction does not does involve a private offering, Kodiak is an “accredited investor” and/or qualified institutional buyer and Kodiak has access to information about the Company and its investment.
At an assumed purchase price under the Equity Purchase Agreement of $0.03 (equal to 75% of the closing bid price of our common stock of $0.04 on December 30, 2014), we will be able to receive up to $1,500,000 in gross proceeds, assuming the sale of the entire 50,000,000 Shares being registered hereunder pursuant to the Equity Purchase Agreement. In the event that we put the entire 50,000,000 Put Shares to Kodiak and fail to receive $1,500,000 in gross proceeds, we would be required to register additional shares to obtain the balance of $1,500,000 under the Equity Purchase Agreement if the market price of our common stock declines. The Company is currently authorized to issue 500,000,000 shares of its common stock. Kodiak has agreed, subject to certain exceptions listed in the Equity Purchase Agreement, to refrain from holding an amount of shares which would result in Kodiak or its affiliates from owning more than 4.99% of the then-outstanding shares of the Company’s common stock at any one time.
There are substantial risks to investors as a result of the issuance of shares of our common stock under the Equity Purchase Agreement. These risks include dilution of stockholders and significant decline in our stock price.
Kodiak will periodically purchase shares of our common stock under the Equity Purchase Agreement and will in turn, sell such shares to investors in the market at the prevailing market price. This may cause our stock price to decline, which will require us to issue increasing numbers of shares to Kodiak to raise the same amount of funds, as our stock price declines.
Kodiak and any participating broker-dealers are “underwriters” within the meaning of the Securities Act. All expenses incurred with respect to the registration of the common stock will be borne by us, but we will not be obligated to pay any underwriting fees, discounts, commission or other expenses incurred by the Selling Security Holder in connection with the sale of such shares.
Except as indicated below, neither the Selling Security Holder nor any of its associates or affiliates has held any position, office, or other material relationship with us in the past three years.
The following table sets forth the name of the Selling Security Holder, the number of shares of common stock beneficially owned by the Selling Security Holder as of the date hereof and the number of share of common stock being offered by the Selling Security Holder. The shares being offered hereby are being registered to permit public secondary trading, and the Selling Security Holder may offer all or part of the shares for resale from time to time. However, the Selling Security Holder is under no obligation to sell all or any portion of such shares nor is the Selling Security Holder obligated to sell any shares immediately upon effectiveness of this prospectus. All information with respect to share ownership has been furnished by the Selling Security Holder. The column entitled “Amount Beneficially Owned After the Offering” assumes the sale of all shares offered.
| Name | Shares Beneficially Owned Prior To Offering | Shares to be Offered | Amount Beneficially Owned After Offering (2) | Percent Beneficially Owned After Offering (2 ) | ||||||||||||
| Kodiak Capital Group, LLC (1) | 0 | 50,000,000 | 0 | 0 | % | |||||||||||
(1) Ryan Hodson, Managing Member of Kodiak Capital Group, LLC, exercises voting and investment control with respect to the shares held by Kodiak Capital Group, LLC.
(2) Assuming the sale of all shares offered.
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This prospectus relates to the resale of up to 50,000,000 Shares issued pursuant to the Equity Purchase Agreement held by the Selling Security Holder.
The Selling Security Holder may, from time to time, sell any or all of their shares of our common stock on any stock exchange, market or trading facility on which the shares are traded or in private transactions. The Selling Security Holder may use any one or more of the following methods when selling shares:
| ● | ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers; | |
| ● | block trades in which the broker-dealer will sell the shares as agent; | |
| ● | purchases by a broker-dealer as principal and resale by the broker-dealer for its account; | |
| ● | privately negotiated transactions; | |
| ● | broker-dealers may agree with the Selling Stock Holder to sell a specified number of such shares at a stipulated price per share; | |
| ● | through the writing or settlement of options or other hedging transactions, whether through an options exchange or otherwise; | |
| ● | a combination of any such methods of sale; or | |
| ● | any other method permitted pursuant to applicable law. |
The Selling Security Holder and any participating broker-dealers are “underwriters” within the meaning of the Securities Act . Pursuant to the terms of the Equity Purchase Agreement, the Selling Security Holder may not engage in any short sales of the Company’s common stock or other hedging activities. The Selling Security Holder may sell the shares directly to market makers acting as principals and/or broker-dealers acting as agents for itself or its customers. Such broker-dealers may receive compensation in the form of discounts, concessions or commissions from the Selling Security Holder and/or the purchasers of shares for whom such broker-dealers may act as agents or to whom they sell as principal or both, which compensation as to a particular broker-dealer might be in excess of customary commissions. Market makers and block purchasers purchasing the shares will do so for their own account and at their own risk. It is possible that the Selling Security Holder will attempt to sell shares of the Company’s common stock in block transactions to market makers or other purchasers at a price per share which may be below the then market price. The Selling Security Holder cannot assure that all or any of the shares offered in this prospectus will be issued to, or sold by, the Selling Security Holder. In addition, any brokers, dealers or agents, upon effecting the sale of any of the shares offered in this prospectus are “underwriters” as that term is defined under the Securities Act or the Exchange Act, or the rules and regulations under such acts. In such event, any commissions received by such broker-dealers or agents and any profit on the resale of the shares purchased by them may be deemed to be underwriting commissions or discounts under the Securities Act.
Discounts, concessions, commissions and similar selling expenses, if any, attributable to the sale of shares will be borne by the Selling Security Holder. The Selling Security Holder may agree to indemnify any agent, dealer or broker-dealer that participates in transactions involving sales of the shares if liabilities are imposed on that person under the Securities Act.
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We are required to pay all fees and expenses incident to the registration of the shares of common stock. Otherwise, all discounts, commissions or fees incurred in connection with the sale of our common stock offered hereby will be paid by the Selling Security Holder.
The Selling Security Holder acquired the securities offered hereby in the ordinary course of business and has advised us that it has not entered into any agreements, understandings or arrangements with any underwriters or broker-dealers regarding the sale of its shares of common stock, nor is there an underwriter or coordinating broker acting in connection with a proposed sale of shares of common stock by the Selling Security Holder. We will file a supplement to this prospectus if the Selling Security Holder enters into a material arrangement with a broker-dealer for sale of common stock being registered. If the Selling Security Holder uses this prospectus for any sale of the shares of common stock, it will be subject to the prospectus delivery requirements of the Securities Act.
Pursuant to a requirement by the Financial Industry Regulatory Authority, or FINRA, the maximum commission or discount to be received by any FINRA member or independent broker/dealer may not be greater than eight percent (8%) of the gross proceeds received by us for the sale of any securities being registered pursuant to SEC Rule 415 under the Securities Act.
The anti-manipulation rules of Regulation M under the Exchange Act may apply to sales of our common stock and activities of the Selling Security Holder. The Selling Security Holder will act independently of us in making decisions with respect to the timing, manner and size of each sale.
We will pay all expenses incident to the registration, offering and sale of the shares of our common stock to the public hereunder other than commissions, fees and discounts of underwriters, brokers, dealers and agents. If any of these other expenses exists, we expect Kodiak to pay these expenses. We have agreed to indemnify Kodiak and its controlling persons against certain liabilities, including liabilities under the Securities Act. We estimate that the expenses of the offering to be borne by us will be approximately $25,000. We will not receive any proceeds from the resale of any of the shares of our common stock by Kodiak. We may, however, receive proceeds from the sale of our common stock under the Equity Purchase Agreement. Neither the Equity Purchase Agreement nor any rights of the parties under the Equity Purchase Agreement may be assigned or delegated to any other person.
General
The Company is authorized to issue 500,000,000 shares of $0.001 par value common stock, and 1,000,000 shares of no par value preferred stock. As of December 30, 2014, the Company had 226,890,278 shares of common stock outstanding, and no shares of preferred stock outstanding.
Common Stock
As of September 30, 2014, we had 226,890,278 shares of common stock outstanding. The shares of our common stock presently outstanding, and any shares of our common stock issues upon exercise of stock options and/or warrants, will be fully paid and non-assessable. Each holder of common stock is entitled to one vote for each share owned on all matters voted upon by shareholders, and a majority vote is required for all actions to be taken by shareholders. In the event we liquidate, dissolve or wind-up our operations, the holders of the common stock are entitled to share equally and ratably in our assets, if any, remaining after the payment of all our debts and liabilities and the liquidation preference of any shares of preferred stock that may then be outstanding. The common stock has no preemptive rights, no cumulative voting rights, and no redemption, sinking fund, or conversion provisions. Since the holders of common stock do not have cumulative voting rights, holders of more than 50% of the outstanding shares can elect all of our Directors, and the holders of the remaining shares by themselves cannot elect any Directors. Holders of common stock are entitled to receive dividends, if and when declared by the Board of Directors, out of funds legally available for such purpose, subject to the dividend and liquidation rights of any preferred stock that may then be outstanding.
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Voting Rights
Each holder of common stock is entitled to one vote for each share of common stock held on all matters submitted to a vote of stockholders.
Dividends
Subject to preferences that may be applicable to any then-outstanding shares of preferred stock, if any, and any other restrictions, holders of common stock are entitled to receive ratably those dividends, if any, as may be declared from time to time by the Company’s board of directors out of legally available funds. The Company and its predecessors have not declared any dividends in the past. Further, the Company does not presently contemplate that there will be any future payment of any dividends on common stock.
Preferred Stock
As of December 30, 2014, we had no shares of preferred stock outstanding. We may issue preferred stock in one or more class or series pursuant to resolution of the Board of Directors. The Board of Directors may determine and alter the rights, preferences, privileges, and restrictions granted to or imposed upon any wholly unissued series of preferred stock, and fix the number of shares and the designation of any series of preferred stock. The Board of Directors may increase or decrease (but not below the number of shares of such series then outstanding) the number of shares of any wholly unissued class or series subsequent to the issue of shares of that class or series. We have no present plans to issue any shares of preferred stock.
Warrants
As of December 30, 2014, we had warrants to purchase an aggregate of 23,528,571 shares of our common stock outstanding. The exercise prices for the warrants range from $0.007-$0.55 per share. These warrants contain a provision in which the exercise price may be adjusted for future corporate actions such as mergers or acquisitions.
Options
As of December 30, 2014, we had no options outstanding.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is First American Stock Transfer with its business address at 4747 N 7th Street, Suite 170, Phoenix, AZ 85014.
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Our Company
We are BlueFire Renewables, Inc., a Nevada corporation (the “Company”). Our goal is to develop, own and operate high-value carbohydrate-based transportation fuel plants, or bio-refineries, to produce ethanol, a viable alternative to fossil fuels, and to provide professional services to bio-refineries worldwide. Our bio-refineries will convert widely available, inexpensive, organic materials such as agricultural residues, high-content biomass crops, wood residues and cellulose from municipal solid wastes into ethanol. This versatility enables us to consider a wide variety of feedstocks and locations in which to develop facilities to become a low cost producer of ethanol. We have licensed for use a patented process from Arkenol, Inc., a Nevada corporation (“Arkenol”), to produce ethanol from cellulose (the “Arkenol Technology”). We are the exclusive North America licensee of the Arkenol Technology to produce ethanol and will evaluate purchasing a broader license as opportunities arise. We may also utilize certain bio-refinery related rights, assets, work-product, intellectual property and other know-how related to 19 ethanol project opportunities originally developed by ARK Energy, Inc., a Nevada corporation, to accelerate our deployment of the
Arkenol Technology.
Company History
We are a Nevada corporation that was initially organized as Atlanta Technology Group, Inc., a Delaware corporation, on October 12, 1993. The Company was re-named Docplus.net Corporation on December 31, 1998, and further re-named Sucre Agricultural Corp. (“Sucre”) and re-domiciled as a Nevada corporation on March 6, 2006. Finally, on May 24, 2006, in anticipation of the reverse merger by which it would acquire BlueFire Ethanol, Inc., a privately held Nevada corporation organized on March 28, 2006, as described below, the Company was re-named to BlueFire Ethanol Fuels, Inc.
On June 27, 2006, the Company completed a reverse merger (the “Reverse Merger”) with BlueFire Ethanol, Inc. (“BlueFire Ethanol”). At the time of Reverse Merger, the Company was a blank-check company and had no operations, revenues or liabilities. The only asset possessed by the Company was $690,000 in cash which continued to be owned by the Company at the time of the Reverse Merger. In connection with the Reverse Merger, the Company issued BlueFire Ethanol 17,000,000 shares of common stock, approximately 85% of all of the outstanding common stock of the Company, for all the issued and outstanding BlueFire Ethanol common stock. The Company stockholders retained 4,028,264 shares of Company common stock. As a result of the Reverse Merger, BlueFire Ethanol became our wholly-owned subsidiary. On June 21, 2006, prior to and in anticipation of the Reverse Merger, Sucre sold 3,000,000 shares of common stock to two related investors in a private offering of shares pursuant to Rule 504 for proceeds of $1,000,000.
On July 20, 2010, the Company changed its name to BlueFire Renewables, Inc. to more accurately reflect our primary business plan expanding the focus from just building cellulosic ethanol projects to include other advanced biofuels, biodiesel, and other drop-in biofuels as well as synthetic lubricants as opportunities arise.
The Company’s shares of common stock began trading under the symbol “BFRE.PK” on the Pink Sheets of the National Quotation Bureau on July 11, 2006 and later began trading on the OTCBB under the symbol “BFRE.OB” on June 19, 2007. On April 14, 2014, the closing price of our Common Stock was $0.003 per share.
Our executive offices are located at 31 Musick, Irvine, California 92618 and our telephone number at such office is (949) 588-3767.
Principal Products or Services and Their Markets
Our goal is to develop, own and operate high-value carbohydrate-based transportation fuel plants, or bio-refineries, to produce ethanol and other biofuels that are viable alternative to fossil fuels, and to provide professional services to bio-refineries worldwide. Our bio-refineries will convert widely available, inexpensive, organic materials such as agricultural residues, high-content biomass crops, wood residues and cellulose from municipal solid wastes into ethanol. This versatility enables us to consider a wide variety of feedstocks and locations in which to develop facilities to become a low cost producer of ethanol.
We have licensed for use the Arkenol Technology, a patented process from Arkenol to produce ethanol from cellulose for sale into the transportation fuel market. We are the exclusive North America licensee of the Arkenol Technology.
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Arkenol Technology
The production of chemicals by fermenting various sugars is a well-accepted science. Its use ranges from producing beverage alcohol and fuel-ethanol to making citric acid and xantham gum for food uses. However, the high price of sugar and the relatively low cost of competing petroleum based fuel has kept the production of chemicals mainly confined to producing ethanol from corn sugar.
In the Arkenol Technology process, incoming biomass feedstocks are cleaned and ground to reduce the particle size for the process equipment. The pretreated material is then dried to a moisture content consistent with the acid concentration requirements for breaking down the biomass, then hydrolyzed (degrading the chemical bonds of the cellulose) to produce hexose and pentose (C5 and C6) sugars at the high concentrations necessary for commercial fermentation. The insoluble materials left are separated by filtering and pressing into a cake and further processed into fuel for other beneficial uses. The remaining acid-sugar solution is separated into its acid and sugar components. The separated sulfuric acid is recirculated and reconcentrated to the level required to breakdown the incoming biomass. The small quantity of acid left in the sugar solution is neutralized with lime to make hydrated gypsum which can be used as an agricultural soil conditioner. At this point the process has produced a clean stream of mixed sugars (both C6 and C5) for fermentation. In an ethanol production plant, naturally-occurring yeast, which Arkenol has specifically cultured by a proprietary method to ferment the mixed sugar stream, is mixed with nutrients and added to the sugar solution where it efficiently converts both the C6 and C5 sugars to fermentation beer (an ethanol, yeast and water mixture) and carbon dioxide. The yeast culture is separated from the fermentation beer by a centrifuge and returned to the fermentation tanks for reuse. Ethanol is separated from the now clear fermentation beer by conventional distillation technology, dehydrated to 200 proof and denatured with unleaded gasoline to produce the final fuel-grade ethanol product. The still bottoms, containing principally water and unfermented sugar, is returned to the process for economic water use and for further conversion of the sugars.
Simply put, the process separates the biomass into two main constituents: cellulose and hemicellulose (the main building blocks of plant life) and lignin (the “glue” that holds the building blocks together), converts the cellulose and hemicellulose to sugars, ferments them and purifies the fermentation liquids into ethanol and other end-products.
Ark Energy
BlueFire may also utilize certain bio-refinery related rights, assets, work-product, intellectual property and other know-how related to nineteen (19) ethanol project opportunities originally developed by ARK Energy, Inc., a Nevada corporation to accelerate BlueFire’s deployment of the Arkenol Technology. These opportunities consist of ARK Energy’s previous relationships, analysis, site development, permitting experience and market research on various potential project locations within North America. ARK Energy has transferred these assets to us and we valued these business assets based on management’s best estimates as to its actual costs of development. In the event we successfully finance the construction of a project that utilizes any of the transferred assets from ARK Energy, we are required to pay ARK Energy for the costs ARK Energy incurred in the development of the assets pertaining to that particular project or location. We did not incur the costs of a third party valuation but based our valuation of the assets acquired by (i) an arms-length review of the value assigned by ARK Energy to the opportunities are based on the actual costs it incurred in developing the project opportunities, and (ii) anticipated financial benefits to us. The company has not developed, paid for, or utilized any of these assets to date.
Pilot Plants
From 1994-2000, a test pilot bio-refinery plant was built and operated by Arkenol in Orange, California to test the effectiveness of the Arkenol Technology using several different types of raw materials containing cellulose. The types of materials tested included: rice straw, wheat straw, green waste, wood wastes, and municipal solid wastes. Various equipment used in the process was also tested and process conditions were verified leading to the issuance of the certain patents in support of the Arkenol Technology. In 2002, using the results obtained from the Arkenol California test pilot plant, JGC Corporation, based in Japan, built and operated a bench scale facility followed by another test pilot bio-refinery plant in Izumi, Japan. At the Izumi plant, Arkenol retained the rights to the Arkenol Technology while the operations of the facility were controlled by JGC Corporation.
Bio-Refinery Projects
We are currently in the development stage of building bio-refineries in North America. We plan to use the Arkenol Technology and utilize JGC’s operations knowledge from the Izumi test pilot plant to assist in the design and engineering of our facilities in North America. MECS and Brinderson Engineering, Inc. (“Brinderson”) provided the preliminary design package, while Brinderson completed the detailed engineering design for our Lancaster Bio-refinery. We feel this completed design should provide the blueprint for subsequent plant constructions. In 2010, MasTec in conjunction with Zachary Engineering completed the detailed engineering design for our planned Fulton Mississippi plant, also known as the Fulton Project.
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We intend to build a facility that will process approximately 190 tons of green waste material per day to produce roughly 3.9 million gallons of ethanol annually. In connection therewith, on November 9, 2007, we purchased the facility site which is located in Lancaster, California. Permit applications were filed on June 24, 2007, to allow for construction of the Lancaster facility. The Los Angeles County Planning Commission issued a Conditional Use Permit for the Lancaster Project in July of 2008. However, a subsequent appeal of the county decision, which BlueFire overcame, combined with the waiting period under the California Environmental Quality Act, pushed the effective date of the permit approval to December 12, 2008. On February 12, 2009, we were issued our Authority to Construct permit by the Antelope Valley Air Quality Management District. In December 2011, BlueFire requested an extension to pay the project’s permits for an additional year while we awaited potential financing. The Company has let the air permits expire as there were no more extensions available and management deemed the project not likely to start construction in the short-term due to a lack of financing. BlueFire will need to resubmit for air permits once it is able to raise the necessary financing. The Company sees the project on hold until we receive the funding to construct the facility.
In 2009, BlueFire completed the engineering package for the Lancaster Bio-refinery, and finalized the Front-End Loading (FEL) 3 stage of engineering for the Lancaster Bio-refinery. In 2010, BlueFire continued to develop the engineering package for the Fulton Project, and completed the FEL stages 2 and 3 of engineering for the Fulton Project readying the facility for construction. FEL is the process for conceptual development of processing industry projects. This process is used in the petrochemical, refining, and pharmaceutical industries. Front-End Loading is also referred to as Front-End Engineering Design (FEED). There are three stages in the FEL process:
| FEL-1 | FEL-2 | FEL-3 | ||
| * Material Balance | * Preliminary Equipment Design | * Purchase Ready Major Equipment Specifications | ||
| * Energy Balance | * Preliminary Layout | * Definitive Estimate | ||
| * Project Charter | * Preliminary Schedule | * Project Execution Plan | ||
| * Preliminary Estimate | * Preliminary 3D Model | |||
| * Electrical Equipment List | ||||
| * Line List | ||||
| * Instrument Index |
We estimate the total cost including contingencies to be in the range of approximately $100 million to $125 million for the Lancaster Bio-refinery. This is due in part to a combination of significant increases in materials costs in the world market from the last estimate until now, and the complexity of our first commercial deployment. At the end of 2008 and throughout 2009, prices for materials declined, although we expect, that prices for items like structural and specialty steel will continue to firm up throughout 2014 along with other materials of construction. The cost approximations above do not reflect any fluctuations in raw materials or construction costs since the original pricing estimates.
The uncertainties of the world credit markets from 2008 to present caused a delay in the financing we needed to enable placement of equipment orders for the construction of our Lancaster Bio-refinery, which would allow us to achieve a sustainable construction schedule after breaking ground. Hence, to insure a timely and continuous construction of the project, BlueFire’s Board of Directors determined it is prudent to delay Lancaster’s groundbreaking until all the necessary funds are in place. Project activities have advanced to a point that once credit is available, orders can be immediately placed and construction started. This project is considered shovel ready and only requires minimal capital to maintain until funding is obtained for its construction.
We are actively seeking financing sources of financing for this facility, but no definitive agreements are in place. In 2009, the Company filed for a loan guarantee with the U.S. Department of Energy (“DOE”) for this project, under DOE Program DE-FOA-0000140, which provided federal loan guarantees for projects that employ innovative energy efficiency, renewable energy, and advanced transmission and distribution technologies (“DOE LGPO”). Although the Company was hopeful of being able to secure the guarantee, in 2010, the Company was informed that the loan guarantee was rejected by the DOE due to a lack of definitive contracts for feedstock and off-take at the time of submittal of the loan guarantee for the Lancaster Bio-refinery, as well as the fact that the Company was also pursuing a much larger project in Fulton, Mississippi.
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Since 2007, The Company has been developing a facility for construction in a joint effort with the DOE. This facility will be located in Fulton, Mississippi, and will use approximately 700 metric dry tons of woody biomass, mill residue, and other cellulosic waste to produce approximately 19 million gallons of ethanol annually (the “Fulton Project”). In 2007, we received an award from the DOE of up to $40 million for the Fulton Project. On or around October 4, 2007, we finalized our first award for a total approved budget of just under $10,000,000 with the DOE (“Award 1”). Award 1 is a 60%/40% cost share, whereby 40% of approved costs may be reimbursed by the DOE pursuant to the total $40 million award announced in February 2007. In December 4, 2009, the DOE announced that the award for this project has been increased to a maximum of $88 million under the American Recovery and Reinvestment Act of 2009 (“ARRA”) and the Energy Policy Act of 2005. On December 23, 2013, the Company received notice from the DOE indicating that the DOE would no longer provide funding under its second award due to the Company’s inability to provide agreements related to the balance of plant financing arrangements for the Fulton Project. The Company is seeking to re-establish funding under this award and has initiated the appeals process with the DOE, but can make no assurances of success in reversing the DOE’s decision. The Company shall exhaust all options available to it in order to reverse the DOE’s decision (See Note 3). As of December 31, 2013, BlueFire has been reimbursed approximately $11,914,906 from the DOE under this award.
In 2010, BlueFire signed definitive agreements for the following three crucial contracts related to the Fulton Project: (a) feedstock supply with Cooper Marine and Timberlands Corporation (“Cooper Marine”), (b) off-take for the ethanol of the facility with Tenaska Biofuels LLC (“Tenaska”), and (c) the construction of the facility with MasTec North America Inc. (“MasTec”). Also in 2010, BlueFire continued to develop the engineering package for the Fulton Project, and completed both the FEL-2 and FEL-3 stages of engineering readying the facility for construction. As of November 2010, the Fulton Project has all necessary permits for construction, and in that same month we began site clearing and preparation work, signaling the beginning of construction. In June 2011, BlueFire completed initial site preparation and the site is now ready for facility construction. In February 2010, we announced that we submitted an application for a $250 million dollar loan guarantee for the Fulton Project, under the DOE LGPO, mentioned above. In February 2011, BlueFire received notice from the DOE LGPO staff that the Fulton Project’s application will not move forward until such time as the project has raised the remaining equity necessary for the completion of funding. In August 2010, BlueFire submitted an application for a $250 million loan guarantee with the U.S. Department of Agriculture (“USDA”) under Section 9003 of the 2008 Farm Bill, as defined below (“USDA LG”). In October 2011, BlueFire was notified by its lender (“Lender”) for the Company’s USDA loan guarantee application that the USDA sent the Lender notice that they are currently ineligible to participate in the USDA Bio-refinery Assistance Program. The USDA has offered to meet with the Lender and the Company in order to provide further explanation as to its decision and to allow the Lender and the Company the opportunity to provide any new information and potential alternatives for the USDA’s consideration. The Company planned to continue to work with the USDA and the Lender in order to satisfy the loan guarantee application requirements which included the substitution of another lender. As of December 31, 2013, no significant progress has been made with the USDA or the Lender in this regard and the company has abandoned this loan guarantee solicitation. The Company may reapply at a later date as funding opportunities arise. Recently, the Company signed a new Master Engineering, Procurement, and Construction contract with the China International Water & Electric Company, a subsidiary of China Three Gorges Corporation (the “EPC”). In tandem with the new EPC contractor, the also recently received a letter of intent from the Export Import Bank of China to provide up to $270 Million USD in debt for the Fulton project subject to meeting the credit criteria of the bank and completing the due diligence process. In Mid 2013, the Company began developing a new integration concept in regards to the Fulton project where a wood pellet facility would be integrated into the ethanol facility to provide a stronger financing package. A preliminary design package and due diligence has been completed. The Company continues to explore this option and will utilize whichever plant design is the most beneficial for financing.
On December 23, 2013, the Company received notice from the DOE indicating that the DOE would no longer provide funding under the DOE Grant for the development of the Fulton Project due to the Company’s inability to comply with certain deadlines related to providing certain information to the DOE with respect to the Company’s future financing arrangements for the Fulton Project. The Company is seeking to re-establish funding under Award 2 and has initiated the appeals process with the DOE. The Company shall exhaust all options available to it in order to reverse the DOE’s decision. Until the Company is notified of the outcome of its appeal or its requests for a reprieve, the company can no longer reimburse for new charges incurred after September 30, 2014. The Company cannot make any assurances that the DOE’s decision will be reversed.
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If the Company’s attempt to appeal the DOE’s decision is unsuccessful, we will devise a new strategy with respect to financing the Fulton Project. The Company will deploy any remaining funds from previous DOE funding for the development of the Fulton Project as planned. The Company is exploring all of its options.
Between the proposed facilities (Lancaster, CA and Fulton, MS) we expect them to create more than 1,000 construction/manufacturing jobs if adequately financed and, once in operation, more than 100 new operations and maintenance jobs.
The Company is also researching and considering other suitable locations for other similar bio-refineries.
Status of Publically Announced Products or Services
In November 2011, BlueFire created SucreSource LLC, a wholly owned subsidiary specifically tasked to partner with synergistic back end companies that need cellulosic sugars as a feedstock for their fermentation or chemical processes. SucreSource will utilize the Arkenol process to provide the front end technology to partner with these companies. SucreSource is cultivating relationships and will continue to develop them throughout 2014.
In February of 2012, SurceSource announced its first client GS Caltex, a South Korean petroleum company. In the same month, it received the first payment under the Professional Services Agreement (PSA) for work on a facility in South Korea. As of September 30, 2014, SucreSource has completed and fulfilled all initial work and obligations under the fixed portion of the PSA. In 2014, the company expanded its scope of work with GS Caltex and has begun billing for additional work product and additional services. Once completed with the expanded services, the Company may provide additional engineering services which will be billed on an hourly basis when services are performed.
Distribution Methods of Products or Services
We will utilize existing ethanol distribution channels to sell the ethanol that is produced from our plants. For example, we will enter into an agreement with an existing refiner or blender to purchase the ethanol and sell it into the Southern California and Mississippi transportation fuels market. Ethanol is currently mandated at a blend level of 10% nationwide which represents an approximately 26+ billion gallon per year market. We are also exploring the potential of onsite blending of E85 (85% ethanol, 15% gasoline) and direct marketing to fueling stations. There are approximately 2,400 E85 fueling stations in the United States.
Competition
According to the Renewable Fuels Association (“RFA”) most of the approximately 14 billion gallons of ethanol supply in the United States is derived from corn (HTTP://WWW.ETHANOLRFA.ORG/) and, as of January 2014, is produced at approximately 210 facilities, ranging in size from 300,000 to 150 million gallons per year, located predominately in the corn belt in the Midwest.
Traditional corn-based production techniques are mature and well entrenched in the marketplace, and the entire industry’s infrastructure is geared toward corn as the principal feedstock.
With the Arkenol Technology, the principle difference from traditional processes apart from production technique is the acquisition and choice of feedstock. The use of a non-commodity based non-food related biomass feedstock enables us to use feedstock typically destined for disposal, i.e. wood waste, yard trimmings and general green waste. All ethanol producers regardless of production technique will fall subject to market fluctuation in the end product, ethanol.
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Due to the feedstock variety we process, we are able to locate production facilities in and around the markets where the ethanol will be consumed, thereby giving us a competitive advantage against much larger traditional producers who must locate plants near their feedstock, i.e. the corn belt in the Midwest, and ship the ethanol to the end market.
However, in the area of biomass-to-ethanol production, there are few companies, and no commercial production infrastructure has been built. As we continue to advance our biomass technology platform, we are likely to encounter competition for the same technologies from other companies that are also attempting to manufacture ethanol from cellulosic biomass feedstocks.
Ethanol production is also expanding internationally. Ethanol produced or processed in certain countries in Central America and the Caribbean region is eligible for tariff reduction or elimination upon importation to the United States under a program known as the Caribbean Basin Initiative. Large ethanol producers, such as Cargill, have expressed interest in building dehydration plants in participating Caribbean Basin countries, such as El Salvador, which would convert ethanol into fuel-grade ethanol for shipment to the United States. Ethanol imported from Caribbean Basin countries may be a less expensive alternative to domestically produced ethanol and may affect our ability to sell our ethanol profitably.
There are approximately 21 next-generation biofuel companies that have received grants from the DOE for development purposes in different stages of development.
Industry Overview
On December 19, 2007, President Bush signed into law the Energy Independence and Security Act of 2007 (Energy Act of 2007). The Energy Act of 2007 provides for an increase in the supply of alternative fuel sources by setting a mandatory Renewable Fuel Standard (RFS) requiring fuel producers to use at least 36 billion gallons of biofuel by 2022, 16 billion gallons of which must come from cellulosic derived fuel. Additionally, the Energy Act of 2007 called for reducing U.S. demand for oil by setting a national fuel economy standard of 35 miles per gallon by 2020 – which will increase fuel economy standards by 40 percent and save billions of gallons of fuel.
In June 2008, the Food, Conservation and Energy Act of 2008 (the “Farm Bill”) was signed into law. The 2008 Farm Bill also modified existing incentives, including ethanol tax credits and import duties and established a new integrated tax credit of $1.01/gallon for cellulosic biofuels.
On February 13, 2009, Congress passed the American Recovery and Reinvestment Act of 2009 (the “Recovery Act”) at the urging of President Obama, who signed it into law four days later (“ARRA”). A direct response to the economic crisis, the Recovery Act has three immediate goals:
| ● | Create new jobs and save existing ones; | |
| ● | Spur economic activity and invest in long-term growth; and | |
| ● | Foster unprecedented levels of accountability and transparency in government spending. |
The Recovery Act intends to achieve those goals by:
| ● | Providing $288 billion in tax cuts and benefits for millions of working families and businesses; | |
| ● | Increasing federal funds for education and health care as well as entitlement programs (such as extending unemployment benefits) by $224 billion; | |
| ● | Making $275 billion available for federal contracts, grants and loans; and | |
| ● | Requiring recipients of Recovery funds to report quarterly on how they are using the money. All the data is posted on Recovery.gov so the public can track the Recovery funds. |
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In addition to offering financial aid directly to local school districts, expanding the Child Tax Credit, and underwriting a process to computerize health records to reduce medical errors and save on health care costs, the Recovery Act is targeted at infrastructure development and enhancement. For instance, the Recovery Act plans investment in the domestic renewable energy industry and the weatherizing of 75% of federal buildings as well as more than one million private homes around the country.
Historically, producers and blenders had a choice of fuel additives to increase the oxygen content of fuels. MTBE (methyl tertiary butyl ether), a petroleum-based additive, was the most popular additive, accounting for up to 75% of the fuel oxygenate market. However, in the United States, ethanol is replacing MTBE as a common fuel additive. While both increase octane and reduce air pollution, MTBE is a presumed carcinogen which contaminates ground water. It has already been banned in California, New York, Illinois and 22 other states. Major oil companies have voluntarily abandoned MTBE and it is scheduled to be phased out under the Energy Policy Act. As MTBE is phased out, we expect demand for ethanol as a fuel additive and fuel extender to rise. A blend of 5.5% or more of ethanol, which does not contaminate ground water like MTBE, effectively complies with U.S. Environmental Protection Agency requirements for reformulated gasoline, which is mandated in most urban areas.
Ethanol is a clean, high-octane, high-performance automotive fuel commonly blended in gasoline to extend supplies and reduce emissions. In 2004, according to the American Coalition for Ethanol, 3% of all United States gasoline was blended with some percentage of ethanol. The most common blend is E10, which contains 10% ethanol and 90% gasoline. There is also growing federal government support for E85, which is a blend of 85% ethanol and 15% gasoline.
Ethanol is a renewable fuel produced by the fermentation of starches and sugars such as those found in grains and other crops. Ethanol contains 35% oxygen by weight and, when combined with gasoline, it acts as an oxygenate, artificially introducing oxygen into gasoline and raising oxygen concentration in the combustion mixture with air. As a result, the gasoline burns more completely and releases less unburnt hydrocarbons, carbon monoxide and other harmful exhaust emissions into the atmosphere. The use of ethanol as an automotive fuel is commonly viewed as a way to reduce harmful automobile exhaust emissions. Ethanol can also be blended with regular unleaded gasoline as an octane booster to provide a mid-grade octane product which is commonly distributed as a premium unleaded gasoline.
Studies published by the Renewable Fuel Association indicate that approximately 13.8 billion gallons of ethanol was consumed in 2012 in the United States and every automobile manufacturer approves and warrants the use of E10. Because the ethanol molecule contains oxygen, it allows an automobile engine to more completely combust fuel, resulting in fewer emissions and improved performance. Fuel ethanol has an octane value of 113 compared to 87 for regular unleaded gasoline. Domestic ethanol consumption has tripled in the last eight years, and consumption increases in some foreign countries, such as Brazil, are even greater in recent years. For instance, 40% of the automobiles in Brazil operate on 100% ethanol, and others use a mixture of 22% ethanol and 78% gasoline. The European Union and Japan also encourage and mandate the increased use of ethanol.
For every barrel of ethanol produced, the American Coalition for Ethanol estimates that 1.2 barrels of petroleum are displaced at the refinery level, and that since 1978, U.S. ethanol production has replaced over 14.0 billion gallons of imported gasoline or crude oil. According to a Mississippi State University Department of Agricultural Economics Staff Report in August 2003, a 10% ethanol blend results in a 25% to 30% reduction in carbon monoxide emissions by making combustion more complete. The same 10% blend lowers carbon dioxide emissions by 6% to 10%.
During the last 20 years, ethanol production capacity in the United States has grown from minimal amounts to an estimated 14.7 billion gallons per year in 2013 In the United States, ethanol is primarily made from starch crops, principally from the starch fraction of corn. Consequently, the production plants are concentrated in the grain belt of the Midwest, principally in Illinois, Iowa, Minnesota, Nebraska and South Dakota.
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In the United States, there are two principal commercial applications for ethanol. The first is as an oxygenate additive to gasoline to comply with clean air regulations. The second is as a voluntary substitute for gasoline - this is a purely economic choice by gasoline retailers who may make higher margins on selling ethanol-blended gasoline, provided ethanol is available in the local market. The U.S. gasoline market is currently approximately 170 billion gallons annually, so the potential market for ethanol (assuming only a 10% blend) is 17 billion gallons per year. Increasingly, motor manufacturers are producing flexible fuel vehicles (particularly sports utility vehicle models) which can run off ethanol blends of up to 85% (known as E85) in order to obtain exemptions from fleet fuel economy quotas. There are now in excess of 5 million flexible fuel vehicles on the road in the United States and automakers will produce several millions per year, offering further potential for significant growth in ethanol demand.
Cellulose to Ethanol Production
In a 2002 report, “Outlook For Biomass Ethanol Production Demand,” the U.S. Energy Information Administration found that advancements in production technology of ethanol from cellulose could reduce costs and result in production increases of 40% to 160% by 2010. Biomass (cellulosic feedstocks) includes agricultural waste, woody fibrous materials, forestry residues, waste paper, municipal solid waste and most plant material. Like waste starches and sugars, they are often available for relatively low cost, or are even free. However, cellulosic feedstocks are more abundant, global and renewable in nature. These waste streams, which would otherwise be abandoned, land-filled or incinerated, exist in populated metropolitan areas where ethanol prices are higher.
Sources and Availability of Raw Materials
The U.S. DOE and USDA in its April 2005 report “BIOMASS AS FEEDSTOCK FOR A BIOENERGY AND BIOPRODUCTS INDUSTRY: THE TECHNICAL FEASIBILITY OF A BILLION-TON ANNUAL SUPPLY” found that about one billion tons of cellulosic materials from agricultural and forest residues are available to produce more than one-third of the current U.S. demand for transportation fuels.
Dependence on One or a Few Major Customers
We have signed a definitive agreement with Tenaska for the off-take of our Fulton Project, which allows Tenaska to exclusively market all ethanol produced at this facility. See “DISTRIBUTION METHODS OF THE PRODUCTS OR SERVICES.”
Patents, Trademarks, Licenses, Franchises, Concessions, Royalty Agreements or Labor Contracts
On March 1, 2006, we entered into a Technology License Agreement with Arkenol, for use of the Arkenol Technology. Arkenol holds the following patents in relation to the Arkenol Technology: 11 U.S. patents, 21 foreign patents, and one pending foreign patent. According to the terms of the agreement, we were granted an exclusive, non-transferable, North American license to use and to sub-license the Arkenol technology. The Arkenol Technology, converts cellulose and waste materials into ethanol and other high value chemicals. As consideration for the grant of the license, we are required to make a onetime payment of $1,000,000 at first project funding and for each plant make the following payments: (1) royalty payment of 3% of the gross sales price for sales by us or our sub-licensees of all products produced from the use of the Arkenol Technology (2) and a onetime license fee of $40.00 per 1,000 gallons of production capacity per plant. According to the terms of the agreement, we made a onetime exclusivity fee prepayment of $30,000 during the period ended December 31, 2006. At March 31, 2010, we had paid Arkenol in full for the license. All sub-licenses issued by us will provide for payments to Arkenol of any other license fees and royalties due.
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Governmental Approval
We are not subject to any government oversight for our current operations other than for corporate governance and taxes. However, the production facilities that we will be constructing will be subject to various federal, state and local environmental laws and regulations, including those relating to the discharge of materials into the air, water and ground, the generation, storage, handling, use, transportation and disposal of hazardous materials, and the health and safety of our employees. In addition, some of these laws and regulations will require our facilities to operate under permits that are subject to renewal or modification. These laws, regulations and permits can often require expensive pollution control equipment or operational changes to limit actual or potential impacts to the environment. A violation of these laws and regulations or permit conditions can result in substantial fines, natural resource damages, criminal sanctions, permit revocations and/or facility shutdowns.
Governmental Regulation
Currently, the federal government encourages the use of ethanol as a component in oxygenated gasoline. This is a measure to both protect the environment, and, to utilize biofuels as a viable renewable domestic fuel to reduce U.S. dependence on foreign oil.
The ethanol industry is heavily dependent on several economic incentives to produce ethanol, including federal ethanol supports. Ethanol sales have been favorably affected by the Clean Air Act amendments of 1990, particularly the Federal Oxygen Program which became effective November 1, 1992. The Federal Oxygen Program requires the sale of oxygenated motor fuels during the winter months in certain major metropolitan areas to reduce carbon monoxide pollution. Ethanol use has increased due to a second Clean Air Act program, the Reformulated Gasoline Program. This program became effective January 1, 1995, and requires the sale of reformulated gasoline in nine major urban areas to reduce pollutants, including those that contribute to ground level ozone, better known as smog. Increasingly stricter EPA regulations are expected to increase the number of metropolitan areas deemed in non-compliance with Clean Air Standards, which could increase the demand for ethanol.
The Energy Policy Act of 2005 established a renewable fuel standard (RFS) to increase in the supply of alternative sources for automotive fuels. The RFS was expanded by the Energy Independence and Security Act of 2007. The RFS requires the blending of renewable fuels (including ethanol and biodiesel) in transportation fuel. In 2008, fuel suppliers must blend 9.0 billion gallons of renewable fuel into gasoline; this requirement increases annually to 36 billion gallons in 2022. The expanded RFS also specifically mandates the use of “advanced biofuels”—fuels produced from non-corn feedstocks and with 50% lower lifecycle greenhouse gas emissions than petroleum fuel—starting in 2009. Of the 36 billion gallons required in 2022, at least 21 billion gallons must be advanced biofuel. There are also specific quotas for cellulosic biofuels and for biomass-based diesel fuel. On May 1, 2007, EPA issued a final rule on the RFS program detailing compliance standards for fuel suppliers, as well as a system to trade renewable fuel credits between suppliers. EPA has not yet initiated a rulemaking on the lifecycle analysis methods necessary to categorize fuels as advanced biofuels. While this program is not a direct subsidy for the construction of biofuels plants, the market created by the renewable fuel standard is expected to stimulate growth of the biofuels industry.
The Farm Bill provides for, among other things, grants for demonstration scale bio-refineries, and loan guarantees for commercial scale bio-refineries that produce advanced biofuels (i.e., any fuel that is not corn-based). Section 9003 includes a Loan Guarantee Program under which the U.S.D.A. could provide loan guarantees up to $250 million to fund development, construction, and retrofitting of commercial-scale refineries. Section 9003 also includes a grant program to assist in paying the costs of the development and construction of demonstration-scale bio-refineries to demonstrate the commercial viability which can potentially fund up to 50% of project costs.
The ARRA, passed into law in February 2009 makes $275 billion available for federal contracts, grants, and loans, some of which is devoted to investment into the domestic renewable energy industry.
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Some other noteworthy governmental actions regarding the production of biofuels are as follows:
| ● | Credit for Production of Cellulosic Biofuel: |
An integrated tax credit whereby producers of cellulosic biofuel can claim up to $1.01 per gallon tax credit. The credit for cellulosic ethanol varies with other ethanol credits such that the total combined value of all credits is $1.01 per gallon. The credit applies to fuel produced after December 31, 2008. This credit is scheduled to terminate on December 31, 2014.
| ● | Special Depreciation Allowance for Cellulosic Biofuel Plant Property: |
A taxpayer may take a depreciation deduction of 50% of the adjusted basis of a new cellulosic biofuel plant in the year it is put in service. Any portion of the cost financed through tax-exempt bonds is exempted from the depreciation allowance. Before amendment by P.L. 110-343, the accelerated depreciation applied only to cellulosic ethanol plants that break down cellulose through enzymatic processes—the amended provision applies to all cellulosic biofuel plants acquired after December 20, 2006, and placed in service before January 1, 2014. This accelerated depreciation allowance was scheduled to terminate on December 31, 2014, but congress has recently reinstated them through December 31, 2015.
Research and Development Activities
For the fiscal years ending December 31, 2013 and December 31, 2012, we spent approximately $591,000 and $476,000 on project development costs, respectively.
To date, project development costs include the research and development expenses related to our future cellulose-to-ethanol production facilities including site development, and engineering activities.
Compliance with Environmental Laws
We will be subject to extensive air, water and other environmental regulations and we will have to obtain a number of environmental permits to construct and operate our plants, including, air pollution construction permits, a pollutant discharge elimination system general permit, storm water discharge permits, a water withdrawal permit, and an alcohol fuel producer’s permit. In addition, we may have to complete spill prevention control and countermeasures plans.
The production facilities that we will build are subject to oversight activities by the federal, state, and local regulatory agencies. There is always a risk that the federal agencies may enforce certain rules and regulations differently than state environmental administrators. State or federal rules are subject to change, and any such changes could result in greater regulatory burdens on plant operations. We could also be subject to environmental or nuisance claims from adjacent property owners or residents in the area arising from possible foul smells or other air or water discharges from the plant.
Employees
We have 5 full time employees as of December 30, 2014, and 2 part time employees. None of our employees are subject to a collective bargaining agreement, and we believe that our relationship with our employees is good.
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We lease approximately 1,500 square feet of furnished office space at 31 Musick, Irvine, California 92618 from 31 Musick LLC for $3,000 per month on a month-to-month basis.
On November 9, 2007, we issued a check in the amount of $96,851, towards the purchase of the land for the Lancaster Bio-refinery totaling a purchase price of $109,108. The approximately 10 acre site is presently vacant and undisturbed except for a water well on the site and to occasional use by off road vehicles. The site is flat and has no distinguishing characteristics and is adjacent to a solid waste landfill at a site that minimizes visual access from outside the immediate area.
On June 14, 2010, we entered in to a lease with Itawamba County, Mississippi. The lease is for 38 acres located in the Port of Itawamba where our Fulton Project will be located. The lease is a 30 year term and currently is $10,292 per month and will be reduced, following a formula tied to jobs creation in the State of Mississippi.
On February 26, 2013, the Company received notice that the Orange County Superior Court (the “Court”) issued a Minute Order (the “Order”) in connection with certain shareholders’ claims of breach of contract and declaratory relief related to 5,740,741 warrants (the “Warrants”) issued by the Company.
Pursuant to the Order, the Court ruled in favor of the shareholders on the two claims, finding that the Warrants contain certain anti-dilution protective provisions which provide for the re-adjustment of the exercise price of such Warrants upon certain events and that such exercise price per share of the Warrants must be decreased to $0.00.
The Company has considered these warrants exercised based on the notice of exercise received from the respective shareholders in December 2012.
On March 7, 2013, the shareholders making claims provided their request for judgment based on the Order received, which was initially refused by the Court via a second minute order received by the Company on April 8, 2013. On April 15, 2013, the Company’s counsel submitted a proposed judgment to the Court as per the Courts request, which followed the Order and provided for no monetary damages against the Company. On May 14, 2013, this proposed judgment was approved by the Court (“Judgment”).
On June 20, 2013, the Company filed motions to vacate the Judgment, a motion for a new trial, and a motion to stay enforcement of the Judgment, all of which were denied on June 27, 2013.
On August 2, 2013, pursuant to the exercise notice of the Warrants, and the Order, the Company issued 5,740,741 shares to certain shareholders. See Note 9 in the accompanying notes to consolidated financial statements for additional information.
Other than as disclosed above, we are currently not involved in any litigation that we believe could have a material adverse effect on our financial condition or results of operations. There is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of our company or any of our subsidiaries, threatened against or affecting our company, our common stock, any of our subsidiaries or of our companies or our subsidiaries’ officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULT OF OPERATIONS
This registration statement on Form S-1 and other reports filed by the Company from time to time with the SEC contain or may contain forward-looking statements and information that are (collectively, the “Filings”) based upon beliefs of, and information currently available to, the Company’s management as well as estimates and assumptions made by Company’s management. Readers are cautioned not to place undue reliance on these forward-looking statements, which are only predictions and speak only as of the date hereof. When used in the Filings, the words “anticipate,” “believe,” “estimate,” “expect,” “future,” “intend,” “plan,” or the negative of these terms and similar expressions as they relate to the Company or the Company’s management identify forward-looking statements. Such statements reflect the current view of the Company with respect to future events and are subject to risks, uncertainties, assumptions, and other factors, including the risks contained in the “Risk Factors” section of this registration statement. Should one or more of these risks or uncertainties materialize, or should the underlying assumptions prove incorrect, actual results may differ significantly from those anticipated, believed, estimated, expected, intended, or planned.
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Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, the Company cannot guarantee future results, levels of activity, performance, or achievements. Except as required by applicable law, including the securities laws of the United States, the Company does not intend to update any of the forward-looking statements to conform these statements to actual results.
Our financial statements are prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). These accounting principles require us to make certain estimates, judgments and assumptions. We believe that the estimates, judgments and assumptions upon which we rely are reasonable based upon information available to us at the time that these estimates, judgments and assumptions are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements as well as the reported amounts of revenues and expenses during the periods presented. Our financial statements would be affected to the extent there are material differences between these estimates and actual results. In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require management’s judgment in its application. There are also areas in which management’s judgment in selecting any available alternative would not produce a materially different result. The following discussion should be read in conjunction with our consolidated financial statements and notes thereto appearing elsewhere in this report.
PLAN OF OPERATION
Our primary business encompasses development activities culminating in the design, construction, ownership and long-term operation of cellulosic ethanol production biorefineries utilizing the licensed Arkenol Technology in North America. Our secondary business is providing support and operational services to Arkenol Technology based biorefineries worldwide. As such, we are currently in the development-stage of finding suitable locations and deploying project opportunities for converting cellulose fractions of municipal solid waste and other opportunistic feedstock into ethanol fuels.
Our initial planned biorefineries in North America are projected as follows:
| ● | A bio-refinery, costing approximately $100 million to $125 million, that will process approximately 190 tons of green waste material annually to produce roughly 3.9 million gallons of ethanol annually. On November 9, 2007, we purchased the facility site which is located in Lancaster, California for the BlueFire Ethanol Lancaster project (“Lancaster Bio-refinery”). Permit applications were filed on June 24, 2007, to allow for construction of the Lancaster Bio-refinery. On February 12, 2009, we were issued our “Authority to Construct” permit by the Antelope Valley Air Quality Management District. In 2009 the Company submitted an application for a $58 million dollar loan guarantee for the Lancaster Bio-refinery with the DOE Program DE-FOA-0000140 (“DOE LGPO”), which provided federal loan guarantees for projects that employed innovative energy efficiency, renewable energy, and advanced transmission and distribution technologies. In 2010, the Company was informed that the loan guarantee for the planned bio-refinery in Lancaster, California, was rejected by the DOE due to a lack of definitive contracts for feedstock and off-take at the time of submittal of the loan guarantee for the Lancaster Bio-refinery, as well as the fact that the Company was also pursuing a much larger project in Fulton, Mississippi. The Lancaster plant is currently shovel ready, except for the air permit which the Company will need to renew once financing is obtained, and only requires minimal capital to maintain until funding is obtained for the construction. Although the Company originally intended to use this proposed facility for their first cellulosic ethanol refinery plant, the Company is now considering using it as a bio-refinery to produce products other than cellulosic ethanol, such as higher value chemicals that would yield fuel additives that could improve the project economics for a smaller facility. Although the Company is actively seeking financing for this project no definitive agreements are in place. |
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| ● | A bio-refinery proposed for development and construction previously in conjunction with the DOE, previously located in Southern California, and now located in Fulton, Mississippi, which will process approximately 700 metric dry tons of woody biomass, mill residue, and other cellulosic waste to produce approximately 19 million gallons of ethanol annually (“Fulton Project”). We estimate the total construction cost of the Fulton Project to be in the range of approximately $300 million. In 2007, we received an Award from the DOE of up to $40 million for the Fulton Project. This award is a 60%/40% cost share, whereby 40% of approved costs may be reimbursed by the DOE pursuant to the total $40 million award announced in February 2007. In 2008, the Company began to draw down on the Award 1 monies that were finalized with the DOE. As our Fulton Project developed further, the Company was able to begin drawing down on Award 2, the second phase of DOE monies. On December 4, 2009, the DOE announced that the total award for this project was increased to a maximum of $88 million under the American Recovery and Reinvestment Act of 2009 (“ARRA”) and the Energy Policy Act of 2005. As of September 12, 2012 Award 1 was officially closed. On December 23, 2013, the Company received notice from the DOE indicating that the DOE would no longer provide funding under the DOE Grant for the development of the Fulton Project due to the Company’s inability to comply with certain deadlines related to providing certain information to the DOE with respect to the Company’s future financing arrangements for the Fulton Project. The Company is seeking to re-establish funding under Award 2 and has initiated the appeals process with the DOE. The Company shall exhaust all options available to it in order to reverse the DOE’s decision. Until the Company is notified of the outcome of its appeal or its requests for a reprieve, the company can no longer reimburse for new charges incurred after September 30, 2014. The Company cannot make any assurances that the DOE’s decision will be reversed. In 2010, BlueFire signed definitive agreements for the following three crucial contracts related to the Fulton Project: (a) feedstock supply with Cooper Marine, (b) off-take for the ethanol of the facility with Tenaska, and (c) the construction of the facility with MasTec. Also in 2010, BlueFire continued to develop the engineering package for the Fulton Project, and completed both the FEL-2 and FEL-3 stages of engineering readying the facility for construction. As of November 2010, the Fulton Project has all necessary permits for construction, and in that same month we began site clearing and preparation work, signaling the beginning of construction. In June 2011, BlueFire completed initial site preparation and the site is now ready for facility construction. In February 2010, we announced that we submitted an application for a $250 million dollar loan guarantee for the Fulton Project, under the DOE LGPO, mentioned above. In February 2011, BlueFire received notice from the DOE LGPO staff that the Fulton Project’s application will not move forward until such time as the project has raised the remaining equity necessary for the completion of funding. In August 2010, BlueFire submitted an application for a $250 million loan guarantee with the USDA. In October 2011, BlueFire was notified by its lender (“Lender”) for the Company’s USDA loan guarantee application that the USDA sent the Lender notice that they were currently ineligible to participate in the USDA Bio-refinery Assistance Program. No significant progress was made with the USDA or the Lender and thus the Company abandoned the pursuit of the USDA Loan Guarantee program, however the Company may reapply at a later date. In Mid 2013, the Company began developing a new integration concept in regards to the Fulton project where a wood pellet facility would be integrated into the ethanol facility to provide a stronger financing package. A preliminary design package and due diligence has been completed. The Company continues to explore this option and will utilize whichever plant design is the most beneficial for financing. Recently, the Company signed a new Master Engineering, Procurement, and Construction contract with the China International Water & Electric Company, a subsidiary of China Three Gorges Corporation (the “EPC”). In tandem with the new EPC contractor, the also recently received a letter of intent from the Export Import Bank of China to provide up to $270 Million USD in debt for the Fulton project subject to meeting the credit criteria of the bank and completing the due diligence process. |
Several other opportunities are being evaluated by us in North America, although no definitive agreements have been reached.
| ● | In November 2011, BlueFire created SucreSource LLC, a wholly owned subsidiary specifically tasked to partner with synergistic back end companies that need cellulosic sugars as a feedstock for their fermentation or chemical processes. SucreSource will utilize the Arkenol process to provide the front end technology to partner with these companies. |
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| ● | In February of 2012, SurceSource announced it had retained its first client, GS Caltex, a South Korean petroleum company. In the same month, it received the first payment under the Professional Services Agreement (the “PSA”) for work on a facility in South Korea. As of September 30, 2014, SucreSource has completed and fulfilled all initial work and obligations under the fixed portion of the PSA. In 2014, the company expanded its scope of work with GS Caltex and has begun billing for additional work product and additional services. Once completed with the expanded services, the Company may provide additional engineering services which will be billed on an hourly basis when services are performed. |
BlueFire’s capital requirement strategy for its planned bio-refineries are as follows:
| ● | Pursue additional operating capital from joint venture partnerships, Federal or State grants or loan guarantees, debt financing or equity financing to fund our ongoing operations and the development of initial bio-refineries in North America. Although the Company is in discussions with potential financial and strategic sources of financing for their planned bio-refineries, no definitive agreements are in place. | |
| ● | The 2008 Farm Bill, Title IX (Energy Title) and subsequent funding Bills provides grants for demonstration scale Bio-refineries, and loan guarantees for commercial scale Bio-refineries that produce advanced Biofuels (i.e., any fuel that is not corn-based). Section 9003 includes a Loan Guarantee Program under which the USDA could provide loan guarantees up to $250 million to fund development, construction, and retrofitting of commercial-scale refineries. Section 9003 also includes a grant program to assist in paying the costs of the development and construction of demonstration-scale bio-refineries to demonstrate the commercial viability which can potentially fund up to 50% of project costs. BlueFire plans to pursue all available opportunities within the Farm Bill and the subsequent funding Bills, although initial attempts have been unsuccessful. | |
| ● | Utilize remaining proceeds from reimbursements under the DOE contract. | |
| ● | The Company shall apply for public funding to leverage private capital raised by us, as applicable. | |
| ● | Seek additional clients to perform engineering services for on a contract basis. |
DEVELOPMENTS IN BLUEFIRE’S BIOREFINERY ENGINEERING AND DEVELOPMENT
BlueFire has completed the engineering package for the Fulton Project, including Front-End Loading (FEL) stages 2 and FEL-3 of engineering for the Fulton Project readying the facility for construction. FEL is the process for conceptual development of processing industry projects. This process is used in the petrochemical, refining, and pharmaceutical industries. Front-End Loading is also referred to as Front-End Engineering Design (FEED).
There are three stages in the FEL process:
| FEL-1 | FEL-2 | FEL-3 | ||
| * Material Balance | * Preliminary Equipment Design | * Purchase Ready Major Equipment Specifications | ||
| * Energy Balance | * Preliminary Layout | * Definitive Estimate | ||
| * Project Charter | * Preliminary Schedule | * Project Execution Plan | ||
| * Preliminary Estimate | * Preliminary 3D Model | |||
| * Electrical Equipment List | ||||
| * Line List | ||||
| * Instrument Index |
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As of November 2010, the Fulton Project had all necessary permits for construction, and in that same month we began site clearing and preparation work, signaling the beginning of construction. In June 2011, BlueFire completed initial site preparation and the site is now ready for facility construction. In February 2010, we announced that we submitted an application for a $250 million dollar loan guarantee for the Fulton Project, under the DOE LGPO, In February 2011, BlueFire received notice from the DOE LGPO staff that the Fulton Project’s application would not move forward until such time as the project has raised the remaining equity necessary for the completion of funding. In August 2010, BlueFire submitted an application for a $250 million loan guarantee with the U.S. Department of Agriculture (“USDA”) under Section 9003 of the 2008 Farm Bill, In October 2011, BlueFire was notified by its lender (“Lender”) for the Company’s USDA loan guarantee application that the USDA sent the Lender notice that they are currently ineligible to participate in the USDA Bio-refinery Assistance Program. The Company attempted to resolve the issue with the Lender and USDA but as of December 31, 2013, no significant progress has been made with the USDA or the Lender and the Company has abandoned the pursuit of the USDA Loan Guarantee program. Additionally, as described above, the Company signed a new Master Engineering, Procurement, and Construction contract with China International Water & Electric Company, a subsidiary of China Three Gorges Corporation, as well as received a letter of intent from the Export Import Bank of China to provide up to $270 Million USD in debt for the Fulton project subject to certain credit criteria of the bank and completion of due diligence.
In Mid 2013, the Company began developing a new integration concept in regards to the Fulton project where a wood pellet facility would be integrated into the ethanol facility to provide a stronger financing package. A preliminary design package and due diligence has been completed. The Company continues to explore this option and will utilize whichever plant design is the most beneficial for financing.
On September 27, 2010, the Company announced a contract with Cooper Marine & Timberlands to provide feedstock for the Company’s planned Fulton Project for a period of up to 15 years. Under the agreement, Cooper Marine & Timberlands (“CMT”) will supply the project with all of the feedstock required to produce approximately 19-million gallons of ethanol per year from locally sourced cellulosic materials such as wood chips, forest residual chips, pre-commercial thinnings and urban wood waste such as construction waste, storm debris, land clearing; or manufactured wood waste from furniture manufacturing. Under the Agreement, CMT will pursue a least-cost strategy for feedstock supply made possible by the project site’s proximity to feedstock sources and the flexibility of BlueFire’s process to use a wide spectrum of cellulosic waste materials in pure or mixed forms. CMT, with several chip mills in operation in Mississippi and Alabama, is a member company of Cooper/T. Smith one of America’s oldest and largest stevedoring and maritime related firms with operations on all three U.S. coasts and foreign operations in Central and South America.
On September 20, 2010, the Company announced an off-take agreement with Tenaska BioFuels, LLC (“TBF”) for the purchase and sale of all ethanol produced at the Company’s planned Fulton Project. Pricing of the 15-year contract follows a market-based formula structured to capture the premium allowed for cellulosic ethanol compared to corn-based ethanol giving the Company a credit worthy contract to support financing of the project. Despite the long-term nature of the contract, the Company is not precluded from the upside in the coming years as fuel prices rise. TBF, a marketing affiliate of Tenaska, provides procurement and marketing, supply chain management, physical delivery, and financial services to customers in the agriculture and energy markets, including the ethanol and biodiesel industries. In business since 1987, Tenaska is one of the largest independent power producers.
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RESULTS OF OPERATIONS
For the Three Months Ended September 30, 2014 Compared to the Three Months Ended September 30, 2013
Revenue
Revenues for the three months ended September 30, 2014 and 2013, were approximately $364,000 and $221,000, respectively. Revenue in both 2014 and 2013 were primarily related to federal grant revenue from the DOE. The federal grant generally provides for reimbursement in connection with related development and construction costs involving commercialization of our technologies. The increase in revenue was due primarily to the Company’s ability to be reimbursed by the DOE for costs incurred in prior periods and from contract revenue from GS Caltex.
Project Development
For the three months ended September 30, 2014, our project development costs were approximately $187,000 compared to project development costs of $135,000 for the same period during 2013. The increase in project development costs is mainly due to increased operating activities related to the Fulton project, the negotiation of contracts, and additional work with the DOE due to the availability of capital resources available to us in the third quarter of 2014 versus the same period in 2013.
General and Administrative Expenses
General and administrative expenses were approximately $264,100 for the three months ended September 30, 2014, compared to $152,600 for the same period in 2013. The increase in general and administrative costs is mainly due to increased legal costs for contract negotiation and travel costs.
Nine Months Ended September 30, 2014 Compared to the Nine Months Ended September 30, 2013
Revenue
Revenues for the nine months ended September 30, 2014 and 2013, were approximately $1,428,000 and $841,000, respectively. Revenue in both 2014 and 2013 was primarily related to federal grant revenue from the DOE. The federal grant generally provides for reimbursement in connection with related development and construction costs involving commercialization of our technologies. The increase in revenue was mainly due to the Company’s ability to be reimbursed by the DOE for costs incurred in prior periods and paid in the current period and for contract services revenue from GS Caltex.
Project Development
For the nine months ended September 30, 2014, our project development costs were approximately $602,000 compared to project development costs of $382,000 for the same period during 2013. The increase in project development costs is mainly due to the fact that project costs were no longer capitalized in 2014.
General and Administrative Expenses
General and administrative expenses were approximately $739,000 for the nine months ended September 30, 2014, compared to $551,000 for the same period in 2013. The increase in general and administrative costs is mainly due to increased legal costs for contract negotiation and travel costs.
Year Ended December 31, 2013 Compared to the Year Ended December 31, 2012
Revenue
Revenue excluding unbilled grant revenue, for the years ended December 31, 2013 and December 31, 2012, was approximately $1,338,000 and $783,000, respectively, and was primarily related to a federal grant from the DOE. The grant generally provides for reimbursement in connection with related development and construction costs involving commercialization of our technologies. The increase in revenue was mainly due to having additional amounts of capital from financing received in the first quarter of 2013 and increased indirect reimbursement rates in fiscal 2013.
Unbilled Grant Revenues
Unbilled grant revenues for the years ended December 31, 2013 and 2012, were $0, and $0, respectively. Unbilled revenue is only recognized to the extent that the related costs can be paid in the normal course of business. Due to capital constraints in 2012, the Company ceased the recognition of unbilled revenue and only recognizes revenue if and when it is realized.
Project Development
For the year ended December 31, 2013, our project development costs were approximately $591,000, compared to project development costs of $476,000 for the same period during 2012. The increase in project development costs is mainly due to an increase in project activities in further preparation of the Fulton site in 2013.
General and Administrative Expenses
General and Administrative Expenses were approximately $716,000 for the year ended December 31, 2013, compared to $1,282,000 for the same period in 2012. The decrease in general and administrative costs is mainly due to further reduce non-critical operations in fiscal 2013 to conserve working capital.
LIQUIDITY AND CAPITAL RESOURCES
Historically, we have funded our operations through financing activities consisting primarily of private placements of debt and equity securities with existing shareholders and outside investors. In addition, in the past we have received funds under the grant received from the DOE. Our principal use of funds has been for the further development of our bio-refinery projects, for capital expenditures and general corporate expenses. As our projects are developed to the point of construction, we anticipate significant purchases of long lead time item equipment for construction if the requisite capital can be obtained. As of September 30, 2014, we had cash and cash equivalents of approximately $87,000. As of November 19, 2014, we had cash and cash equivalents of approximately $112,000.
Management has funded operations primarily through proceeds received in connection with loans from its majority shareholder, the private placement of the Company’s common stock in December 2007 for net proceeds of approximately $14,500,000, the issuance of convertible notes with warrants in July and in August 2007, various convertible notes, and Department of Energy reimbursements throughout 2009 to 2014.
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Changes in Cash Flows
During the nine months ended September 30, 2014 and 2013, we used cash of approximately $134,000 and $73,000 in operating activates. During the 2014 period we had a net loss of approximately $145,000, which was offset by non-cash charges of approximately $196,000 and net cash usage stemming from operating assets and liabilities of approximately $185,000. During the 2013 period we had a net loss of approximately $210,000, which was offset by non-cash charges of approximately $60,640 and net cash usage stemming from operating assets and liabilities of approximately $76,000. The increase in cash used in operating activities was primarily a result of greater costs stemming from travel and contract negotiations.
During the nine months ended September 30, 2014, we used no cash from DOE reimbursements in construction activities at our Fulton Project, compared with net cash receipts of $14 for the same period in 2013. The lack of net receipts are due to the fact that the Company no longer capitalizes costs since 2013.
During the nine months ended September 30, 2014, we had positive cash flow from financing activities of approximately $174,000 compared to approximately $110,000 for the same period in 2013. During the nine months ended September 30, 2014 we received gross proceeds from a convertible note of approximately $35,000. For the same period in 2013, we received gross proceeds of approximately $110,000 from convertible notes.
CRITICAL ACCOUNTING POLICIES
We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements require the use of estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Our management periodically evaluates the estimates and judgments made. Management bases its estimates and judgments on historical experience and on various factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates as a result of different assumptions or conditions.
The methods, estimates, and judgment we use in applying our most critical accounting policies have a significant impact on the results we report in our financial statements. The SEC has defined “critical accounting policies” as those accounting policies that are most important to the portrayal of our financial condition and results, and require us to make our most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Based upon this definition, our most critical estimates relate to the fair value of warrant liabilities. We also have other key accounting estimates and policies, but we believe that these other policies either do not generally require us to make estimates and judgments that are as difficult or as subjective, or it is less likely that they would have a material impact on our reported results of operations for a given period. For additional information see Note 2, “Summary of Significant Accounting Policies” in the notes to our reviewed financial statements appearing elsewhere in this quarterly report and our annual audited financial statements appearing on Form 10-K. Although we believe that our estimates and assumptions are reasonable, they are based upon information presently available, and actual results may differ significantly from these estimates.
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any off-balance sheet arrangements.
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MARKET PRICE OF AND DIVIDENDS ON REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) Market Information
Our shares of common stock began trading under the symbol “BFRE.PK” on the Pink Sheets of the National Quotation Bureau on July 11, 2006 and later began trading on the OTCBB under the symbol “BFRE.OB” on June 19, 2007.
The following table sets forth the high and low trade information for our common stock for each quarter during the past three fiscal years. The prices reflect inter-dealer quotations, do not include retail mark-ups, markdowns or commissions and do not necessarily reflect actual transactions.
| Quarter ended | Low Price | High Price | ||||||
| March 31, 2012 | $ | 0.13 | $ | 0.57 | ||||
| June 30, 2012 | $ | 0.17 | $ | 0.42 | ||||
| September 30, 2012 | $ | 0.09 | $ | 0.23 | ||||
| December 31, 2012 | $ | 0.12 | $ | 0.18 | ||||
| March 31, 2013 | $ | 0.05 | $ | 0.15 | ||||
| June 30, 2013 | $ | 0.02 | $ | 0.10 | ||||
| September 30, 2013 | $ | 0.008 | $ | 0.0259 | ||||
| December 31, 2013 | $ | 0.003 | $ | 0.0195 | ||||
| March 31, 2014 | $ | 0.0015 | $ | 0.009 | ||||
| June 30, 2014 | $ | 0.0023 | $ | 0.0044 | ||||
| September 30, 2014 | $ | 0.0023 | $ | 0.0048 | ||||
| December 31, 2014 (through December 30, 2014) | $ | 0.0018 | $ | 0.08 | ||||
(b) Holders
As of December 30, 2014, a total of 226,890,278 shares of the Company’s common stock are currently outstanding held by approximately 2,900 shareholders of record.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is First American Stock Transfer with its business address at 4747 N 7th Street, Suite 170, Phoenix, AZ 85014.
(c) Dividends
We have not declared or paid any dividends on our common stock and intend to retain any future earnings to fund the development and growth of our business. Therefore, we do not anticipate paying dividends on our common stock for the foreseeable future. There are no restrictions on our present ability to pay dividends to stockholders of our common stock, other than those prescribed by Nevada law.
(d) Securities Authorized for Issuance under Equity Compensation Plans
2006 Incentive and Non-Statutory Stock Option Plan, as Amended
In order to compensate our officers, directors, employees and/or consultants, on December 14, 2006, our Board of Directors approved and stockholders ratified by consent the 2006 Incentive and Non-Statutory Stock Option Plan (the “Plan”). The Plan has a total of 10,000,000 shares reserved for issuance.
On October 16, 2007, the Board of Directors reviewed the Plan. As such, it determined that the Plan was to be used as a comprehensive equity incentive program for which the Board of Directors serves as the plan administrator and, therefore, amended the Plan (the “Amended and Restated Plan”) to add the ability to grant restricted stock awards.
Under the Amended and Restated Plan, an eligible person in the Company’s service may acquire a proprietary interest in the Company in the form of shares or an option to purchase shares of the Company’s common stock. The amendment includes certain previously granted restricted stock awards as having been issued under the Amended and Restated Plan.
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As of December 31, 2013, we have issued the following stock options and grants under the Amended and Restated Plan:
Equity Compensation Plan Information
| Plan category | Number of securities to be issued upon exercise of outstanding options, warrants and rights and number of shares of restricted stock | Weighted average exercise price of outstanding options, warrants and rights (1) | Number of securities remaining available for future issuance | |||||||||
| Equity compensation plans approved by security holders under the Amended and Restated Plan | - | $ | N/A | 4,945,730 | ||||||||
| Equity compensation plans not approved by security holders | - | |||||||||||
| Total | - | |||||||||||
| (1) | Excludes shares of restricted stock issued under the Plan |
Rule 10B-18 Transactions
During the years ended December 31, 2013 and 2012, there were no repurchases of the Company’s common stock by the Company.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The following table and biographical summaries set forth information, including principal occupation and business experience, about our directors and executive officers as of April 15, 2014. There is no familial relationship between or among the nominees, directors or executive officers of the Company.
| NAME | AGE | POSITION | OFFICER AND/OR DIRECTOR SINCE | |||
| Arnold Klann | 63 | President, CEO and Director | June 2006 | |||
| Necitas Sumait | 54 | Secretary, SVP and Director | June 2006 | |||
| John Cuzens | 63 | SVP, Chief Technology Officer | June 2006 | |||
| Chris Nichols | 48 | Director | June 2006 | |||
| Joseph Sparano | 67 | Director | March 2011 |
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The Company’s directors serve in such capacity until the first annual meeting of the Company’s shareholders and until their successors have been elected and qualified. The Company’s officers serve at the discretion of the Company’s board of directors, until their death, or until they resign or have been removed from office.
There are no agreements or understandings for any director or officer to resign at the request of another person and none of the directors or officers is acting on behalf of or will act at the direction of any other person. The activities of each director and officer are material to the operation of the Company. No other person’s activities are material to the operation of the Company.
Arnold R. Klann – Chairman of the Board and Chief Executive Officer
Mr. Klann has been our Chairman of the Board and Chief Executive Officer since our inception in March 2006. Mr. Klann has been President of ARK Energy, Inc. and Arkenol, Inc. from January 1989 to present. Mr. Klann has an AA from Lakeland College in Electrical Engineering. BlueFire believes that Mr. Klann’s contacts in the ethanol and cellulose industries and his overall insight into our business are a valuable asset to the Company.
Necitas Sumait – Senior Vice President and Director
Mrs. Sumait has been our Director and Senior Vice President since our inception in March 2006. Prior to this, Mrs. Sumait was Vice President of ARK Energy/Arkenol from December 1992 to July 2006. Mrs. Sumait has a MBA in Technological Management from Illinois Institute of Technology and a B.S. in Biology from DePaul University. BlueFire believes that Mrs. Sumait’s work with, and insight into, the environmental regulation and policy of our business is a valuable asset to the Company.
John Cuzens – Chief Technology Officer and Senior Vice President
Mr. Cuzens has been our Chief Technology Officer and Senior Vice President since our inception in March 2006. Mr. Cuzens was a Director from March 2006 until his resignation from the Board of Directors in July 2007. Prior to this, he was Director of Projects Wahlco Inc. from 2004 to June 2006. He was employed by Applied Utility Systems Inc from 2001 to 2004 and Hydrogen Burner Technology form 1997-2001. He was with ARK Energy and Arkenol from 1991 to 1997 and is the co-inventor on seven of Arkenol’s eight U.S. foundation patents for the conversion of cellulosic materials into fermentable sugar products using a modified strong acid hydrolysis process. Mr. Cuzens has a B.S. Chemical Engineering degree from the University of California at Berkeley.
Chris Nichols – Director (Chairman, Compensation Committee)
Mr. Nichols has been our Director since our inception in March 2006. Mr. Nichols is currently the Chief Sales Officer for Field Nation, LLC. Previously, Mr Nichols was the Chairman of the Board and Chief Executive Officer of Advanced Growing Systems, Inc. From 2003 to 2006, Mr. Nichols was the Senior Vice President of Westcap Securities’ Private Client Group. Prior to this, Mr. Nichols was a Registered Representative at Fisher Investments from December 2002 to October 2003. He was a Registered Representative with Interfirst Capital Corporation from 1997 to 2002. Mr. Nichols is a graduate of California State University in Fullerton with a B.A. degree in Marketing. The Company believes that Mr. Nichols’ experience in public company financing will assist us with the formation of new capital into the Company.
Joseph Sparano – Director
Mr. Sparano currently serves as an executive advisor to the Western States Petroleum Association’s (“WSPA”) board of directors. WSPA is an non-profit trade association that represents companies that account for the bulk of petroleum exploration, production, refining, transportation and marketing in the six western states of Arizona, California, Hawaii, Nevada, Oregon and Washington. In his role as executive advisor, Mr. Sparano advises the WSPA’s President and Chairman on matters related to the trade organization’s operations and advocacy in six Western states (CA, AZ, NV, WA, OR, HI). Mr. Sparano has served in such role since January 2010, at which time he resigned as the President of the WSPA, a role in which he served since March 2003. Prior to joining the WSPA, from March 2000 to March 2003, Mr. Sparano served as the President of Tesoro Petroleum Corporation’s (“Tesoro”) West Coast Regional Business Unit and as Vice President of the company’s Heavy Fuels Marketing segment. Tesoro is an independent marketer and refiner of petroleum products. Prior to joining Teroso, from September 1990 to August 1995, Mr. Sparano served as the Chairman and Chief Executive Officer of Pacific Refining Company, a California based petroleum refining operation. Mr. Sparano graduated cum laude from the Stevens Institute of Technology, receiving a B.S. in chemical engineering. The Company believes that Mr. Sparano’s experience in both mergers and acquisitions and in representing the oil and gas industry will assist us with the formation of new strategic partnerships.
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Family Relationships
There are no family relationships among our directors, executive officers, or persons nominated or chosen by the Company to become directors or executive officers.
Executive Legal Proceedings
Except as set forth below, no director or executive officer has been a director or executive officer of any business which has filed a bankruptcy petition or had a bankruptcy petition filed against it during the past ten years. No director or executive officer has been convicted of a criminal offense or is the subject of a pending criminal proceeding during the past ten years. No director or executive officer has been the subject of any order, judgment or decree of any court permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities during the past ten years. No director or officer has been found by a court to have violated a federal or state securities or commodities law during the past ten years.
Mr. Nichols was a director of Advanced Nurseries, Inc. (“Advanced Nurseries”), until September 2009. In March 2009, Advanced Nurseries filed for Chapter 11 bankruptcy. In September 2009, the bankruptcy was voluntarily converted into a Chapter 7 bankruptcy.
Mr. Nichols was a director of Organic Growing Systems, Inc. (“Organic”), until June 2010. In February 2010, Organic filed for Chapter 11 bankruptcy. In June 2010, the bankruptcy was voluntarily converted into a Chapter 7 bankruptcy.
None of our directors or executive officers or their respective immediate family members or affiliates are indebted to us.
Committees of the Board of Directors
Each of our Audit Committee, Compensation Committee and Nomination Committee are composed of a majority of independent board members and are also chaired by an independent board member.
Audit Committee
Christopher Nichols
Compensation Committee
Christopher Nichols, Chairman
Nomination Committee
Joseph Sparano, Chairman; Arnold Klann; Necitas Sumait
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Exchange Act requires the Company’s directors, executive officers and persons who beneficially own 10% or more of a class of securities registered under Section 12 of the Exchange Act to file reports of beneficial ownership and changes in beneficial ownership with the SEC. Directors, executive officers and greater than 10% stockholders are required by the rules and regulations of the SEC to furnish the Company with copies of all reports filed by them in compliance with Section 16(a). To the best of the Company’s knowledge, any reports required to be filed were timely filed as of April 15, 2014.
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Code of Ethics
The Company has adopted a Code of Ethics that applies to the Registrant’s directors, officers and key employees.
Board Nomination Procedure
There has been no material change to the procedures by which security holders may recommend nominees to the Company’s board of directors since the Company provided disclosure on such process on its proxy statement on Schedule 14A, as amended, filed on May 19, 2010, with the SEC.
The following table sets forth information with respect to compensation paid by us to our executive officers during the three most recent fiscal years. This information includes the dollar value of base salaries, bonus awards and number of stock options granted, and certain other compensation, if any.
Summary Compensation Table
| Name and Principal Position | Year | Salary ($) (2) | Bonus ($) | Stock Awards ($) (1) | Option Awards ($) | Non-Equity Incentive Plan Compensation ($) | Non-Qualified Deferred Compensation Earnings ($) | All Other Compensation ($) | Total ($) | |||||||||||||||||||||||||||
| Arnold Klann | 2014 | 226,000 | 0 | 0 | 226,000 | |||||||||||||||||||||||||||||||
| Chief Executive Officer, | 2013 | 226,000 | 0 | 0 | 226,000 | |||||||||||||||||||||||||||||||
| President | 2012 | 226,000 | 1,700 | 0 | 227,700 | |||||||||||||||||||||||||||||||
| Necitas Sumait | 2014 | 180,000 | 0 | 0 | 180,000 | |||||||||||||||||||||||||||||||
| Secretary, | 2013 | 180,000 | 0 | 0 | 180,000 | |||||||||||||||||||||||||||||||
| Vice President | 2012 | 180,000 | 1,700 | 0 | 181,700 | |||||||||||||||||||||||||||||||
| John Cuzens | 2014 | 180,000 | 0 | 0 | 180,000 | |||||||||||||||||||||||||||||||
| Treasurer, | 2013 | 180,000 | 0 | 0 | 180,000 | |||||||||||||||||||||||||||||||
| Vice President | 2012 | 180,000 | 0 | 0 | 180,000 | |||||||||||||||||||||||||||||||
| (1) | Reflects the value of shares of restricted common stock issued as compensation for serving on the Company’s board of directors. See notes to the consolidated financial statements for valuation. | |
| (2) | In 2012, due to a lack of capital, the Company accrued, but had not paid back salary in the amounts of $113,000 to Mr Klann, $90,000 to Ms Sumait, $90,000 and to Mr. Cuzens. |
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2014 Outstanding Equity Awards at Fiscal Year
| OPTION AWARDS | STOCK AWARDS | |||||||||||||||||||||||||||||||||
| Name | Number of Securities Underlying Unexercised Options (#) Exercisable | Number of Securities Underlying Unexercised Options (#) Unexercisable | Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options (#) | Option Exercise Price ($) | Option Expiration Date | Number of Shares or Units of Stock That Have Not Vested (#) | Market Value of Shares or Units of Stock That Have Not Vested ($) | Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested (#) | Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested (#) | |||||||||||||||||||||||||
| Arnold Klann | ||||||||||||||||||||||||||||||||||
| Necitas Sumait | ||||||||||||||||||||||||||||||||||
| John Cuzens | ||||||||||||||||||||||||||||||||||
| Chris Nichols | ||||||||||||||||||||||||||||||||||
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2014 Director Compensation Table
| Name | Fees Earned or Paid in Cash ($) | Stock Awards ($) | Option Awards ($) | Non-Equity Incentive Plan Compensation ($) | Change in Pension Value and Non- Qualified Deferred Compensation Earnings ($) | All Other Compensation ($) | Total ($) | |||||||||||||||||||||
| Arnold Klann | ||||||||||||||||||||||||||||
| Necitas Sumait | ||||||||||||||||||||||||||||
| Chris Nichols (1) | 6,000 | 6,000 | ||||||||||||||||||||||||||
| Joseph Sparano (1) | 6,000 | 6,000 | ||||||||||||||||||||||||||
Employment Contracts
On June 27, 2006, the Company entered into employment agreements with three of its executive officers. The employment agreements are for a period of three years, which expired in 2009, with prescribed percentage increases beginning in 2007 and can be cancelled upon a written notice by either employee or employer (if certain employee acts of misconduct are committed). The total aggregate annual amount due under the employment agreements is approximately $520,000. These contracts have not been renewed. Each of the executive officers are currently working for the Company on a month to month basis.
In addition, on June 27, 2006, the Company entered into a Directors agreement with four individuals to join the Company’s board of directors. Under the terms of the agreement the non-employee Director (Chris Nichols) will receive annual compensation in the amount of $5,000 and all Directors receive a onetime grant of 5,000 shares of the Company’s common stock. The common shares vested immediately. The value of the common stock granted was determined to be approximately $67,000 based on the estimated fair market value of the Company’s common stock over a reasonable period of time.
On July 31, 2008, the Board of Directors approved the re-election of Victor Doolan, Joseph Emas, Christopher Nichols, Arnold Klann and Necitas Sumait. The Company also resolved to grant each Board Chair, and the Secretary each an additional 5,000 shares of stock. The value of the common stock granted at the time of the grant was determined to be approximately $123,000 based on the estimated fair market value of the Company’s common stock.
On July 23, 2009, the Board of Directors approved the re-election of Victor Doolan, Joseph Emas, Christopher Nichols, Arnold Klann and Necitas Sumait. The Company also resolved to grant each Board Chair, and the Secretary each an additional 5,000 shares of stock. The value of the common stock granted at the time of the grant was determined to be approximately $5,250 based on the estimated fair market value of the Company’s common stock.
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On December 22, 2009, the Company Board of Directors accepted the resignation of Joseph I. Emas, which had been submitted on December 21, 2009. Mr. Emas served on the Audit Committee, Compensation Committee and as Chairman of the Nominating Committee. Mr. Emas resignation was not a result of any disagreements relating to the Company’s operations, policies or practices.
On July 15, 2010, the Company entered into a Directors agreement with Roger Petersen to join the Company’s board of directors. Under the terms of the agreement Mr. Petersen will receive annual compensation in the amount of $5,000 and also Directors receive an annual grant of 6,000 shares of the Company’s common stock. The common shares vest immediately. The value of the common stock granted was determined to be approximately $1,440 based on the estimated fair market value of the Company’s common stock over a reasonable period of time.
On December 14, 2010, Victor Doolan resigned from his position on the board of directors of the Company. His resignation was not the result of any disagreements with the Company on any matters relating to the Company’s operations, policies or practices.
On March 1, 2011, the Company entered into a director agreement with Joseph Sparano to join the Company’s board of directors. Under the terms of the agreement, Mr. Sparano will receive annual compensation in the amount of $5,000 and also directors receive an annual grant of 6,000 shares of the Company’s common stock. The common shares vest immediately. The value of the common stock will be determined when issued.
On September 23, 2011, Christopher Scott resigned from his position as the Chief Financial Officer of the Company. His resignation was not the result of any disagreements with the Company on any matters relating to the Company’s operations, policies or practices.
On January 25, 2012, Roger Peterson resigned from his position on the board of directors of the Company. His resignation was not the result of any disagreements with the Company on any matters relating to the Company’s operations, policies or practices.
On August 1, 2012, the Board of Directors approved the re-election of Joseph Sparano, Christopher Nichols, Arnold Klann and Necitas Sumait. The Company also resolved to grant each member the stock that was not issued in 2011. The value of the common stock granted at the time of the grant was determined to be approximately $7,500 based on the estimated fair market value of the Company’s common stock.
On November 19, 2013, the Board of Directors approved the re-election of Joseph Sparano, Christopher Nichols, Arnold Klann and Necitas Sumait. As of April 15, 2014, the Company has not yet granted to each member the stock to be issued as of November 19, 2013.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of December 30, 2014, our authorized capitalization was 501,000,000 shares of capital stock, consisting of 500,000,000 shares of common stock, $0.001 par value per share and 1,000,000 shares of preferred stock, no par value per share. As of December 30, 2014, there were 226,890,278 shares of our common stock outstanding, all of which were fully paid, non-assessable and entitled to vote. Each share of our common stock entitles its holder to one vote on each matter submitted to the stockholders.
The following table sets forth, as of December 30, 2014, the number of shares of our common stock owned by (i) each person who is known by us to own of record or beneficially five percent (5%) or more of our outstanding shares, (ii) each of our directors, (iii) each of our executive officers and (iv) all of our directors and executive officers as a group. Unless otherwise indicated, each of the persons listed below has sole voting and investment power with respect to the shares of our common stock beneficially owned.
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Executive Officers, Directors, and More than 5% Beneficial Owners
The address of each owner who is an officer or director is c/o the Company at 31 Musick, Irvine California 92618.
| Name of Beneficial Owner (1) | Number of Shares | Percent of Class (2) | ||||||
| Arnold Klann | 20,290,258 | 8.94 | % | |||||
| Chief Executive Officer, President, Chairman | ||||||||
| Necitas Sumait | 3,096,000 | 1.36 | % | |||||
| Senior Vice President, Director | ||||||||
| John Cuzens | 3,058,500 | 1.35 | % | |||||
| Chief Technology Officer, Senior Vice President | ||||||||
| Chris Nichols | 24,500 | * | % | |||||
| Director | ||||||||
| Joseph Sparano | 12,000 | * | % | |||||
| Director | ||||||||
| All officers and directors as a group (5 persons) | 11.67 | % | ||||||
| All officers, directors and 5% holders as a group (5 persons) | 11.67 | % | ||||||
* denotes less than 1%
| (1) | Beneficial ownership is determined in accordance with Rule 13d-3(a) of the Exchange Act and generally includes voting or investment power with respect to securities. | |
| (2) | Figures may not add up due to rounding of percentages. |
Share Issuances/Consulting Agreements
On July 31, 2008, the Company renewed all of its existing Directors appointments, issued 6,000 shares to each and paid $5,000 to the three outside members. Pursuant to the Board of Director agreements, the Company’s “in-house” board members (CEO and Vice-President) waived their annual cash compensation of $5,000. The value of the common stock granted was determined to be approximately $123,000 based on the fair market value of the Company’s common stock of $4.10 on the date of the grant. During the years ended December 31, 2008, the Company expensed approximately $138,000, related to the agreements.
On July 23, 2009, the Company renewed all of its existing Directors’ appointment, issued 6,000 shares to each and paid $5,000 to the three outside member. Pursuant to the Board of Director agreements, the Company’s “in-house” board members (CEO and Vice-President) waived their annual cash compensation of $5,000. The value of the common stock granted was determined to be approximately $26,400 based on the fair market value of the Company’s common stock of $0.88 on the date of the grant. During the year 2009 the Company expensed approximately $41,400 related to these agreements.
On July 15, 2010, the Company renewed all of its existing Directors’ appointment, issued 6,000 shares to each and paid $5,000 to the three outside member. Pursuant to the Board of Director agreements, the Company’s “in-house” board members (CEO and Vice-President) waived their annual cash compensation of $5,000. The value of the common stock granted was determined to be approximately $7,200 based on the fair market value of the Company’s common stock of $0.24 on the date of the grant. During the year ended December 31, 2010, the Company expensed approximately $17,000 related to these agreements.
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On August 1, 2012, the Company renewed all of its existing Directors’ appointments, issued two years of shares to each (totaling 10,000 for the CEO and Vice-President, and 12,000 shares to the outside board members). The $5,000 to the two outside members were accrued, and as yet unpaid as of December 31, 2012. Pursuant to the Board of Director agreements, the Company’s “in-house” board members (CEO and Vice-President) waived their annual cash compensation of $5,000. The value of the common stock granted was determined to be approximately $7,500 based on the fair market value of the Company’s common stock of $0.17 on the date of the grant. During the year ended December 31, 2012, the Company expensed approximately $17,500 related to these agreements.
On November 19, 2013, the Company renewed all of its existing Directors’ appointments, but as of December 30, 2014, the Company has not yet granted to each member the stock to be issued pursuant to their appointments. The $5,000 to the two outside members was accrued, and as yet unpaid as of December 31, 2013. Pursuant to the Board of Director agreements, the Company’s “in-house” board members (CEO and Vice-President) waived their annual cash compensation of $5,000.
Stock Option Issuances Under Amended 2006 Plan
No stock options have been granted by the Company’s Board of Directors in 2011, 2012, 2013 or 2014.
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION
OF SECURITIES ACT LIABILITIES
The Company’s Amended and Restated Bylaws provide for indemnification of directors and officers against certain liabilities. Officers and directors of the Company are indemnified generally for any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, except an action by or in the right of the corporation, against expenses, including attorneys’ fees, judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with the action, suit or proceeding if he acted in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, has no reasonable cause to believe his conduct was unlawful.
The Company’s Amended and Restated Articles of Incorporation further provides the following indemnifications:
(a) a director of the Corporation shall not be personally liable to the Corporation or to its shareholders for damages for breach of fiduciary duty as a director of the Corporation or to its shareholders for damages otherwise existing for (i) any breach of the director’s duty of loyalty to the Corporation or to its shareholders; (ii) acts or omission not in good faith or which involve intentional misconduct or a knowing violation of the law; (iii) acts revolving around any unlawful distribution or contribution; or (iv) any transaction from which the director directly or indirectly derived any improper personal benefit. If Nevada Law is hereafter amended to eliminate or limit further liability of a director, then, in addition to the elimination and limitation of liability provided by the foregoing, the liability of each director shall be eliminated or limited to the fullest extent permitted under the provisions of Nevada Law as so amended. Any repeal or modification of the indemnification provided in these Articles shall not adversely affect any right or protection of a director of the Corporation under these Articles, as in effect immediately prior to such repeal or modification, with respect to any liability that would have accrued, but for this limitation of liability, prior to such repeal or modification.
(b) the Corporation shall indemnify, to the fullest extent permitted by applicable law in effect from time to time, any person, and the estate and personal representative of any such person, against all liability and expense (including, but not limited to attorney’s fees) incurred by reason of the fact that he is or was a director or officer of the Corporation, he is or was serving at the request of the Corporation as a director, officer, partner, trustee, employee, fiduciary, or agent of, or in any similar managerial or fiduciary position of, another domestic or foreign corporation or other individual or entity of an employee benefit plan. The Corporation shall also indemnify any person who is serving or has served the Corporation as a director, officer, employee, fiduciary, or agent and that person’s estate and personal representative to the extent and in the manner provided in any bylaw, resolution of the shareholders or directors, contract, or otherwise, so long as such provision is legally permissible.
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Company pursuant to the foregoing provisions, or otherwise, the Company has been advised that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by us of expenses incurred or paid by our directors, officers or controlling persons in the successful defense of any action, suit or proceedings) is asserted by such director, officer, or controlling person in connection with any securities being registered, we will, unless in the opinion of our counsel the matter has been settled by controlling precedent, submit to court of appropriate jurisdiction the question whether such indemnification by us is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issues.
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TRANSACTIONS WITH RELATED PERSONS, PROMOTERS, AND CERTAIN CONTROL PERSONS
On November 10, 2011, the Company obtained a line of credit in the amount of $40,000 from its CEO to provide additional liquidity to the Company as needed, at his sole discretion. Under the terms of the note, the Company is to repay any principal balance and interest, at 12% per annum, within 30 days of receiving qualified investment financing of $100,000 or more. During the nine months ended September 30, 2014, the CEO advanced the Company an additional net $34,000 under the line of credit, bringing the balance to $45,230, which is in excess of the line of credit limit, however, during the nine-months ended September 30, 2014, the Company and the CEO amended this line of credit so that the maximum amount that could be borrowed is $55,000.
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Our Articles of Incorporation provide that it will indemnify its officers and directors to the full extent permitted by Nevada state law. Our By-laws provide that we will indemnify and hold harmless our officers and directors for any liability including reasonable costs of defense arising out of any act or omission taken on our behalf, to the full extent allowed by Nevada law, if the officer or director acted in good faith and in a manner the officer or director reasonably believed to be in, or not opposed to, the best interests of the corporation.
Insofar as indemnification for liabilities arising under the Securities Act of 1933 (the “Act” or “Securities Act”) may be permitted to directors, officers or persons controlling us pursuant to the foregoing provisions, or otherwise, we have been advised that in the opinion of the SEC, such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable.
The validity of the shares of our common stock offered by the Selling Stock Holders has been passed upon by the law firm of Lucosky Brookman LLP.
No expert or counsel named in this prospectus as having prepared or certified any part of this prospectus or having given an opinion upon the validity of the securities being registered or upon other legal matters in connection with the registration or offering of the common stock was employed on a contingency basis, or had, or is to receive, in connection with the offering, a substantial interest, direct or indirect, in the registrant or any of its parents or subsidiaries. Nor was any such person connected with the registrant or any of its parents or subsidiaries as a promoter, managing or principal underwriter, voting trustee, director, officer, or employee.
The consolidated financial statements as of December 31, 2013 and 2012, and the related consolidated statements of operations, stockholders’ deficit, and cash flows for the years then ended, and the period from March 28, 2006 to December 31, 2013 included in this prospectus and the registration statement have been audited by dbbmckennon to the extent and for the periods set forth in their report appearing elsewhere herein and in the registration statement, and are included in reliance upon such report given upon the authority of said firm as experts in auditing and accounting
We have filed a registration statement on Form S-1 under the Securities Act of 1933, as amended, relating to the shares of common stock being offered by this prospectus, and reference is made to such registration statement. This prospectus constitutes the prospectus of BlueFire Renewables, Inc. filed as part of the registration statement, and it does not contain all information in the registration statement, as certain portions have been omitted in accordance with the rules and regulations of the SEC.
We are subject to the informational requirements of the Securities Exchange Act of 1934 which requires us to file reports, proxy statements and other information with the SEC. Such reports, proxy statements and other information may be inspected at public reference facilities of the SEC at 100 F Street, N.E., Washington D.C. 20549. Copies of such material can be obtained from the Public Reference Section of the SEC at 100 F Street, N.E., Washington, D.C. 20549 at prescribed rates. Because we file documents electronically with the SEC, you may also obtain this information by visiting the SEC’s Internet website at http://www.sec.gov.
| 47 |
FINANCIAL STATEMENTS
Table of Contents
| 48 |
BLUEFIRE RENEWABLES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
| September 30, 2014 | December 31, 2013 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 86,868 | $ | 46,992 | ||||
| Costs of financing | - | 1,031 | ||||||
| Prepaid expenses | 13,163 | 4,636 | ||||||
| Total current assets | 100,031 | 52,659 | ||||||
| Property, plant and equipment, net of accumulated depreciation of $106,746 and $106,041, respectively | 110,535 | 111,240 | ||||||
| Total assets | $ | 210,566 | $ | 163,899 | ||||
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 920,964 | $ | 1,108,684 | ||||
| Accrued liabilities | 109,086 | 272,910 | ||||||
| Convertible notes payable, net of discount of $0 and $75,695, respectively | - | 322,385 | ||||||
| Notes payable, net of discount of $22,017 and $0, respectively | 357,983 | - | ||||||
| Line of credit, related party | 45,230 | 11,230 | ||||||
| Note payable to a related party | 200,000 | 200,000 | ||||||
| Derivative liability | - | 122,309 | ||||||
| Total current liabilities | 1,633,263 | 2,037,518 | ||||||
| Outstanding warrant liability | 241 | 58 | ||||||
| Total liabilities | 1,633,504 | 2,037,576 | ||||||
| Non-controlling interest - redeemable | 859,517 | 856,044 | ||||||
| Stockholders’ deficit: | ||||||||
| Preferred stock, no par value, 1,000,000 shares authorized; none issued and outstanding | - | - | ||||||
| Common stock, $0.001 par value; 500,000,000 shares authorized; 226,890,278 and 73,486,861 shares issued; and 226,858,106 and 68,910,395 outstanding, as of September 30, 2014 and December 31, 2013, respectively | 226,890 | 68,943 | ||||||
| Additional paid-in capital | 16,561,845 | 16,123,744 | ||||||
| Treasury stock at cost, 32,172 shares at September 30, 2014 and December 31, 2013 | (101,581 | ) | (101,581 | ) | ||||
| Accumulated deficit | (18,969,609 | ) | (18,820,827 | ) | ||||
| Total stockholders’ deficit | (2,282,455 | ) | (2,729,721 | ) | ||||
| Total liabilities and stockholders’ deficit | $ | 210,566 | $ | 163,899 | ||||
See accompanying notes to consolidated financial statements
| F-1 |
BLUEFIRE RENEWABLES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| For the Three Months ended September 30, 2014 | For the
Three Months ended September 30, 2013 | For the Nine Months ended September 30, 2014 | For the Nine Months ended September 30, 2013 | |||||||||||||
| Revenues: | ||||||||||||||||
| Consulting fees | $ | 48,953 | $ | 2,405 | $ | 263,178 | $ | 4,425 | ||||||||
| Department of energy grant revenues | 314,970 | 219,017 | 1,164,473 | 836,956 | ||||||||||||
| Total revenues | 363,923 | 221,422 | 1,427,651 | 841,381 | ||||||||||||
| Cost of revenue: | ||||||||||||||||
| Consulting revenue | 18,792 | - | 31,161 | - | ||||||||||||
| Gross margin | 345,131 | 221,422 | 1,396,490 | 841,381 | ||||||||||||
| Operating expenses: | ||||||||||||||||
| Project development | 186,757 | 135,443 | 602,230 | 382,131 | ||||||||||||
| General and administrative | 264,132 | 152,605 | 739,160 | 551,207 | ||||||||||||
| Total operating expenses | 450,889 | 288,048 | 1,341,390 | 933,338 | ||||||||||||
| Operating income (loss) | (105,758 | ) | (66,626 | ) | 55,100 | (91,957 | ) | |||||||||
| Other income and (expense): | ||||||||||||||||
| Amortization of debt discount | (47,222 | ) | (52,511 | ) | (131,763 | ) | (178,127 | ) | ||||||||
| Interest expense | (9,613 | ) | (18,740 | ) | (46,165 | ) | (95,187 | ) | ||||||||
| Related party interest expense | (1,458 | ) | (467 | ) | (3,212 | ) | (1,386 | ) | ||||||||
| Gain on settlement of accounts payable and accrued liabilities | - | 96,076 | 95,990 | 96,076 | ||||||||||||
| Gain / (loss) from change in fair value of warrant liability | 55 | 386 | (183 | ) | 22,241 | |||||||||||
| Gain / (loss) from change in fair value of derivative liability | (45,048 | ) | 8,504 | (112,785 | ) | 68,009 | ||||||||||
| Loss on excess of derivative over face value | - | - | - | (28,507 | ) | |||||||||||
| Total other income or (expense) | (103,286 | ) | 33,248 | (198,118 | ) | (116,881 | ) | |||||||||
| Loss before income taxes | (209,044 | ) | (33,378 | ) | (143,018 | ) | (208,838 | ) | ||||||||
| Provision for income taxes | 800 | - | 2,291 | 751 | ||||||||||||
| Net loss | $ | (209,844 | ) | $ | (33,378 | ) | $ | (145,309 | ) | $ | (209,589 | ) | ||||
| Net income (loss) attributable to non-controlling interest | 1,100 | (376 | ) | 3,473 | (3,118 | ) | ||||||||||
| Net loss attributable to controlling interest | $ | (210,944 | ) | $ | (33,002 | ) | $ | (148,782 | ) | $ | (206,471 | ) | ||||
| Basic and diluted loss per common share | $ | (0.00 | ) | $ | (0.00 | ) | $ | (0.00 | ) | $ | (0.01 | ) | ||||
| Weighted average common shares outstanding, basic and diluted | 187,175,232 | 42,298,786 | 151,334,103 | 38,006,195 | ||||||||||||
See accompanying notes to consolidated financial statements
| F-2 |
BLUEFIRE RENEWABLES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| For the Nine Months Ended September 30, 2014 | For the Nine Months Ended September 30, 2013 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | (145,309 | ) | $ | (209,589 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Change in the fair value of warrant liability | 183 | (22,241 | ) | |||||
| Change in fair value of derivative liability | 112,785 | (68,009 | ) | |||||
| Loss on excess fair value of derivative liability | - | 28,507 | ||||||
| Gain on settlement of accounts payable and accrued liabilities | (95,990 | ) | (96,076 | ) | ||||
| Share-based compensation | 46,711 | 9,075 | ||||||
| Amortization | 131,763 | 206,949 | ||||||
| Depreciation | 705 | 2,435 | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | - | 3,518 | ||||||
| Prepaid expenses and other current assets | (8,527 | ) | (9,580 | ) | ||||
| Accounts payable | (14,422 | ) | 191,296 | |||||
| Accrued liabilities | (162,023 | ) | (109,320 | ) | ||||
| Net cash used in operating activities | (134,124 | ) | (73,035 | ) | ||||
| Cash flows from investing activities: | ||||||||
| Construction in progress | - | 14 | ||||||
| Net cash provided by investing activities | - | 14 | ||||||
| Cash flows from financing activities: | ||||||||
| Proceeds from convertible notes payable | 35,000 | 110,000 | ||||||
| Repayment of convertible notes payable | (275,000 | ) | - | |||||
| Proceeds from notes payable | 380,000 | - | ||||||
| Net proceeds from related party line of credit/notes payable | 34,000 | - | ||||||
| Net cash provided by financing activities | 174,000 | 110,000 | ||||||
| Net increase in cash and cash equivalents | 39,876 | 36,979 | ||||||
| Cash and cash equivalents beginning of period | 46,992 | 59,603 | ||||||
| Cash and cash equivalents end of period | $ | 86,868 | $ | 96,582 | ||||
| Supplemental disclosures of cash flow information | ||||||||
| Cash paid during the period for: | ||||||||
| Interest | $ | 98,179 | $ | 5,779 | ||||
| Income taxes | $ | 0 | $ | 751 | ||||
| Supplemental schedule of non-cash investing and financing activities: | ||||||||
| Conversion of convertible notes payable into common stock | $ | 120,000 | $ | 101,000 | ||||
| Interest converted to common stock | $ | 2,800 | $ | 4,040 | ||||
| Discount on fair value of warrants issued with note payable | $ | 42,380 | $ | - | ||||
| Derivative liability reclassed to additional paid-in capital | $ | - | $ | 86,187 | ||||
| Liabilities settled in connection with the Liabilities Purchase Agreement | $ | 110,935 | $ | - | ||||
See accompanying notes to consolidated financial statements
| F-3 |
BLUEFIRE RENEWABLES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND BUSINESS
BlueFire Renewables, Inc. (“BlueFire” or the “Company”) was incorporated in the State of Nevada on March 28, 2006. BlueFire was established to deploy the commercially ready and patented process for the conversion of cellulosic waste materials to ethanol (“Arkenol Technology”) under a technology license agreement with Arkenol, Inc. (“Arkenol”). BlueFire’s use of the Arkenol Technology positions it as a cellulose-to-ethanol company with demonstrated production of ethanol from urban trash (post-sorted “MSW”), rice and wheat straws, wood waste and other agricultural residues. The Company’s goal is to develop and operate high-value carbohydrate-based transportation fuel production facilities in North America, and to provide professional services to such facilities worldwide. These “biorefineries” will convert widely available, inexpensive, organic materials such as agricultural residues, high-content biomass crops, wood residues, and cellulose from MSW into ethanol.
On July 15, 2010, the board of directors of BlueFire, by unanimous written consent, approved the filing of a Certificate of Amendment to the Company’s Articles of Incorporation with the Secretary of State of Nevada, changing the Company’s name from BlueFire Ethanol Fuels, Inc. to BlueFire Renewables, Inc. On July 20, 2010, the Certificate of Amendment was accepted by the Secretary of State of Nevada.
On November 25, 2013, the Company filed an amendment to the Company’s articles of incorporation with the Secretary of State of the State of Nevada, to increase the Company’s authorized common stock from one hundred million (100,000,000) shares of common stock, par value $0.001 per share, to five hundred million (500,000,000) shares of common stock, par value $0.001 per share.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Management’s Plans
Going Concern
The Company has historically incurred recurring losses. Management has funded operations primarily through loans from its majority shareholder, the private placement of the Company’s common stock in December 2007 for net proceeds of approximately $14,500,000, the issuance of convertible notes with warrants in July and in August 2007, various convertible notes, and Department of Energy reimbursements from 2009 to 2014. The Company may encounter further difficulties in establishing operations due to the time frame of developing, constructing and ultimately operating the planned bio-refinery projects.
As of September 30, 2014, the Company has negative working capital of approximately $1,533,000. Management has estimated that operating expenses for the next 12 months will be approximately $1,700,000, excluding engineering costs related to the development of bio-refinery projects. These matters raise substantial doubt about the Company’s ability to continue as a going concern. Throughout the remainder of 2014, the Company intends to fund its operations with remaining reimbursements under the Department of Energy contract as available, as well as seek additional funding in the form of equity or debt. The Company’s ability to get reimbursed under the DOE contract is dependent on the availability of cash to pay for the related costs and the availability of funds remaining under the contract after the discontinuance of the Department of Energy contract further disclosed in Note 3. As of November 19, 2014, the Company expects the current resources available to them will only be sufficient for a period of approximately one month unless significant additional financing is received. Management has determined that the general expenditures must be reduced and additional capital will be required in the form of equity or debt securities. In addition, if we cannot raise additional short term capital we may consume all of our cash reserved for operations. There are no assurances that management will be able to raise capital on terms acceptable to the Company. If we are unable to obtain sufficient amounts of additional capital, we may be required to reduce the scope of our planned development, which could harm our business, financial condition and operating results. The financial statements do not include any adjustments that might result from these uncertainties.
| F-4 |
Additionally, the Company’s Lancaster plant is currently shovel ready, except for the air permit which the Company will need to renew and only requires minimal capital to maintain until funding is obtained for the construction. This project shall continue once we receive the funding necessary to construct the facility.
As of December 31, 2010, the Company completed the detailed engineering on our proposed Fulton Project, procured all necessary permits for construction of the plant, and began site clearing and preparation work, signaling the beginning of construction. As of September 30, 2014, all site preparation activities have been completed, including clearing and grating of the site, building access roads, completing railroad tie-ins to connect the site to the rail system, and finalizing the layout plan to prepare for the site foundation. As of December 31, 2013, the construction-in-progress was deemed impaired due to the discontinuance of future funding from the DOE further described in Note 3.
We estimate the total construction cost of the bio-refineries to be in the range of approximately $300 million for the Fulton Project and approximately $100 million to $125 million for the Lancaster Biorefinery. These cost approximations do not reflect any increase/decrease in raw materials or any fluctuation in construction cost that would be realized by the dynamic world metals markets or inflation of general costs of construction. The Company is currently in discussions with potential sources of financing for these facilities but no definitive agreements are in place. The Company cannot continue significant development or furtherance of the Fulton project until financing for the construction of the Fulton plant is obtained.
Basis of Presentation
The accompanying unaudited consolidated interim financial statements have been prepared by the Company pursuant to the rules and regulations of the United States Securities Exchange Commission. Certain information and disclosures normally included in the annual financial statements prepared in accordance with the accounting principles generally accepted in the Unites States of America have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, all adjustments and disclosures necessary for a fair presentation of these financial statements have been included. Such adjustments consist of normal recurring adjustments. These interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements of the Company for the year ended December 31, 2013. The results of operations for the three and nine months ended September 30, 2014 are not necessarily indicative of the results that may be expected for the full year.
In July 2014, the Company elected to early adopt Accounting Standards Update No. 2014-10, Development Stage Entities (Topic 915): Elimination of Certain Financial Reporting Requirements. The adoption of this ASU allows the company to remove the inception to date information and all references to development stage.
Principles of Consolidation
The consolidated financial statements include the accounts of BlueFire Renewables, Inc., and its wholly-owned subsidiaries, BlueFire Ethanol, Inc., and SucreSource LLC. BlueFire Ethanol Lancaster, LLC, and BlueFire Fulton Renewable Energy LLC (excluding 1% interest sold) are wholly-owned subsidiaries of BlueFire Ethanol, Inc. All intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reported periods. Actual results could materially differ from those estimates.
Project Development
Project development costs are either expensed or capitalized. The costs of materials and equipment that will be acquired or constructed for project development activities, and that have alternative future uses, both in project development, marketing or sales, will be classified as property and equipment and depreciated over their estimated useful lives. To date, project development costs include the research and development expenses related to the Company’s future cellulose-to-ethanol production facilities. During the three and nine months ended September 30, 2014 and 2013, research and development costs, net of stock-based compensation, included in Project Development expense were approximately $187,000, $135,000, $602,000 and $382,000, respectively.
| F-5 |
Convertible Debt
Convertible debt is accounted for under the guidelines established by Accounting Standards Codification (“ASC”) 470-20 “Debt with Conversion and Other Options”. ASC 470-20 governs the calculation of an embedded beneficial conversion, which is treated as an additional discount to the instruments where derivative accounting (explained below) does not apply. The amount of the value of warrants and beneficial conversion feature may reduce the carrying value of the instrument to zero, but no further. The discounts relating to the initial recording of the derivatives or beneficial conversion features are accreted over the term of the debt.
The Company calculates the fair value of warrants and conversion features issued with the convertible instruments using the Black-Scholes valuation method, using the same assumptions used for valuing employee options for purposes of ASC 718 “Compensation – Stock Compensation”, except that the contractual life of the warrant or conversion feature is used. Under these guidelines, the Company allocates the value of the proceeds received from a convertible debt transaction between the conversion feature and any other detachable instruments (such as warrants) on a relative fair value basis. The allocated fair value is recorded as a debt discount or premium and is amortized over the expected term of the convertible debt to interest expense.
The Company accounts for modifications of its BCF’s in accordance with ASC 470-50 “Modifications and Extinguishments”. ASC 470-50 requires the modification of a convertible debt instrument that changes the fair value of an embedded conversion feature and the subsequent recognition of interest expense or the associated debt instrument when the modification does not result in a debt extinguishment.
Equity Instruments Issued with Registration Rights Agreement
The Company accounts for these penalties as contingent liabilities, applying the accounting guidance of ASC 450 “Contingencies”. This accounting is consistent with views established in ASC 825 “Financial Instruments”. Accordingly, the Company recognizes damages when it becomes probable that they will be incurred and amounts are reasonably estimable.
In connection with the Company signing the $2,000,000 Equity Facility with TCA on March 28, 2012, the Company agreed to file a registration statement related to the transaction with the Securities and Exchange Commission (“SEC”) covering the shares that may be issued to TCA under the Equity Facility within 45 days of closing. Although under the Registration Rights Agreement the registration statement was to be declared effective within 90 days following closing, it was not declared effective. The Company was working with TCA to resolve this issue and, on April 11, 2014, the Equity Facility was canceled and related convertible note repaid in full. No registration rights penalties were incurred as part of the repayment.
Fair Value of Financial Instruments
The Company follows the accounting guidance under ASC 820 “Fair Value Measurements and Disclosures.” Fair value is defined as the exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. The guidance also establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs market participants would use in valuing the asset or liability and are developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the factors market participants would use in valuing the asset or liability. The guidance establishes three levels of inputs that may be used to measure fair value:
| ● | Level 1. Observable inputs such as quoted prices in active markets; |
| ● | Level 2. Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and |
| ● | Level 3. Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions. |
| F-6 |
The Company did not have any level 1 financial instruments at September 30, 2014 or December 31, 2013.
As of September 30, 2014, and December 31, 2013 the Company’s warrant and derivative liabilities are considered level 2 items (see Notes 4 and 5).
As of September 30, 2014 and December 31, 2013 the Company’s redeemable non-controlling interest is considered a level 3 item and changed during nine months ended September 30, 2014 as follows:
| Balance at December 31, 2013 | $ | 856,044 | ||
| Net loss attributable to non-controlling interest | 3,473 | |||
| Balance at September 30, 2014 | $ | 859,517 |
Risks and Uncertainties
The Company’s operations are subject to new innovations in product design and function. Significant technical changes can have an adverse effect on product lives. Design and development of new products are important elements to achieve and maintain profitability in the Company’s industry segment. The Company may be subject to federal, state and local environmental laws and regulations. The Company does not anticipate expenditures to comply with such laws and does not believe that regulations will have a material impact on the Company’s financial position, results of operations, or liquidity. The Company believes that its operations comply, in all material respects, with applicable federal, state, and local environmental laws and regulations.
Loss per Common Share
The Company presents basic loss per share (“EPS”) and diluted EPS on the face of the consolidated statement of operations. Basic loss per share is computed as net loss divided by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur from common shares issuable through stock options, warrants, and other convertible securities. As of September 30, 2014 and 2013, the Company had 15,128,571 and 428,571 warrants, respectively, for which all of the exercise prices were in excess of the average closing price of the Company’s common stock during the corresponding period and thus no shares are considered dilutive under the treasury stock method of accounting and their effects would have been antidilutive due to the loss in the periods presented.
Derivative Financial Instruments
We do not use derivative financial instruments to hedge exposures to cash-flow risks or market-risks that may affect the fair values of our financial instruments. However, under the provisions ASC 815 – “Derivatives and Hedging” certain financial instruments that have characteristics of a derivative, as defined by ASC 815, such as embedded conversion features on our Convertible Notes, that are potentially settled in the Company’s own common stock, are classified as liabilities when either (a) the holder possesses rights to net-cash settlement or (b) physical or net-share settlement is not within our control. In such instances, net-cash settlement is assumed for financial accounting and reporting purposes, even when the terms of the underlying contracts do not provide for net-cash settlement. Derivative financial instruments are initially recorded, and continuously carried, at fair value each reporting period.
The value of the embedded conversion feature is determined using the Black-Scholes option pricing model. All future changes in the fair value of the embedded conversion feature will be recognized currently in earnings until the note is converted or redeemed. Determining the fair value of derivative financial instruments involves judgment and the use of certain relevant assumptions including, but not limited to, interest rate risk, credit risk, volatility and other factors. The use of different assumptions could have a material effect on the estimated fair value amounts.
Redeemable - Non-controlling Interest
Redeemable interest held by third parties in subsidiaries owned or controlled by the Company is reported on the consolidated balance sheets outside permanent equity. All non-controlling interest reported in the consolidated statements of operations reflects the respective interests in the income or loss after income taxes of the subsidiaries attributable to the other parties, the effect of which is removed from the net income or loss available to the Company. The Company accretes the redemption value of the redeemable non-controlling interest over the redemption period.
| F-7 |
New Accounting Pronouncements
In June 2014, the FASB issued ASU No. 2014-10, which eliminates the concept of a development stage entity, or DSE, in its entirety from GAAP. Under existing guidance, DSEs are required to report incremental information, including inception-to-date financial information, in their financial statements. A DSE is an entity devoting substantially all of its efforts to establishing a new business and for which either planned principal operations have not yet commenced or have commenced but there has been no significant revenues generated from that business. Entities classified as DSEs will no longer be subject to these incremental reporting requirements after adopting ASU No. 2014-10. ASU No. 2014-10 is effective for fiscal years beginning after December 15, 2014, with early adoption permitted. Retrospective application is required for the elimination of incremental DSE disclosures. Prior to the issuance of ASU No. 2014-10, the Company had met the definition of a DSE since its inception. The Company elected to adopt this ASU early, and therefore it has eliminated the incremental disclosures previously required of DSEs, starting with its June 30, 2014 Quarterly Report on Form 10-Q.
Management does not believe that any other recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the accompanying financial statements.
NOTE 3 – DEVELOPMENT CONTRACTS
Department of Energy Awards 1 and 2
In February 2007, the Company was awarded a grant for up to $40 million from the U.S. Department of Energy’s (“DOE”) cellulosic ethanol grant program to develop a solid waste biorefinery project at a landfill in Southern California. During October 2007, the Company finalized Award 1 for a total approved budget of just under $10,000,000 with the DOE. This award was a 60%/40% cost share, whereby 40% of approved costs may be reimbursed by the DOE pursuant to the total $40 million award announced in February 2007.
In December 2009, as a result of the American Recovery and Reinvestment Act, the DOE increased the Award 2 to a total of $81 million for Phase II of its Fulton Project. This is in addition to a renegotiated Phase I funding for development of the biorefinery of approximately $7 million out of the previously announced $10 million total. This brought the DOE’s total award to the Fulton project to approximately $88 million In September 2012 Award 1 was officially closed.
Since 2009, our operations had been financed to a large degree through funding provided by the DOE. We have relied on access to this funding as a source of liquidity for capital requirements not satisfied by the cash flow from our operations. If we are unable to access government funding our ability to finance our projects and/or operations and implement our strategy and business plan will be severely hampered.
On December 23, 2013, the Company received notice from the DOE indicating that the DOE would no longer provide funding under Award 2 due to the Company’s inability to comply with certain deadlines related to providing certain information to the DOE with respect to the Company’s future financing arrangements for the Fulton Project. The Company is seeking to re-establish funding under Award 2 and has initiated the appeals process with the DOE. The Company shall exhaust all options available to it in order to reverse the DOE’s decision. Without a definitive response to the Company’s request for a reprieve by the DOE, the Company can no longer reimburse for new project costs incurred after September 30, 2014, except for those related to closing out the award. As of November 19, 2014, there is still approximately $88,300 available under the grant for costs incurred prior to September 30, 2014, but not yet paid for, which is required for reimbursement and for costs to close out the award. We cannot guarantee that we will continue to receive grants, loan guarantees, or other funding for our projects from the DOE.
As of September 30, 2014, the Company has received reimbursements of approximately $13,079,839 under these awards.
NOTE 4 –NOTES PAYABLE
On March 28, 2012 the Company entered into a $300,000 promissory note with a third party. See Note 9 for additional information.
As further described below, the Company has entered into several convertible notes with Asher Enterprises, Inc. Under the terms of these notes, the Company is to repay any principal balance and interest, at 8% per annum at a given maturity date which is generally less than one year. The Company has the option to prepay the convertible promissory notes prior to maturity at varying prepayment penalty rates specified under such notes. Each of the convertible promissory notes are convertible into shares of the Company’s common stock after six months as calculated by multiplying 58% (42% discount to market) by the average of the lowest three closing bid prices during the 10 days prior to the conversion date.
| F-8 |
The Company determined that since the conversion prices are variable and do not contain a floor, the conversion feature represents a derivative liability upon the ability to convert the loan after the six month period specified above. Since the conversion feature is only convertible after six months, there is no derivative liability upon issuance. However, the Company will account for the derivative liability upon the passage of time and the note becoming convertible if not extinguished, as defined above.
On June 13, 2013, the Company issued a convertible note in favor of Asher Enterprises, Inc. in the principal amount of $32,000 pursuant to the terms above, with a maturity date of March 17, 2014. In accordance with the terms of the note, the note became convertible on December 10, 2013.
The Company calculated the derivative liability using the Black-Scholes pricing model for the note upon the initial date the note became convertible and recorded the fair market value of the derivative liability of approximately $28,000, resulting in a discount to the note. The discount was amortized over the term of the note and accelerated as the note was converted. As of September 30, 2014, the entire discount was amortized to interest expense, with no remaining unamortized discount and the note was fully converted into 22,207,699 shares of common stock.
On December 19, 2013, the Company issued a convertible note in favor of Asher Enterprises, Inc. in the principal amount of $37,500 which was funded and effective in January 2014 with terms identified above and has a maturity date of December 23, 2014. The conversion feature was not triggered until July 2014 due to the effective date of the note being in January 2014.
The Company calculated the derivative liability using the Black-Scholes pricing model for the note upon the initial date the note became convertible and recorded the fair market value of the derivative liability of approximately $35,290, resulting in a discount to the note. The discount was amortized over the term of the note and accelerated as the note was converted. As of September 30, 2014, the entire discount was amortized to interest expense, with no remaining unamortized discount and the note was fully converted into 24,537,990 shares of common stock. See below for assumptions used in valuing the derivative liability.
Using the Black-Scholes pricing model, with the range of inputs listed below, we calculated the fair market value of the conversion feature at inception (as applicable), at each conversion event, and at quarter end. Based on valuation conducted during the three months and at September 30, 2014 of derivative liabilities related to Asher Enterprises, Inc. notes, the Company recognized a loss on derivative liabilities of $18,686, which is included in the accompanying statement of operations within gain (loss) from change in fair value of derivative liabilities.
During the three months ending September 30, 2014, the range of inputs used to calculate derivative liabilities noted above were as follows:
| Three months ending | ||||
| September 30, 2014 | ||||
| Annual dividend yield | 0.00 | |||
| Expected life (years) | 0.17- 0.11 | |||
| Risk-free interest rate | .03-.01 | % | ||
| Expected volatility | 234.68 | % |
Fees paid to secure the convertible debts were accounted for as deferred financing costs and capitalized in the accompanying balance sheet or considered an on-issuance discount to the notes. The deferred financing costs and discounts, as applicable, are amortized over the term of the notes.
As of the nine months ended September 30, 2014, the Company amortized on-issuance discounts totaling $2,500 with $0 remaining, and costs of financing of $1,031 with $0 remaining related to these notes.
Tarpon Bay Convertible Notes
Pursuant to a 3(a)10 transaction with Tarpon Bay Partners LLC (“Tarpon”), on November 4, 2013, the Company issued to Tarpon a convertible promissory note in the principal amount of $25,000 (the “Tarpon Initial Note”). Under the terms of the Tarpon Initial Note, the Company shall pay Tarpon $25,000 on the date of maturity which was January 30, 2014. This note was convertible by Tarpon into the Company’s Common Shares at a 50% discount to the lowest closing bid price for the Common Stock for the twenty (20) trading days ending on the trading day immediately before the conversion date.
| F-9 |
Also pursuant to the 3(a)10 transaction with Tarpon, on December 23, 2013, the Company issued a convertible promissory note in the principal amount of $50,000 in favor of Tarpon as a success fee (the “Tarpon Success Fee Note”). The Tarpon Success Fee Note was due on June 30, 2014. The Tarpon Success Fee Note was convertible into shares of the Company’s common stock at a conversion price for each share of Common Stock at a 50% discount from the lowest closing bid price in the twenty (20) trading days prior to the day that Tarpon requests conversion.
Each of the above notes were issued without funds being received. Accordingly, the notes were issued with a full on-issuance discount that was amortized over the term of the notes. During the nine months ended September 30, 2014, amortization of approximately $51,960 was recognized to interest expense related to the discounts on the notes.
As of September 30, 2014, the Tarpon Initial Note and the Tarpon Success Fee Note were repaid in full.
Because the conversion price was variable and did not contain a floor, the conversion feature represents a derivative liability upon issuance. Accordingly, the Company calculated the derivative liability using the Black-Sholes pricing mode for the notes upon inception, resulting in a day one loss of approximately $96,000. The derivative liability was marked to market each quarter and as of September 30, 2014 which resulted in a loss of approximately $46,000. The Company used the following range of assumptions for the three months ended September 30, 2014 and December 31, 2013:
| September 30, 2014 | December 31, 2013 | |||||||
| Annual dividend yield | 0 | % | 0 | % | ||||
| Expected life (years) | 0.00 - 0.01 | 0.8 | ||||||
| Risk-free interest rate | 0.01% - 0.02 | % | 0.02 | % | ||||
| Expected volatility | 229% - 242 | % | 159 | % | ||||
During the nine months ended September 30, 2014, the Company paid $25,000 in cash and issued 45,647,727 shares of common stock on the Tarpon Initial Note and Tarpon Success Fee Note to satisfy all obligations under these notes.
AKR Promissory Note
On April 8, 2014, the Company issued a promissory note in favor of AKR Inc, (“AKR”) in the principal aggregate amount of $350,000 (the “AKR Note”). The AKR Note is due on April 8, 2015, and requires the Company to (i) incur interest at five percent (5%) per annum; (ii) issue on April 8, 2014 to AKR warrants allowing them to buy 7,350,000 common shares of the Company at an exercise price of $0.007 per common share, such warrants to expire on April 8, 2016 (“AKR Warrant A”); (iii) issue on August 8, 2014 to AKR warrants allowing them to buy 7,350,000 common shares of the Company at an exercise price of $0.007 per common share, such warrants to expire on April 8, 2016 (“AKR Warrant B”); and (iv) issue on November 8, 2014 to AKR warrants allowing them to buy 8,400,000 common shares of the Company at an exercise price of $0.007 per common share, such warrants to expire on April 8, 2016 (“AKR Warrant C”, together with AKR Warrant A and AKR Warrant B the “AKR Warrants”). The Company may prepay the debt, prior to maturity with no prepayment penalty.
The Company valued the AKR Warrants as of the date of the note and recorded a discount of $42,380 based the relative fair value of the AKR Warrants compared to the debt. During the nine months ended September 30, 2014 the Company amortized $20,363 of the discount to interest expense. As of September 30, 2014 unamortized discount of $22,017 remains. The Company assessed the fair value of the AKR Warrants based on the Black-Scholes pricing model. See below for variables used in assessing the fair value.
| April 8, 2014 | ||||
| Annual dividend yield | - | |||
| Expected life (years) of | 1.41 - 2.00 | |||
| Risk-free interest rate | 0.40 | % | ||
| Expected volatility | 183% - 206 | % | ||
| F-10 |
On April 24, 2014, the Company issued a promissory note in favor of AKR in the principal aggregate amount of $30,000 (“2nd AKR Note”). The 2nd AKR Note was due on July 24, 2014, but was subsequently extended to December 31, 2014. Pursuant to the terms of the 2nd AKR Note, the Company is to repay any principal balance and interest, at 5% per annum at maturity. Company may prepay the debt, prior to maturity with no prepayment penalty.
NOTE 5 - OUTSTANDING WARRANT LIABILITY
The Company issued 428,571 warrants to purchase common stock in connection with the Stock Purchase Agreement entered into on January 19, 2011 with Lincoln Park Capital, LLC (See Note 9). These warrants are accounted for as a liability under ASC 815. The Company assesses the fair value of the warrants quarterly based on the Black-Scholes pricing model. See below for variables used in assessing the fair value.
| September 30, 2014 | December 31, 2013 | |||||||
| Annual dividend yield | - | - | ||||||
| Expected life (years) | 1.30 | 2.05 | ||||||
| Risk-free interest rate | 0.13 | % | 0.38 | % | ||||
| Expected volatility | 236 | % | 150 | % | ||||
In connection with these warrants, the Company recognized a gain/(loss) on the change in fair value of warrant liability of approximately $55, $400, $(180), and $22,200 during the three and nine-months ended September 30, 2014 and 2013, respectively.
Expected volatility is based primarily on historical volatility. Historical volatility was computed using weekly pricing observations for recent periods that correspond to the expected life of the warrants. The Company believes this method produces an estimate that is representative of our expectations of future volatility over the expected term of these warrants. The Company currently has no reason to believe future volatility over the expected remaining life of these warrants is likely to differ materially from historical volatility. The expected life is based on the remaining term of the warrants. The risk-free interest rate is based on U.S. Treasury securities rates.
NOTE 6 - COMMITMENTS AND CONTINGENCIES
Fulton Project Lease
On July 20, 2010, the Company entered into a thirty year lease agreement with Itawamba County, Mississippi for the purpose of the development, construction, and operation of the Fulton Project. At the end of the primary 30 year lease term, the Company shall have the right for two additional thirty year terms. The current lease rate is computed based on a per acre rate per month that is approximately $10,300 per month. The lease stipulates the lease rate is to be reduced at the time of the construction start by a Property Cost Reduction Formula which can substantially reduce the monthly lease costs. The lease rate shall be adjusted every five years to the Consumer Price Index.
Rent expense under non-cancellable leases was approximately $30,900, $30,900, $92,600 and $92,600, during the three and nine-months ended September 30, 2014 and 2013, respectively.
As of September 30, 2014 and December 31, 2013, $0, and $233,267 of the monthly lease payments were included in accounts payable on the accompanying balance sheets During the nine months ended September 30, 2014, the County of Itawamba gave the Company credit for past site preparation reimbursements provided to the County through DOE reimbursements totaling approximately $96,000 which was recorded as a gain in the accompanying statement of operations. The remaining past due balances from December 31, 2013 were paid in full.
Legal Proceedings
On February 26, 2013, the Company received notice that the Orange County Superior Court (the “Court”) issued a Minute Order (the “Order”) in connection with certain shareholders’ claims of breach of contract and declaratory relief related to 5,740,741 warrants (the “Warrants”) issued by the Company.
Pursuant to the Order, the Court ruled in favor of the shareholders on the two claims, finding that the Warrants contain certain anti-dilution protective provisions which provide for the re-adjustment of the exercise price of such Warrants upon certain events and that such exercise price per share of the Warrants must be decreased to $0.00.
| F-11 |
The Company has considered these warrants exercised based on the notice of exercise received from the respective shareholders in December 2012.
On March 7, 2013, the shareholders making claims provided their request for judgment based on the Order received, which has been initially refused by the Court via a second minute order received by the Company on April 8, 2013. On April 15, 2013, the Company’s counsel submitted a proposed judgment to the Court as per the Courts request, which followed the Order and provided for no monetary damages against the Company. On May 14, 2013, this proposed judgment was approved by the Court (“Judgment”).
On June 20, 2013, the Company filed motions to vacate the Judgment, a motion for a new trial, and a motion to stay enforcement of the Judgment, all of which were denied on June 27, 2013.
On August 2, 2013, pursuant to the exercise notice of the Warrants, and the Order, the Company issued 5,740,741 shares to certain shareholders. See Note 9 for additional information.
Other than the above, we are currently not involved in litigation that we believe will have a materially adverse effect on our financial condition or results of operations. There is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of our company or any of our subsidiaries, threatened against or affecting our company, our common stock, any of our subsidiaries or of our company’s or our company’s subsidiaries’ officers or directors in their capacities as such, in which an adverse decision is expected to have a material adverse effect.
NOTE 7 - RELATED PARTY TRANSACTIONS
On November 10, 2011, the Company obtained a line of credit in the amount of $40,000 from its CEO to provide additional liquidity to the Company as needed, at his sole discretion. Under the terms of the note, the Company is to repay any principal balance and interest, at 12% per annum, within 30 days of receiving qualified investment financing of $100,000 or more. During the nine months ended September 30, 2014, the CEO advanced the Company an additional net $34,000 under the line of credit, bringing the balance to $45,230, which is in excess of the line of credit limit, however, during the nine-months ended September 30, 2014, the Company and the CEO amended this line of credit so that the maximum amount that could be borrowed is $55,000.
NOTE 8 - REDEEMABLE NON-CONTROLLING INTEREST
On December 23, 2010, the Company sold a one percent (1%) membership interest in its operating subsidiary, BlueFire Fulton Renewable Energy, LLC (“BlueFire Fulton” or the “Fulton Project”), to an accredited investor for a purchase price of $750,000 (“Purchase Price”). The Company maintains a 99% ownership interest in the Fulton Project. In addition, the investor received a right to require the Company to redeem the 1% interest for $862,500, or any pro-rata amount thereon. The redemption is based upon future contingent events based upon obtaining financing for the construction of the Fulton Project. The third party equity interests in the consolidated joint ventures are reflected as redeemable non-controlling interests in the Company’s consolidated financial statements outside of equity. The Company accreted the redeemable non-controlling interest for the total redemption price of $862,500 through the estimated forecasted financial close, originally estimated to be the end of the third quarter of 2011.
Net income (loss) attributable to the redeemable non-controlling interest for the three and nine-months ended September 30, 2014 and 2013 was $1,100, $(376), $3,473, $(3,118), respectively.
NOTE 9 - STOCKHOLDERS’ DEFICIT
Stock-Based Compensation
During the three and nine months ended September 30, 2014 and 2013, the Company recognized stock-based compensation, including consultants, of approximately $0, $0, $46,711, and $48,200, to general and administrative expenses and $0, $0, $0, and $0 to project development expenses, respectively. There is no additional future compensation expense to record as of September 30, 2014 based on the previous awards.
| F-12 |
Stock Purchase Agreement
On January 19, 2011, the Company signed a $10 million purchase agreement (the “Purchase Agreement”) with Lincoln Park Capital Fund, LLC (“LPC”), an Illinois limited liability company. The Company also entered into a registration rights agreement with LPC whereby we agreed to file a registration statement related to the transaction with the U.S. Securities & Exchange Commission (“SEC”) covering the shares that may be issued to LPC under the Purchase Agreement within ten days of the agreement. Although under the Purchase Agreement the registration statement was to be declared effective by March 31, 2011, LPC did not terminate the Purchase Agreement. The registration statement was declared effective on May 10, 2011, without any penalty. The Purchase Agreement was terminated in July 18, 2013. During the nine months ended September 30, 2014 and 2013 the Company drew $0 on the Purchase Agreement.
Upon signing the Purchase Agreement, BlueFire received $150,000 from LPC as an initial purchase under the $10 million commitment in exchange for 428,571 shares of our common stock and warrants to purchase 428,571 shares of our common stock at an exercise price of $0.55 per share. The warrants contain a ratchet provision in which the exercise price will be adjusted based on future issuances of common stock, excluding certain issuances; if issuances are at prices lower than the current exercise price (see Note 6). The warrants have an expiration date of January 2016.
Equity Facility Agreement
On March 28, 2012, BlueFire finalized a committed equity facility (the “Equity Facility”) with TCA Global Credit Master Fund, LP, a Cayman Islands limited partnership (“TCA”), whereby the parties entered into (i) a committed equity facility agreement (the “Equity Agreement”) and (ii) a registration rights agreement (the “Registration Rights Agreement”). Pursuant to the terms of the Equity Agreement, for a period of twenty-four (24) months commencing on the date of effectiveness of the Registration Statement (as defined below), TCA committed to purchase up to $2,000,000 of BlueFire’s common stock, par value $0.001 per share (the “Shares”), pursuant to Advances (as defined below), covering the Registrable Securities (as defined below). The purchase price of the Shares under the Equity Agreement was equal to ninety-five percent (95%) of the lowest daily volume weighted average price of BlueFire’s common stock during the five (5) consecutive trading days after BlueFire delivers to TCA an Advance notice in writing requiring TCA to advance funds (an “Advance”) to BlueFire, subject to the terms of the Equity Agreement. The “Registrable Securities” include (i) the Shares; and (ii) any securities issued or issuable with respect to the Shares by way of exchange, stock dividend or stock split or in connection with a combination of shares, recapitalization, merger, consolidation or other reorganization or otherwise. As further consideration for TCA entering into and structuring the Equity Facility, BlueFire paid to TCA a fee by issuing to TCA shares of BlueFire’s common stock that equal a dollar amount of $110,000 (the “Facility Fee Shares”). It was the intention of BlueFire and TCA that the value of the Facility Fee Shares shall equal $110,000. In the event the value of the Facility Fee Shares issued to TCA did not equal $110,000 after a nine month evaluation date, the Equity Agreement provided for an adjustment provision allowing for necessary action (either the issuance of additional shares to TCA or the return of shares previously issued to TCA to BlueFire’s treasury) to adjust the number of Facility Fee Shares issued. BlueFire also entered into the Registration Rights Agreement with TCA. Pursuant to the terms of the Registration Rights Agreement, BlueFire was obligated to file a registration statement (the “Registration Statement”) with the U.S. Securities and Exchange Commission (the “SEC’) to cover the Registrable Securities within 45 days of closing. BlueFire must use its commercially reasonable efforts to cause the Registration Statement to be declared effective by the SEC by a date that is no later than 90 days following closing.
On March 28, 2012, BlueFire entered into a security agreement (the “Security Agreement”) with TCA, related to a $300,000 convertible promissory note issued by BlueFire in favor of TCA (the “Convertible Note”). The Security Agreement granted to TCA a continuing, first priority security interest in all of BlueFire’s assets, wheresoever located and whether now existing or hereafter arising or acquired. On March 28, 2012, BlueFire issued the Convertible Note in favor of TCA. The maturity date of the Convertible Note was March 28, 2013, and the Convertible Note bore interest at a rate of twelve percent (12%) per annum with a default rate of eighteen percent (18%) per annum. The Convertible Note was convertible into shares of BlueFire’s common stock at a price equal to ninety-five percent (95%) of the lowest daily volume weighted average price of BlueFire’s common stock during the five (5) trading days immediately prior to the date of conversion. The Convertible Note had the option to be prepaid in whole or in part at BlueFire’s option without penalty. The proceeds received by the Company under the purchase agreement were used for general working capital purposes which include costs reimbursed under the DOE cost share program.
| F-13 |
In connection with the Convertible Note, approximately $93,000 was withheld and immediately disbursed to cover costs of the Convertible Note and Equity Facility described above. The costs related to the Convertible Note were $24,800 which were capitalized as deferred financing costs; were amortized on a straight-line basis over the term of the Convertible Note. In addition, $7,500 was dispersed to cover legal fees. After all costs, the Company received approximately $207,000 in cash from the Convertible Note. Amortization of the deferred financing costs during the nine months ended September 30, 2014 and 2013 was approximately $0 and $38,600, respectively. As of September 30, 2014, there were no remaining deferred financing costs.
This note contained an embedded conversion feature whereby the holder could convert the note at a discount to the fair value of the Company’s common stock price. Based on applicable guidance the embedded conversion feature was considered a derivative instrument and bifurcated. This liability was recorded on the face of the financial statements as “derivative liability”, and was revalued each reporting period. During the nine months ended September 30, 2014, the note was repaid in full along with accrued interest and fees thereon. Accordingly, the remaining derivative liability of $13,189 was transferred to equity.
On April 11, 2014, the Convertible Note with TCA was repaid in full.
Liability Purchase Agreement
On December 9, 2013, The Circuit Court of the Second Judicial Circuit in and for Leon County, Florida (the “Court”), entered an order (the “Order”) approving, among other things, the fairness of the terms and conditions of an exchange pursuant to Section 3(a)(10) of the Securities Act of 1933, in accordance with a stipulation of settlement (the “Settlement Agreement”) between the Company, and Tarpon Bay Partners, LLC, a Florida limited liability company (“Tarpon”), in the matter entitled Tarpon Bay Partners, LLC v. BlueFire Renewables, Inc., Case No. 2013-CA-2975 (the “Action”). Tarpon commenced the Action against the Company on November 21, 2013 to recover an aggregate of $583,710 of past-due accounts payable of the Company, which Tarpon had purchased from certain creditors of the Company pursuant to the terms of separate receivable purchase agreements between Tarpon and each of such vendors (the “Assigned Accounts”), plus fees and costs (the “Claim”). The Assigned Accounts relate to certain legal, accounting, financial services, and the repayment of aged debt. The Order provides for the full and final settlement of the Claim and the Action. The Settlement Agreement became effective and binding upon the Company and Tarpon upon execution of the Order by the Court on December 9, 2013. Notwithstanding anything to the contrary in the Stipulation, the number of shares beneficially owned by Tarpon will not exceed 9.99% of the Company’s Common Stock. In connection with the Settlement Agreement, the Company relied on the exemption from registration provided by Section 3(a)(10) under the Securities Act.
Pursuant to the terms of the Settlement Agreement approved by the Order, the Company shall issue and deliver to Tarpon shares (the “Settlement Shares”) of the Company’s Common Stock in one or more tranches as necessary, and subject to adjustment and ownership limitations, sufficient to generate proceeds such that the aggregate Remittance Amount (as defined in the Settlement Agreement) equals the Claim. In addition, pursuant to the terms of the Settlement Agreement, the Company issued to Tarpon the Tarpon Initial Note in the principal amount of $25,000. Under the terms of the Tarpon Initial Note, the Company shall pay Tarpon $25,000 on the date of maturity which was January 30, 2014. This Note was convertible by Tarpon into the Company’s Common Shares (See Note 4).
Pursuant to the fairness hearing, the Order, and the Company’s agreement with Tarpon, on December 23, 2013, the Company issued the Tarpon Success Fee Note in the principal amount of $50,000 in favor of Tarpon as a commitment fee. The Tarpon Success Fee Note was due on June 30, 2014. The Tarpon Success Fee Note was convertible into shares of the Company’s common stock (See Note 4).
In connection with the settlement, on December 18, 2013 the Company issued 6,619,835 shares of Common Stock to Tarpon in which gross proceeds of $29,802 were generated from the sale of the Common Stock. In connection with the transaction, Tarpon received fees of $7,450 and providing payments of $22,352 to settle outstanding vendor payables. During the nine months ended September 30, 2014, the Company issued Tarpon 61,010,000 shares of Common Stock from which gross proceeds of $163,406 were generated from the sale of the Common Stock. In connection with the transaction, Tarpon received fees of $42,402 and providing payments of $121,004 to settle outstanding vendor payables. Any shares not used by Tarpon are subject to return to the Company. Accordingly, the Company accounts for these shares as issued but not outstanding until the shares have been sold by Tarpon and the proceeds are known. Net proceeds received by Tarpon are included as a reduction to accounts payable or other liability as applicable, as such funds are legally required to be provided to the party Tarpon purchased the debt from.
| F-14 |
Warrants Exercised
Some of our warrants contain a provision in which the exercise price is to be adjusted for future issuances of common stock at prices lower than their current exercise price.
In 2012, certain shareholders’ owning an aggregate of 5,740,741 warrants made claims of the Company that the exercise price of their warrants should have been adjusted due to a certain issuance of common shares by the Company (see Note 6). The Company believed that said issuance would not trigger adjustment based on the terms of the respective agreements.
On December 4, 2012, these shareholders presented exercise forms to the Company to exercise all 5,740,741 warrants for a like amount of common shares. The warrants were exercised at $0.00, which is the amount the shareholders’ believed the new exercise price should be based the ratchet provision and their claims.
On February 26, 2013, the Company received notice that the Court issued an Order in connection with these certain shareholders’ claims of breach of contract and declaratory relief related to 5,740,741 warrants issued by the Company.
Pursuant to the Order, the Court ruled in favor of the shareholders on the two claims, finding that the Warrants contain certain anti-dilution protective provisions which provide for the re-adjustment of the exercise price of such Warrants upon certain events and that such exercise price per share of the Warrants must be decreased to $0.00.
The Company has considered these warrants exercised based on the notice of exercise received from the respective shareholders in December 2012. The Company determined, that based on the Order by the Court a ratchet event had taken place based on the Order and claims made. The Company used December 4, 2012 as the date in which the new terms were considered to be in force based on the Shareholders’ notice to exercise on that date and the Courts subsequent Order that allowed the Shareholders to do so. On August 2, 2013, the Company issued these 5,740,741 shares.
Note 10 - Subsequent Events
Subsequent to September 30, 2014, the Company issued to AKR, AKR Warrant C to purchase up to 8,400,000 shares of the Company’s common stock, in connection with the AKR Note transaction on April 8, 2014 (See Note 4).
Subsequent to September 30, 2014, the Company signed a new master engineering, procurement and construction contract with the China International Water & Electric Company, a subsidiary of China Three Gorges Corporation.
Subsequent to September 30, 2014, the Company received a letter of intent from The Export Import Bank of China to provide up to $270 Million USD in debt for the Fulton project subject to meeting certain credit criteria and completion of further due diligence.
| F-15 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
BlueFire Renewables, Inc. and subsidiaries
We have audited the accompanying consolidated balance sheets of BlueFire Renewables, Inc. and subsidiaries (collectively the “Company”), a development stage company, as of December 31, 2013 and 2012, and the related consolidated statements of operations, stockholders’ deficit, and cash flows for the years then ended, and the period from March 28, 2006 (“Inception”) to December 31, 2013. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosure in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of BlueFire Renewables, Inc. and subsidiaries as of December 31, 2013 and 2012, and the results of its operations and its cash flows for the years then ended, and for the period from Inception to December 31, 2013, in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 2 of the consolidated financial statements, the Company has limited working capital, incurred losses since Inception, and has significant operating costs expected to be incurred in the next twelve months. These factors raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans with respect to these matters are discussed in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
| dbbmckennon | |
| Newport Beach, California | |
| April 15, 2014 |
| F-16 |
BLUEFIRE RENEWABLES, INC. AND SUBSIDIARIES
(A DEVELOPMENT-STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
| December 31, 2013 | December 31, 2012 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 46,992 | $ | 59,603 | ||||
| Accounts receivable | - | 3,538 | ||||||
| Costs of financing | 1,031 | 25,644 | ||||||
| Prepaid expenses | 4,636 | 8,952 | ||||||
| Total current assets | 52,659 | 97,737 | ||||||
| Property and equipment, net of accumulated depreciation of $106,041 and $103,159, respectively | 111,240 | 1,218,314 | ||||||
| Total assets | $ | 163,899 | $ | 1,316,051 | ||||
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 1,108,684 | $ | 1,080,056 | ||||
| Accrued liabilities | 272,910 | 595,760 | ||||||
| Convertible notes payable, net of discount of $75,695 and $41,502, respectively | 322,385 | 359,498 | ||||||
| Line of credit, related party | 11,230 | 15,230 | ||||||
| Note payable to a related party | 200,000 | 200,000 | ||||||
| Derivative liability | 122,309 | 59,949 | ||||||
| Total current liabilities | 2,037,518 | 2,310,493 | ||||||
| Outstanding warrant liability | 58 | 22,600 | ||||||
| Total liabilities | 2,037,576 | 2,333,093 | ||||||
| Redeemable noncontrolling interest | 856,044 | 849,945 | ||||||
| Stockholders’ deficit: | ||||||||
| Preferred stock, no par value, 1,000,000 shares authorized; none issued and outstanding | - | - | ||||||
| Common stock, $0.001 par value; 500,000,000 and 100,000,000 shares authorized; 73,486,861 and 33,591,538 shares issued and 68,910,395 and 33,559,366 outstanding, as of December 31, 2013 and 2012, respectively | 68,943 | 33,591 | ||||||
| Additional paid-in capital | 16,123,744 | 14,847,401 | ||||||
| Committed shares to be issued; 0 and 5,740,741 shares at December 31, 2013 and 2012, respectively | - | 803,704 | ||||||
| Treasury stock at cost, 32,172 shares | (101,581 | ) | (101,581 | ) | ||||
| Deficit accumulated during the development stage | (18,820,827 | ) | (17,450,102 | ) | ||||
| Total stockholders’ deficit | (2,729,721 | ) | (1,866,987 | ) | ||||
| Total liabilities and stockholders’ deficit | $ | 163,899 | $ | 1,316,051 | ||||
See accompanying notes to consolidated financial statements
| F-17 |
BLUEFIRE RENEWABLES, INC. AND SUBSIDIARIES
(A DEVELOPMENT-STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
| For
the year ended | For
the year ended | From
March 28, 2006 (Inception) Through | ||||||||||
| December 31, 2013 | December 31, 2012 | December 31, 2013 | ||||||||||
| Revenues: | ||||||||||||
| Consulting fees | $ | 2,020 | $ | 140,345 | $ | 285,980 | ||||||
| Department of Energy grant revenues | 1,336,449 | 642,596 | 7,954,779 | |||||||||
| Department of Energy unbilled grant revenues | - | - | 197,041 | |||||||||
| Total revenues | 1,338,469 | 782,941 | 8,437,800 | |||||||||
| Cost of revenue | ||||||||||||
| Consulting revenue | - | 61,391 | 61,391 | |||||||||
| Gross margin | - | 721,550 | 8,376,409 | |||||||||
| Operating expenses: | ||||||||||||
| Project development, including stock based compensation of $0, $0, and $4,468,490, respectively | 591,356 | 475,792 | 19,998,305 | |||||||||
| General and administrative, including stock based compensation of $12,215, $160,874, and $6,484,759, respectively | 716,127 | 1,281,851 | 18,782,027 | |||||||||
| Impairment of property and equipment | 1,162,148 | - | 1,162,148 | |||||||||
| Related party license fee | - | - | 1,000,000 | |||||||||
| Total operating expenses | 2,469,631 | 1,757,643 | 40,942,480 | |||||||||
| Operating loss | (1,131,162 | ) | (1,036,093 | ) | (32,566,071 | ) | ||||||
| Other income and (expense): | ||||||||||||
| Other income | - | - | 256,295 | |||||||||
| Financing related charge | - | - | (211,660 | ) | ||||||||
| Amortization of debt discount | (221,990 | ) | (122,953 | ) | (1,031,776 | ) | ||||||
| Interest expense | (109,679 | ) | (295,648 | ) | (461,424 | ) | ||||||
| Related party interest expense | (1,730 | ) | (4,845 | ) | (175,943 | ) | ||||||
| Loss on extinguishment of debt | - | - | (2,818,370 | ) | ||||||||
| Loss on warrant modification | - | (803,704 | ) | (803,704 | ) | |||||||
| Gain on settlement of accounts payable and accrued liabilities | 134,062 | 37,891 | 179,873 | |||||||||
| Deobligation of Department of Energy billings in excess of estimated earnings | - | 354,000 | 354,000 | |||||||||
| Gain from change in fair value of warrant liability | 22,542 | 12,326 | 2,967,358 | |||||||||
| Gain from change in fair value of derivative liability | 70,614 | 101,621 | 172,235 | |||||||||
| Loss on excess fair value of derivative liability | (124,883 | ) | - | (124,883 | ) | |||||||
| Loss on the retirement of warrants | - | - | (146,718 | ) | ||||||||
| Total other income and (expense) | (231,064 | ) | (721,312 | ) | (1,844,717 | ) | ||||||
| Loss before provision for income taxes | (1,362,226 | ) | (1,757,405 | ) | (34,410,788 | ) | ||||||
| Provision for income taxes | 2,400 | 2,400 | 87,947 | |||||||||
| Net loss | $ | (1,364,626 | ) | $ | (1,759,805 | ) | $ | (34,498,735 | ) | |||
| Net income (loss) attributable to noncontrolling interest | 6,099 | (2,586 | ) | (6,456 | ) | |||||||
| Net loss attributable to controlling interest | $ | (1,370,725 | ) | $ | (1,757,219 | ) | $ | (34,492,279 | ) | |||
| Basic and diluted loss per common share attributable to controlling interest | $ | (0.03 | ) | $ | (0.05 | ) | ||||||
| Weighted average common shares outstanding, basic and diluted | 44,651,379 | 32,750,207 | ||||||||||
See accompanying notes to consolidated financial statements
| F-18 |
BLUEFIRE RENEWABLES, INC. AND SUBSIDIARIES
(A DEVELOPMENT-STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
| Common Stock | Additional Paid-in |
Deficit Accumulated During the Development |
Stockholders’ | |||||||||||||||||
| Shares | Amount | Capital | Stage | Deficit | ||||||||||||||||
| Balance at March 28, 2006 (inception) | - | $ | - | $ | - | $ | - | $ | - | |||||||||||
| Issuance of founder’s share at $.001 per share | 17,000,000 | 17,000 | 17,000 | |||||||||||||||||
| Common shares retained by Sucre Agricultural Corp., Shareholders | 4,028,264 | 4,028 | 685,972 | - | 690,000 | |||||||||||||||
| Costs associated with the acquisition of Sucre Agricultural Corp. | (3,550 | ) | (3,550 | ) | ||||||||||||||||
| Common shares issued for services in November 2006 at $2.99 per share | 37,500 | 38 | 111,962 | - | 112,000 | |||||||||||||||
| Common shares issued for services in November 2006 at $3.35 per share | 20,000 | 20 | 66,981 | - | 67,001 | |||||||||||||||
| Common shares issued for services in December 2006 at $3.65 per share | 20,000 | 20 | 72,980 | - | 73,000 | |||||||||||||||
| Common shares issued for services in December 2006 at $3.65 per share | 20,000 | 20 | 72,980 | - | 73,000 | |||||||||||||||
| Estimated value of common shares at $3.99 per share and warrants at $2.90 issuable for services upon vesting in February 2007 | - | - | 160,000 | - | 160,000 | |||||||||||||||
| Share-based compensation related to options | - | - | 114,811 | - | 114,811 | |||||||||||||||
| Share-based compensation related to warrants | - | - | 100,254 | - | 100,254 | |||||||||||||||
| Net Loss | - | - | - | (1,555,497 | ) | (1,555,497 | ) | |||||||||||||
| Balances at December 31, 2006 | 21,125,764 | $ | 21,126 | $ | 1,382,390 | $ | (1,555,497 | ) | $ | (151,981 | ) | |||||||||
See accompanying notes to consolidated financial statements
| F-19 |
BLUEFIRE RENEWABLES, INC. AND SUBSIDIARIES
(A DEVELOPMENT-STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
| Common Stock | Additional Paid-in | Deficit Accumulated During the Development | Stockholders’ | |||||||||||||||||
| Shares | Amount | Capital | Stage | Deficit | ||||||||||||||||
| Balances at December 31, 2006 | 21,125,764 | $ | 21,126 | $ | 1,382,390 | $ | (1,555,497 | ) | $ | (151,981 | ) | |||||||||
| Common shares issued for cash in January 2007, at $2.00 per share to unrelated individuals, including costs associated with private placement of 6,250 shares and $12,500 cash paid | 284,750 | 285 | 755,875 | - | 756,160 | |||||||||||||||
| Amortization of share based compensation related to employment agreement in January 2007 $3.99 per share | 10,000 | 10 | 39,890 | - | 39,900 | |||||||||||||||
| Common shares issued for services in February 2007 at $5.92 per share | 37,500 | 38 | 138,837 | - | 138,875 | |||||||||||||||
| Adjustment to record remaining value of warrants at $4.70 per share issued for services in February 2007 | - | - | 158,118 | - | 158,118 | |||||||||||||||
| Common shares issued for services in March 2007 at $7.18 per share | 37,500 | 37 | 269,213 | - | 269,250 | |||||||||||||||
| Fair value of warrants at $6.11 for services vested in March 2007 | - | - | 305,307 | - | 305,307 | |||||||||||||||
| Fair value of warrants at $5.40 for services vested in June 2007 | - | - | 269,839 | - | 269,839 | |||||||||||||||
| Common shares issued for services in June 2007 at $6.25 per share | 37,500 | 37 | 234,338 | - | 234,375 | |||||||||||||||
| Share based compensation related to employment agreement in February 2007 $5.50 per share | 50,000 | 50 | 274,951 | - | 275,001 | |||||||||||||||
| Common Shares issued for services in August 2007 at $5.07 per share | 13,000 | 13 | 65,901 | - | 65,914 | |||||||||||||||
| Share based compensation related to options | - | - | 4,692,863 | - | 4,692,863 | |||||||||||||||
| Value of warrants issued in August, 2007 for debt replacement services valued at $4.18 per share | - | - | 107,459 | - | 107,459 | |||||||||||||||
| Relative fair value of warrants associated with July 2007 convertible note agreement | - | - | 332,255 | - | 332,255 | |||||||||||||||
| Exercise of stock options in July 2007 at $2.00 per share | 20,000 | 20 | 39,980 | - | 40,000 | |||||||||||||||
| Relative fair value of warrants and beneficial conversion feature in connection with the $2,000,000 convertible note payable in August 2007 | - | - | 2,000,000 | - | 2,000,000 | |||||||||||||||
| Stock issued in lieu of interest payments on the senior secured convertible note at $4.48 and $2.96 per share in October and December 2007 | 15,143 | 15 | 55,569 | - | 55,584 | |||||||||||||||
| Conversion of $2,000,000 note payable in August 2007 at $2.90 per share | 689,655 | 689 | 1,999,311 | - | 2,000,000 | |||||||||||||||
| Common shares issued for cash at $2.70 per share, December 2007, net of legal costs of $90,000 and placement agent cost of $1,050,000 | 5,740,741 | 5,741 | 14,354,259 | - | 14,360,000 | |||||||||||||||
| Loss on Extinguishment of debt in December 2007 | - | - | 955,637 | - | 955,637 | |||||||||||||||
| Net loss | - | - | - | (14,276,418 | ) | (14,276,418 | ) | |||||||||||||
| Balances at December 31, 2007 | 28,061,553 | $ | 28,061 | $ | 28,431,992 | $ | (15,831,915 | ) | $ | 12,628,138 | ||||||||||
See accompanying notes to consolidated financial statements
| F-20 |
BLUEFIRE RENEWABLES, INC. AND SUBSIDIARIES
(A DEVELOPMENT-STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
| Common Stock | Additional Paid-in | Deficit Accumulated During the Development | Treasury | Stockholders’ | ||||||||||||||||||||
| Shares | Amount | Capital | Stage | Stock | Deficit | |||||||||||||||||||
| Balances at December 31, 2007 | 28,061,553 | $ | 28,061 | $ | 28,431,992 | $ | (15,831,915 | ) | $ | - | $ | 12,628,138 | ||||||||||||
| Share based compensation relating to options | - | - | 3,769,276 | - | - | 3,769,276 | ||||||||||||||||||
| Common shares issued for services in July 2008 at $4.10 per share | 30,000 | 30 | 122,970 | - | - | 123,000 | ||||||||||||||||||
| Common shares issued for services in July, September, and December 2008 at $3.75, $2.75, and $0.57 per share, respectively | 41,500 | 41 | 63,814 | - | - | 63,855 | ||||||||||||||||||
| Purchase of treasury shares between April to September 2008 at an average of $3.12 | (32,172 | ) | - | - | - | (101,581 | ) | (101,581 | ) | |||||||||||||||
| Net loss | - | - | - | (14,370,594 | ) | - | (14,370,594 | ) | ||||||||||||||||
| Balances at December 31, 2008 | 28,100,881 | $ | 28,132 | $ | 32,388,052 | $ | (30,202,509 | ) | $ | (101,581 | ) | $ | 2,112,094 | |||||||||||
See accompanying notes to consolidated financial statements
| F-21 |
BLUEFIRE RENEWABLES, INC. AND SUBSIDIARIES
(A DEVELOPMENT-STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
| Common Stock | Additional Paid-in | Deficit Accumulated During the Development | Treasury | Stockholders’ | ||||||||||||||||||||
| Shares | Amount | Capital | Stage | Stock | Deficit | |||||||||||||||||||
| Balances at December 31, 2008 | 28,100,881 | $ | 28,132 | $ | 32,388,052 | $ | (30,202,509 | ) | $ | (101,581 | ) | $ | 2,112,094 | |||||||||||
| Cumulative effect of warrants reclassified | - | - | (18,586,588 | ) | 18,586,588 | - | - | |||||||||||||||||
| Reclassification of long term warrant liability | - | - | - | (2,915,136 | ) | - | (2,915,136 | ) | ||||||||||||||||
| Common shares issued for services in June 2009 at $1.50 per share | 11,412 | 11 | 17,107 | - | - | 17,118 | ||||||||||||||||||
| Common shares issued for services in July 2009 at $0.88 per share | 30,000 | 30 | 26,370 | - | - | 26,400 | ||||||||||||||||||
| Common shares issued for services in August 2009 at $0.80 per share | 100,000 | 100 | 79,900 | - | - | 80,000 | ||||||||||||||||||
| Option to purchase Common shares for services in August 2009 at an option price of $3.00 for 100,000 shares | - | - | 8,273 | - | - | 8,273 | ||||||||||||||||||
| Common shares issued for services in September and October 2009 at $0.89 and $0.95 per share, respectively | 22,500 | 23 | 20,678 | - | - | 20,701 | ||||||||||||||||||
| Common shares to be issued for services in August 2009 at $0.80 per share | - | - | 80,000 | - | - | 80,000 | ||||||||||||||||||
| Net income | - | - | - | 1,136,092 | - | 1,136,092 | ||||||||||||||||||
| Balances at December 31, 2009 | 28,264,793 | $ | 28,296 | $ | 14,033,792 | $ | (13,394,965 | ) | $ | (101,581 | ) | $ | 565,542 | |||||||||||
See accompanying notes to consolidated financial statements
| F-22 |
BLUEFIRE RENEWABLES, INC. AND SUBSIDIARIES
(A DEVELOPMENT-STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
| Common Stock | Additional Paid-in | Deficit Accumulated During the Development | Treasury | Stockholders’ | ||||||||||||||||||||
| Shares | Amount | Capital | Stage | Stock | Deficit | |||||||||||||||||||
| Balances at December 31, 2009 | 28,264,793 | $ | 28,296 | $ | 14,033,792 | $ | (13,394,965 | ) | $ | (101,581 | ) | $ | 565,542 | |||||||||||
| Common shares issued for services in March 2010 at $0.36 per share | 37,500 | 38 | 13,462 | - | - | 13,500 | ||||||||||||||||||
| Common shares issued for services in May 2010 at $0.30 per share | 43,000 | 43 | 12,957 | - | - | 13,000 | ||||||||||||||||||
| Common shares released in May 2010 issued at $0.80 per share, additional paid-in capital included in 2009 balance | 100,000 | 100 | (100 | ) | - | - | - | |||||||||||||||||
| Common shares issued for services in May 2010 at $0.18 per share | 37,500 | 38 | 6,712 | - | - | 6,750 | ||||||||||||||||||
| Common shares issued for services in July 2010 at $0.24 per share | 30,000 | 30 | 7,170 | - | - | 7,200 | ||||||||||||||||||
| Common shares cancelled in October 2010 at $0.30 per share | (43,000 | ) | (43 | ) | (12,957 | ) | - | - | (13,000 | ) | ||||||||||||||
| Common shares issued for services in October 2010 at $0.46 per share | 37,000 | 37 | 16,983 | - | - | 17,020 | ||||||||||||||||||
| Common shares issued for services in November 2010 at $0.50 per share | 6,435 | 6 | 3,211 | - | - | 3,217 | ||||||||||||||||||
| Common shares issued for services in December 2010 at $.048 per share | 10,000 | 10 | 4,790 | - | - | 4,800 | ||||||||||||||||||
| Discount on related party note payable | - | - | 83,736 | - | - | 83,736 | ||||||||||||||||||
| Net loss | - | - | - | (922,906 | ) | - | (922,906 | ) | ||||||||||||||||
| Balances at December 31, 2010 | 28,523,228 | $ | 28,555 | $ | 14,169,756 | $ | (14,317,871 | ) | $ | (101,581 | ) | $ | (221,141 | ) | ||||||||||
See accompanying notes to consolidated financial statements
| F-23 |
BLUEFIRE RENEWABLES, INC. AND SUBSIDIARIES
(A DEVELOPMENT-STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
| Deficit | ||||||||||||||||||||||||||||
| Accumulated | ||||||||||||||||||||||||||||
| Common Stock | Additional Paid-in | Committed Shares | During
the Development | Treasury | Stockholders’ | |||||||||||||||||||||||
| Shares | Amount | Capital | To Be Issued | Stage | Stock | Deficit | ||||||||||||||||||||||
| Balances at December 31, 2010 | 28,523,228 | $ | 28,555 | $ | 14,169,756 | $ | - | $ | (14,317,871 | ) | $ | (101,581 | ) | $ | (221,141 | ) | ||||||||||||
| Common shares issued for cash at $0.35 per share in January 2011, net of discount from warrant liability of $125,562 | 428,571 | 429 | 24,009 | - | - | - | 24,438 | |||||||||||||||||||||
| Committed shares issued to LPC | 600,000 | 600 | (600 | ) | - | - | - | - | ||||||||||||||||||||
| Common shares issued for reduction of accounts payable in March 2011 ranging from $0.47 to $0.50 per share | 60,000 | 60 | 29,040 | - | - | - | 29,100 | |||||||||||||||||||||
| Common shares issued for services in March 2011 at $0.42 per share | 30,000 | 30 | 12,570 | - | - | - | 12,600 | |||||||||||||||||||||
| Common shares issued for services in April 2011 at $0.43 per share | 26,042 | 26 | 11,224 | - | - | - | 11,250 | |||||||||||||||||||||
| Common shares issued for cash in May 2011, ranging from $0.22 to $0.29 per share | 284,045 | 284 | 69,716 | - | - | - | 70,000 | |||||||||||||||||||||
| Common shares issued for services in July 2011, ranging from $0.17 to $0.20 per share | 155,034 | 155 | 28,977 | - | - | - | 29,132 | |||||||||||||||||||||
| Common shares issued for services in August 2011, at $0.16 per share | 75,000 | 75 | 11,925 | - | - | - | 12,000 | |||||||||||||||||||||
| Common shares issued for cash in August 2011, ranging from $0.16 to $0.18 per share | 175,438 | 175 | 29,825 | - | - | - | 30,000 | |||||||||||||||||||||
| Common shares issued for services in September 2011, at $0.18 per share | 10,000 | 10 | 1,790 | - | - | - | 1,800 | |||||||||||||||||||||
| Common shares issued for services in October 2011, at $0.15 per share | 173,077 | 173 | 25,979 | - | - | - | 26,152 | |||||||||||||||||||||
| Common shares issued for services in November 2011, ranging from $0.21 to $0.23 per share | 253,638 | 253 | 57,006 | - | - | - | 57,259 | |||||||||||||||||||||
| Common shares issued for cash in November 2011, ranging from $0.15 to $0.16 per share | 659,894 | 660 | 99,340 | - | - | - | 100,000 | |||||||||||||||||||||
| Common shares issued for services in December 2011, at $0.14 per share | 85,721 | 86 | 11,572 | - | - | - | 11,658 | |||||||||||||||||||||
| Common shares issued for settlement of accrued rent in December, 2011 at $0.14 per share | 527,980 | 528 | 73,390 | - | - | - | 73,918 | |||||||||||||||||||||
| Accretion of redeemable noncontrolling interest | - | - | (112,500 | ) | - | - | - | (112,500 | ) | |||||||||||||||||||
| Net loss attributable to controlling interest | - | - | - | - | (1,375,012 | ) | - | (1,375,012 | ) | |||||||||||||||||||
| Balances at December 31, 2011 | 32,067,668 | $ | 32,099 | $ | 14,543,019 | $ | - | $ | (15,692,883 | ) | $ | (101,581 | ) | $ | (1,219,346 | ) | ||||||||||||
See accompanying notes to consolidated financial statements
| F-24 |
BLUEFIRE RENEWABLES, INC. AND SUBSIDIARIES
(A DEVELOPMENT-STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
| Common Stock | Additional Paid-in | Committed Shares | Deficit Accumulated During the Development | Treasury | Stockholders’ | |||||||||||||||||||||||
| Shares | Amount | Capital | To Be Issued | Stage | Stock | Deficit | ||||||||||||||||||||||
| Balances at December 31, 2011 | 32,067,668 | $ | 32,099 | $ | 14,543,019 | $ | - | $ | (15,692,883 | ) | $ | (101,581 | ) | $ | (1,219,346 | ) | ||||||||||||
| Common Shares issued for Legal Services in January 2012 at $0.14 per share | 80,357 | 80 | 11,170 | - | - | - | 11,250 | |||||||||||||||||||||
| Common Shares and Committed Shares issued for cash to LPC in January 2012 at $0.15 per share | 235,465 | 235 | 34,765 | - | - | - | 35,000 | |||||||||||||||||||||
| Common Shares issued to TCA in March 2012 at $0.39 per share | 280,612 | 281 | 109,719 | - | - | - | 110,000 | |||||||||||||||||||||
| Common Shares issued for Legal Services in April 2012 at $0.41 per share | 80,645 | 81 | 32,581 | - | - | - | 32,662 | |||||||||||||||||||||
| Common Shares issued for Legal Services in July 2012 at $0.23 per share | 93,750 | 94 | 21,469 | - | - | - | 21,563 | |||||||||||||||||||||
| Common Shares issued for Services in August 2012 ranging from $0.15 to $0.17 per share | 57,889 | 58 | 9,506 | - | - | - | 9,564 | |||||||||||||||||||||
| Common Shares issued for Legal Services in September 2012 at $0.13 per share | 135,000 | 135 | 17,063 | - | - | - | 17,198 | |||||||||||||||||||||
| Common Shares issued Settlement of accrued rent in December 2012 at $0.13 per share | 527,980 | 528 | 68,109 | - | - | - | 68,637 | |||||||||||||||||||||
| Shares committed to be issued in connection with warrant exercise | - | - | - | 803,704 | - | - | 803,704 | |||||||||||||||||||||
| Net loss attributable to controlling interest | - | - | - | - | (1,757,219 | ) | - | (1,757,219 | ) | |||||||||||||||||||
| Balances at December 31, 2012 | 33,559,366 | $ | 33,591 | $ | 14,847,401 | $ | 803,704 | $ | (17,450,102 | ) | $ | (101,581 | ) | $ | (1,866,987 | ) | ||||||||||||
See accompanying notes to consolidated financial statements
| F-25 |
BLUEFIRE RENEWABLES, INC. AND SUBSIDIARIES
(A DEVELOPMENT-STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
| Common Stock | Additional Paid-in | Committed Shares | Deficit Accumulated During the Development | Treasury | Stockholders’ | |||||||||||||||||||||||
| Shares | Amount | Capital | To Be Issued | Stage | Stock | Deficit | ||||||||||||||||||||||
| Balances at December 31, 2012 | 33,559,366 | $ | 33,591 | $ | 14,847,401 | $ | 803,704 | $ | (17,450,102 | ) | $ | (101,581 | ) | $ | (1,866,987 | ) | ||||||||||||
| Common Shares issued for Legal Services in January 2013 at $0.121 per share | 75,000 | 75 | 9,000 | - | - | - | 9,075 | |||||||||||||||||||||
| Common Shares issued for conversion of note in February 2013 at $0.072 per share | 206,897 | 207 | 14,793 | - | - | - | 15,000 | |||||||||||||||||||||
| Common Shares issued for conversion of note in March 2013 ranging from $0.032 to $0.046 per share | 909,779 | 910 | 34,090 | - | - | - | 35,000 | |||||||||||||||||||||
| Common Shares issued for conversion of note in April 2013 at $0.03 per share | 525,902 | 526 | 15,514 | - | - | - | 16,040 | |||||||||||||||||||||
| Common Shares issued for conversion of note in May 2013 at $0.023 per share | 865,801 | 866 | 19,134 | - | - | - | 20,000 | |||||||||||||||||||||
| Common Shares issued for conversion of note in June 2013 at $0.014 per share | 1,397,059 | 1,397 | 17,603 | - | - | - | 19,000 | |||||||||||||||||||||
| Common Shares issued for conversion of note in July 2013 at $0.0095 per share | 1,263,158 | 1,263 | 10,737 | - | - | - | 12,000 | |||||||||||||||||||||
| Common Shares issued in connection with Court Ordered warrant exercise in August 2013 at $0 per share | 5,740,741 | 5,741 | 797,963 | (803,704 | ) | - | - | - | ||||||||||||||||||||
| Common Shares issued for conversion of note in August 2013 ranging from $0.0066 to $0.0087 per share | 2,754,441 | 2,754 | 19,046 | - | - | - | 21,800 | |||||||||||||||||||||
| Common Shares issued for conversion of note in September 2013 ranging from $0.0054 to $0.0076 per share | 4,269,980 | 4,270 | 23,130 | - | - | - | 27,400 | |||||||||||||||||||||
| Common Shares issued for conversion of note in October 2013 at $0.005 per share | 2,300,000 | 2,300 | 9,200 | - | - | - | 11,500 | |||||||||||||||||||||
| Common Shares issued in settlement of accrued payroll and accounts payable in October 2013 at $0.0125 per share | 9,847,501 | 9,848 | 113,246 | - | - | - | 123,094 | |||||||||||||||||||||
| Common Shares issued for conversion of note in October 2013 at $0.0052 per share | 2,307,692 | 2,308 | 9,692 | - | - | - | 12,000 | |||||||||||||||||||||
| Common Shares issued for conversion of note in November 2013 at $0.0052 per share | 811,538 | 811 | 3,409 | - | - | - | 4,220 | |||||||||||||||||||||
| Common Shares issued in connection with 3(a)10 transaction in December 2013 at $0.0061 per share | 2,075,540 | 2,076 | 10,484 | - | - | - | 12,560 | |||||||||||||||||||||
| Extinguishment of derivative liabilities associated with convertible notes | - | - | 169,302 | - | - | - | 169,302 | |||||||||||||||||||||
| Net loss attributable to controlling interest | - | - | - | - | (1,370,725 | ) | - | (1,370,725 | ) | |||||||||||||||||||
| Balances at December 31, 2013 | 68,910,395 | 68,943 | 16,123,744 | - | (18,820,827 | ) | (101,581 | ) | (2,729,721 | ) | ||||||||||||||||||
See accompanying notes to consolidated financial statements
| F-26 |
BLUEFIRE RENEWABLES, INC. AND SUBSIDIARIES
(A DEVELOPMENT-STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
| For the year ended | For the year ended | From March 28, 2006 (Inception) to | ||||||||||
| December 31, 2013 | December 31, 2012 | December 31, 2013 | ||||||||||
| Cash flows from operating activities: | ||||||||||||
| Net loss | $ | (1,364,626 | ) | $ | (1,759,805 | ) | $ | (34,498,735 | ) | |||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||||||
| Gain from change in fair value of warrant liability | (22,542 | ) | (12,326 | ) | (2,967,358 | ) | ||||||
| Gain from change in fair value of derivative liability | (70,614 | ) | (101,621 | ) | (172,235 | ) | ||||||
| Loss on excess fair value of derivative liability | 124,883 | 124,883 | ||||||||||
| Founders Shares | - | - | 17,000 | |||||||||
| Costs associated with purchase of Sucre Agricultural Corp | - | - | (3,550 | ) | ||||||||
| Interest expense on beneficial conversion feature of convertible notes | - | - | 676,983 | |||||||||
| Loss on extinguishment of convertible debt | - | - | 2,718,370 | |||||||||
| Loss on retirement of warrants | - | - | 146,718 | |||||||||
| Common stock issued for interest on convertible notes | - | - | 55,585 | |||||||||
| Discount on sale of stock associated with private placement | - | - | 211,660 | |||||||||
| Accretion of discount on note payable to related party | - | - | 83,736 | |||||||||
| Gain from deobligation and change in accounting estimate on Department of Energy billings | - | (354,000 | ) | - | ||||||||
| Debt issuance costs for rejected loan guarantees | - | - | 583,634 | |||||||||
| Gain on settlement of accounts payable and accrued liabilities | (134,062 | ) | (37,891 | ) | (179,873 | ) | ||||||
| Loss on warrant modification | - | 803,704 | 803,704 | |||||||||
| Impairment of property and equipment | 1,162,148 | - | 1,162,148 | |||||||||
| Share-based compensation | 12,215 | 160,874 | 11,725,556 | |||||||||
| Unrealized Department of Energy unbilled receivables | - | 20,116 | 20,116 | |||||||||
| Amortization | 250,812 | 304,725 | 555,537 | |||||||||
| Depreciation | 2,882 | 14,909 | 106,398 | |||||||||
| Changes in operating assets and liabilities: | ||||||||||||
| Accounts receivable | 3,538 | (3,538 | ) | - | ||||||||
| Department of Energy unbilled grant receivable | - | 187,454 | 42,183 | |||||||||
| Prepaid expenses and other current assets | 4,316 | 6,959 | (4,637 | ) | ||||||||
| Accounts payable | 139,705 | 399,928 | 1,261,075 | |||||||||
| Accrued liabilities | (169,310 | ) | 128,844 | 405,822 | ||||||||
| Net cash used in operating activities | (60,655 | ) | (241,668 | ) | (17,125,280 | ) | ||||||
| Cash flows from investing activities: | ||||||||||||
| Acquisition of property and equipment | - | - | (217,636 | ) | ||||||||
| Construction in progress, net | (57,956 | ) | (45,457 | ) | (1,116,307 | ) | ||||||
| Net cash used in investing activities | (57,956 | ) | (45,457 | ) | (1,333,943 | ) | ||||||
See accompanying notes to consolidated financial statements
| F-27 |
BLUEFIRE RENEWABLES, INC. AND SUBSIDIARIES
(A DEVELOPMENT-STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
| For the year ended | For the year ended | From March 28, 2006 (Inception) to | ||||||||||
| December 31, 2013 | December 31, 2012 | December 31, 2013 | ||||||||||
| Cash flows from financing activities: | ||||||||||||
| Cash paid for treasury stock | - | - | (101,581 | ) | ||||||||
| Cash received in acquisition of Sucre Agricultural Corp. | - | - | 690,000 | |||||||||
| Proceeds from sale of stock through private placement | - | - | 544,500 | |||||||||
| Proceeds from exercise of stock options | - | - | 40,000 | |||||||||
| Proceeds from issuance of common stock | - | 35,000 | 14,745,000 | |||||||||
| Proceeds from convertible notes payable | 110,000 | 395,500 | 3,005,500 | |||||||||
| Repayment of notes payable | - | - | (500,000 | ) | ||||||||
| Proceeds from related party line of credit/notes payable | - | - | 335,230 | |||||||||
| Repayment from related party line of credit/notes payable | (4,000 | ) | (4,000 | ) | (124,000 | ) | ||||||
| Debt issuance costs | - | (94,800 | ) | (658,434 | ) | |||||||
| Retirement of warrants | - | - | (220,000 | ) | ||||||||
| Proceeds from sale of LLC Unit | - | - | 750,000 | |||||||||
| Net cash provided by financing activities | 106,000 | 331,700 | 18,506,215 | |||||||||
| Net increase (decrease) in cash and cash equivalents | (12,611 | ) | 44,575 | 46,992 | ||||||||
| Cash and cash equivalents beginning of period | 59,603 | 15,028 | - | |||||||||
| Cash and cash equivalents end of period | $ | 46,992 | $ | 59,603 | $ | 46,992 | ||||||
| Supplemental disclosures of cash flow information | ||||||||||||
| Cash paid during the period for: | ||||||||||||
| Interest | $ | 13,105 | $ | 4,343 | $ | 74,550 | ||||||
| Income taxes | $ | 2,700 | $ | 8,179 | $ | 29,500 | ||||||
| Supplemental schedule of non-cash investing and financing activities: | ||||||||||||
| Conversion of senior secured convertible notes payable | $ | - | $ | - | $ | 2,000,000 | ||||||
| Conversion of non-secured convertible notes payable | $ | 186,500 | $ | - | $ | 186,500 | ||||||
| Interest converted to common stock | $ | 7,460 | $ | - | $ | 63,029 | ||||||
| Fair value of warrants issued to placement agents | $ | - | $ | - | $ | 725,591 | ||||||
| Discount on related party note payable | $ | - | $ | - | $ | 83,736 | ||||||
| Accounts payable, net of reimbursement, included in construction-in-progress | $ | - | $ | - | $ | 45,842 | ||||||
| Accretion of redeemable non-controlling interest | $ | - | $ | - | $ | 112,500 | ||||||
| Derivative liability reclassified to additional paid-in capital | $ | 169,301 | $ | - | $ | 169,301 | ||||||
| Discount on convertible notes payable | $ | - | $ | 167,070 | $ | 167,070 | ||||||
| Convertible loans issued in connection with these Liabilities Purchase Agreement | $ | 75,000 | $ | - | $ | 75,000 | ||||||
| Accounts payable and accrued liabilities paid in common stock | $ | 146,080 | $ | - | $ | 146,080 | ||||||
See accompanying notes to consolidated financial statements
| F-28 |
BLUEFIRE RENEWABLES, INC. AND SUBSIDIARIES
(A DEVELOPMENT-STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND BUSINESS
BlueFire Ethanol, Inc. (“BlueFire”) was incorporated in the state of Nevada on March 28, 2006 (“Inception”). BlueFire was established to deploy the commercially ready and patented process for the conversion of cellulosic waste materials to ethanol (“Arkenol Technology”) under a technology license agreement with Arkenol, Inc. (“Arkenol”). BlueFire’s use of the Arkenol Technology positions it as a cellulose-to-ethanol company with demonstrated production of ethanol from urban trash (post-sorted “MSW”), rice and wheat straws, wood waste and other agricultural residues. The Company’s goal is to develop and operate high-value carbohydrate-based transportation fuel production facilities in North America, and to provide professional services to such facilities worldwide. These “biorefineries” will convert widely available, inexpensive, organic materials such as agricultural residues, high-content biomass crops, wood residues, and cellulose from MSW into ethanol.
On July 15, 2010, the board of directors of BlueFire, by unanimous written consent, approved the filing of a Certificate of Amendment to the Company’s Articles of Incorporation with the Secretary of State of Nevada, changing the Company’s name from BlueFire Ethanol Fuels, Inc. to BlueFire Renewables, Inc. On July 20, 2010, the Certificate of Amendment was accepted by the Secretary of State of Nevada.
On November 25, 2013, the Company filed an amendment to the Company’s articles of incorporation with the Secretary of State of the State of Nevada, to increase the Company’s authorized common stock from one hundred million (100,000,000) shares of common stock, par value $0.001 per share, to five hundred million (500,000,000) shares of common stock, par value $0.001 per share.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Going Concern
The Company is a development-stage company which has incurred losses since Inception. Management has funded operations primarily through proceeds received in connection with the reverse merger, loans from its majority shareholder, the private placement of the Company’s common stock in December 2007 for net proceeds of approximately $14,500,000, the issuance of convertible notes with warrants in July and in August 2007, various convertible notes, and Department of Energy reimbursements throughout 2009 to 2013. The Company may encounter further difficulties in establishing operations due to the time frame of developing, constructing and ultimately operating the planned bio-refinery projects.
As of December 31, 2013, the Company has negative working capital of approximately $1,985,000. Management has estimated that operating expenses for the next 12 months will be approximately $1,700,000, excluding engineering costs related to the development of bio-refinery projects. These matters raise substantial doubt about the Company’s ability to continue as a going concern. Throughout the remainder of 2014, the Company intends to fund its operations with remaining reimbursements under the Department of Energy contract, as well as seek additional funding in the form of equity or debt. The Company’s ability to get reimbursed under the DOE contract is dependent on the availability of cash to pay for the related costs and the availability of funds remaining under the contract after the discontinuance of the Department of Energy contract further disclosed in Note 3. As of April 15, 2014, the Company expects the current resources available to them will only be sufficient for a period of approximately one month unless significant additional financing is received. Management has determined that the general expenditures must be reduced and additional capital will be required in the form of equity or debt securities. In addition, if we cannot raise additional short term capital we may consume all of our cash reserved for operations. There are no assurances that management will be able to raise capital on terms acceptable to the Company. If we are unable to obtain sufficient amounts of additional capital, we may be required to reduce the scope of our planned development, which could harm our business, financial condition and operating results. The financial statements do not include any adjustments that might result from these uncertainties.
Additionally, the Company’s Lancaster plant is currently shovel ready, except for the air permit which the Company will need to renew as stated below, and only requires minimal capital to maintain until funding is obtained for the construction. The preparation for the construction of this plant was the primary capital use in 2009. In December 2011, BlueFire requested an extension to pay the project’s permits for an additional year while we awaited potential financing. The Company has let the air permits expire as there were no more extensions available and management deemed the project not likely to start construction in the short-term. BlueFire will need to resubmit for air permits once it is able to raise the necessary financing. The Company sees this project on hold until we receive the funding to construct the facility.
| F-29 |
As of December 31, 2010, the Company completed the detailed engineering on our proposed Fulton Project, procured all necessary permits for construction of the plant, and began site clearing and preparation work, signaling the beginning of construction. As of December 31, 2013, all site preparation activities have been completed, including clearing and grating of the site, building access roads, completing railroad tie-ins to connect the site to the rail system, and finalizing the layout plan to prepare for the site foundation. As of December 31, 2013, the construction-in-progress to date was deemed impaired as disclosed in Note 4.
We estimate the total construction cost of the bio-refineries to be in the range of approximately $300 million for the Fulton Project and approximately $100 million to $125 million for the Lancaster Biorefinery. These cost approximations do not reflect any increase/decrease in raw materials or any fluctuation in construction cost that would be realized by the dynamic world metals markets. The Company is currently in discussions with potential sources of financing for these facilities but no definitive agreements are in place. The Company believes that our inability to get financing thus far for the projects as well as the no go decision from the DOE requires impairment of our Fulton Project assets (See Note 4). The Company cannot continue significant development or furtherance of the Fulton project until financing for the construction of the Fulton plant is obtained.
Principles of Consolidation
The consolidated financial statements include the accounts of BlueFire Renewables, Inc., and its wholly-owned subsidiary, BlueFire Ethanol, Inc. BlueFire Ethanol Lancaster, LLC, BlueFire Fulton Renewable Energy LLC (excluding 1% interest sold), and SucreSource LLC are wholly-owned subsidiaries of BlueFire Ethanol, Inc. All intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reported periods. Actual results could materially differ from those estimates.
Cash and Cash Equivalents
For purpose of the statement of cash flows, the Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents.
Debt Issuance Costs
Debt issuance costs are capitalized and amortized over the term of the debt using the effective interest method, or expensed upon conversion or extinguishment when applicable. Costs are capitalized for amounts incurred in connection with proposed financings. In the event the financing related to the capitalized cost is not successful, the costs are immediately expensed (see Note 5).
Accounts Receivable
Accounts receivable are reported net of allowance for expected losses. It represents the amount management expects to collect from outstanding balances. Differences between the amount due and the amount management expects to collect are charged to operations in the year in which those differences are determined, with an offsetting entry to a valuation allowance. As of December 31, 2013 and 2012, the Company has reserved zero and approximately and $20,000, respectively.
Intangible Assets
License fees acquired are either expensed or recognized as intangible assets. The Company recognizes intangible assets when the following criteria are met: 1) the asset is identifiable, 2) the Company has control over the asset, 3) the cost of the asset can be measured reliably, and 4) it is probable that economic benefits will flow to the Company. During the year ended December 31, 2009, the Company paid a license fee (see Note 10) to Arkenol, Inc., a related party. The license fee was expensed because the Company is still in the research and development stage and cannot readily determine the probability of future economic benefits for said license.
| F-30 |
Property and Equipment
Property and equipment are stated at cost. The Company’s fixed assets are depreciated using the straight-line method over a period ranging from three to five years, except land which is not depreciated. Maintenance and repairs are charged to operations as incurred. Significant renewals and betterments are capitalized. At the time of retirement or other disposition of property and equipment, the cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is reflected in operations. During the year ended December 31, 2010, the Company began to capitalize costs in connection with the construction of its Fulton plant, and continued to do so in 2013 until it was determined that the project should be impaired. A portion of these costs were reimbursed under the Department of Energy grant discussed in Note 3. The reimbursable portion was treated as a reduction of those costs.
Revenue Recognition
The Company is currently a development-stage company. The Company will recognize revenues from 1) consulting services rendered to potential sub licensees for development and construction of cellulose to ethanol projects, 2) sales of ethanol from its production facilities when (a) persuasive evidence that an agreement exists; (b) the products have been delivered; (c) the prices are fixed and determinable and not subject to refund or adjustment; and (d) collection of the amounts due is reasonably assured.
As discussed in Note 3, the Company received a federal grant from the United States Department of Energy, (“DOE”). The grant generally provides for payment in connection with related development and construction costs involving commercialization of our technologies. Grant award reimbursements are recorded as either contra assets or as revenues depending upon whether the reimbursement is for capitalized construction costs or expenses paid by the Company. Contra capitalized cost and revenues from the grant are recognized in the period during which the conditions under the grant have been met and the Company has made payment for the related asset or expense. The Company recognizes DOE unbilled grant receivables for those costs that have been incurred during a period but not yet paid at period end, are otherwise reimbursable under the terms of the grant, and are expected to be paid in the normal course of business. Realization of unbilled receivables is dependent on the Company’s ability to meet their obligation for reimbursable costs.
Project Development
Project development costs are either expensed or capitalized. The costs of materials and equipment that will be acquired or constructed for project development activities, and that have alternative future uses, both in project development, marketing or sales, will be classified as property and equipment and depreciated over their estimated useful lives. To date, project development costs include the research and development expenses related to the Company’s future cellulose-to-ethanol production facilities. During the years ended December 31, 2013 and 2012 and for the period from March 28, 2006 (Inception) to December 31, 2013, research and development costs included in Project Development were $591,356, $475,792, and $15,529,815, respectively.
Convertible Debt
Convertible debt is accounted for under the guidelines established by Accounting Standards Codification (“ASC”) 470 “Debt with Conversion and Other Options” and ASC 740 “Beneficial Conversion Features”. The Company records a beneficial conversion feature (“BCF”) related to the issuance of convertible debt that have conversion features at fixed or adjustable rates that are in-the-money when issued and records the fair value of warrants issued with those instruments. The BCF for the convertible instruments is recognized and measured by allocating a portion of the proceeds to warrants and as a reduction to the carrying amount of the convertible instrument equal to the intrinsic value of the conversion features, both of which are credited to paid-in-capital.
The Company calculates the fair value of warrants issued with the convertible instruments using the Black-Scholes valuation method, using the same assumptions used for valuing employee options for purposes of ASC 718 “Compensation – Stock Compensation”, except that the contractual life of the warrant is used. Under these guidelines, the Company allocates the value of the proceeds received from a convertible debt transaction between the conversion feature and any other detachable instruments (such as warrants) on a relative fair value basis. The allocated fair value is recorded as a debt discount or premium and is amortized over the expected term of the convertible debt to interest expense. For a conversion price change of a convertible debt issue, the additional intrinsic value of the debt conversion feature, calculated as the number of additional shares issuable due to a conversion price change multiplied by the previous conversion price, is recorded as additional debt discount and amortized over the remaining life of the debt.
| F-31 |
The Company accounts for modifications of its BCF’s in accordance with ASC 470 “Modifications and Exchanges”. ASC 470 requires the modification of a convertible debt instrument that changes the fair value of an embedded conversion feature and the subsequent recognition of interest expense or the associated debt instrument when the modification does not result in a debt extinguishment.
Equity Instruments Issued with Registration Rights Agreement
The Company accounts for these penalties as contingent liabilities, applying the accounting guidance of ASC 450 “Contingencies”. This accounting is consistent with views established in ASC 825 “Financial Instruments”. Accordingly, the Company recognizes damages when it becomes probable that they will be incurred and amounts are reasonably estimable.
In connection with the issuance of common stock for gross proceeds of $15,500,000 in December 2007 and the $2,000,000 convertible note financing in August 2007, the Company was required to file a registration statement on Form SB-2 or Form S-3 with the Securities and Exchange Commission in order to register the resale of the common stock under the Securities Act. The Company filed that registration statement on December 18, 2007 and as required under the registration rights agreement had the registration statement declared effective by the Securities and Exchange Commission (“SEC”) on March 27, 2009 and in so doing incurred no liquidated damages. As of December 31, 2013 and 2012, the Company does not believe that any liquidated damages are probable and thus no amounts have been accrued in the accompanying financial statements.
In connection with the Company signing the $10,000,000 Purchase Agreement with LPC, the Company was required to file a registration statement related to the transaction with the SEC covering the shares that may be issued to LPC under the Purchase Agreement within ten days of the agreement, and the registration statement was to be declared effective by March 31, 2011. The registration statement was declared effective on May 10, 2011, without any penalty, and LPC did not terminate the Purchase Agreement.
In connection with the Company signing the $2,000,000 Equity Facility with TCA on March 28, 2012, the Company agreed to file a registration statement related to the transaction with the SEC covering the shares that may be issued to TCA under the Equity Facility within 45 days of closing. Although under the Registration Rights Agreement the registration statement was to be declared effective within 90 days following closing, it has yet to be declared effective. The Company is working with TCA to resolve this issue. There has been no accrual for any penalties as it relates to the Equity Facility Registration Rights Agreement. The penalty for filing to get the registration statement effective is capped at $20,000, and the Company believes that any penalty is remote as the terms of the TCA Agreement, when combined with the debt portion of financing from TCA, both of which were provided by TCA, prevent us from having it declared effective.
Income Taxes
The Company accounts for income taxes in accordance with ASC 740 “Income Taxes” requires the Company to provide a net deferred tax asset/liability equal to the expected future tax benefit/expense of temporary reporting differences between book and tax accounting methods and any available operating loss or tax credit carry forwards.
This Interpretation sets forth a recognition threshold and valuation method to recognize and measure an income tax position taken, or expected to be taken, in a tax return. The evaluation is based on a two-step approach. The first step requires an entity to evaluate whether the tax position would “more likely than not,” based upon its technical merits, be sustained upon examination by the appropriate taxing authority. The second step requires the tax position to be measured at the largest amount of tax benefit that is greater than 50 percent likely of being realized upon ultimate settlement. The Company does not have any uncertain positions which require such analysis.
Fair Value of Financial Instruments
Fair value is defined as the exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. The guidance also establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs market participants would use in valuing the asset or liability and are developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the factors market participants would use in valuing the asset or liability. The guidance establishes three levels of inputs that may be used to measure fair value:
Level 1. Observable inputs such as quoted prices in active markets;
Level 2. Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and
Level 3. Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
| F-32 |
The Company did not have any level 1 financial instruments at December 31, 2013 and 2012.
As of December 31, 2013 and 2012, the warrant liability and derivative liability are considered level 2 items, see Notes 5, 6, and 9.
As of December 31, 2013 and 2012, the Company’s redeemable noncontrolling interest is considered a level 3 item and changed during 2012 and 2013 due to the following:
| Balance as of January 1, 2013 | $ | 849,945 | ||
| Net gain attributable to noncontrolling interest | 6,099 | |||
| Balance at December 31, 2013 | $ | 856,044 |
See Note 8 for details of valuation and changes during the years 2013 and 2012.
The carrying amounts reported in the accompanying consolidated financial statements for current assets and current liabilities approximate the fair value because of the immediate or short term maturities of the financial instruments.
Risks and Uncertainties
The Company’s operations are subject to new innovations in product design and function. Significant technical changes can have an adverse effect on product lives. Design and development of new products are important elements to achieve and maintain profitability in the Company’s industry segment. The Company may be subject to federal, state and local environmental laws and regulations. The Company does not anticipate expenditures to comply with such laws and does not believe that regulations will have a material impact on the Company’s financial position, results of operations, or liquidity. The Company believes that its operations comply, in all material respects, with applicable federal, state, and local environmental laws and regulations.
Concentrations of Credit Risk
The Company maintains its cash accounts in a commercial bank and in an institutional money-market fund account. The total cash balances held in a commercial bank are secured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000, although on January 1, 2014 this amount is scheduled to return to $100,000 per depositor, per insured bank. At times, the Company has cash deposits in excess of federally insured limits. In addition, the Institutional Funds Account is insured through the Securities Investor Protection Corporation (“SIPC”) up to $500,000 per customer, including up to $100,000 for cash. At times, the Company has cash deposits in excess of federally and institutional insured limits.
As of December 31, 2013 and 2012, the Department of Energy made up 100% of billed and unbilled Grant Revenues and Department of Energy grant receivables. Management believes the loss of this organization would have a material impact on the Company’s financial position, results of operations, and cash flows.
As of December 31, 2013 and 2012, one customer made up 100% of the Company’s consulting fees revenue. Management believes the loss of consulting to this organization would have a material impact on the Company’s financial position, results of operations, and cash flows.
As of December 31, 2013 and 2012 three vendors made up 65% and 64% of accounts payable, respectively.
Loss per Common Share
The Company presents basic loss per share (“EPS”) and diluted EPS on the face of the consolidated statement of operations. Basic loss per share is computed as net loss divided by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur from common shares issuable through stock options, warrants, and other convertible securities. For the years ended December 31, 2013 and 2012, the Company had no options and 428,571 and 928,571 warrants outstanding, respectively, for which all of the exercise prices were in excess of the average closing price of the Company’s common stock during the corresponding year and thus no shares are considered as dilutive under the treasury-stock method of accounting and their effects would have been antidilutive due to the loss.
| F-33 |
Share-Based Payments
The Company accounts for stock options issued to employees and consultants under ASC 718 “Share-Based Payment”. Under ASC 718, share-based compensation cost to employees is measured at the grant date, based on the estimated fair value of the award, and is recognized as expense over the employee’s requisite vesting period.
The Company measures compensation expense for its non-employee stock-based compensation under ASC 505 “Equity”. The fair value of the option issued or committed to be issued is used to measure the transaction, as this is more reliable than the fair value of the services received. The fair value is measured at the value of the Company’s common stock on the date that the commitment for performance by the counterparty has been reached or the counterparty’s performance is complete. The fair value of the equity instrument is charged directly to stock-based compensation expense and credited to additional paid-in capital.
Derivative Financial Instruments
We do not use derivative financial instruments to hedge exposures to cash-flow risks or market-risks that may affect the fair values of our financial instruments. However, under the provisions ASC 815 – “Derivatives and Hedging” certain financial instruments that have characteristics of a derivative, as defined by ASC 815, such as embedded conversion features on our convertible notes, that are potentially settled in the Company’s own common stock, are classified as liabilities when either (a) the holder possesses rights to net-cash settlement or (b) physical or net-share settlement is not within our control. In such instances, net-cash settlement is assumed for financial accounting and reporting purposes, even when the terms of the underlying contracts do not provide for net-cash settlement. Derivative financial instruments are initially recorded, and continuously carried, at fair value each reporting period.
The value of the embedded conversion feature is determined using the Black-Scholes option pricing model. All future changes in the fair value of the embedded conversion feature will be recognized currently in earnings until the note is converted or redeemed. Determining the fair value of derivative financial instruments involves judgment and the use of certain relevant assumptions including, but not limited to, interest rate risk, credit risk, volatility and other factors. The use of different assumptions could have a material effect on the estimated fair value amounts.
Lines of Credit with Share Issuance
Shares issued to obtain a line of credit are recorded at fair value at contract inception. When shares are issued to obtain a line of credit rather than in connection with the issuance, the shares are accounted for as equity, at the measurement date in accordance with ASC 505-50 “Equity-Based Payments to Non-Employees.” The issuance of these shares is equivalent to the payment of a loan commitment or access fee, and, therefore, the offset is recorded akin to debt issuance costs. The deferred fee is amortized on a straight-line basis over the stated term of the line of credit, or other period as deemed appropriate.
Redeemable - Noncontrolling Interest
Redeemable interest held by third parties in subsidiaries owned or controlled by the Company is reported on the consolidated balance sheets outside permanent equity. As these redeemable noncontrolling interests provide for redemption features not solely within the control of the issuer, we classify such interests outside of permanent equity in accordance with ASC 480-10, “Distinguishing Liabilities from Equity”. All redeemable noncontrolling interest reported in the consolidated statements of operations reflects the respective interests in the income or loss after income taxes of the subsidiaries attributable to the other parties, the effect of which is removed from the net loss available to the Company. The Company accretes the redemption value of the redeemable noncontrolling interest over the redemption period using the straight-line method.
Impairment of Long-Lived Assets
The Company regularly evaluates whether events and circumstances have occurred that indicate the carrying amount of property and equipment may not be recoverable. When factors indicate that these long-lived assets should be evaluated for possible impairment, the Company assesses the potential impairment by determining whether the carrying value of such long-lived assets will be recovered through the future undiscounted cash flows expected from use of the asset and its eventual disposition. If the carrying amount of the asset is determined not to be recoverable, a write-down to fair value is recorded. Fair values are determined based on quoted market values, discounted cash flows, or external appraisals, as applicable. The Company regularly evaluates whether events and circumstances have occurred that indicate the useful lives of property and equipment may warrant revision. The carrying value of our construction in progress, included in property and equipment, was impaired for its full carrying value of $1,162,148 at December 31, 2013. There was no impairment as of December 31, 2012.
| F-34 |
New Accounting Pronouncements
Management does not believe that any recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the accompanying financial statements.
NOTE 3 – DEVELOPMENT CONTRACT
Department of Energy Awards 1 and 2
In February 2007, the Company was awarded a grant for up to $40 million from the U.S. Department of Energy’s (“DOE”) cellulosic ethanol grant program to develop a solid waste biorefinery project at a landfill in Southern California. During October 2007, the Company finalized Award 1 for a total approved budget of just under $10,000,000 with the DOE. This award was a 60%/40% cost share, whereby 40% of approved costs may be reimbursed by the DOE pursuant to the total $40 million award announced in February 2007. In October 2009, the Company received from the DOE a one-time reimbursement of approximately $3,841,000. This was primarily related to the Company amending its award to include costs previously incurred in connection with the development of the Lancaster site which have a direct attributable benefit to the Fulton Project.
In December 2009, as a result of the American Recovery and Reinvestment Act, the DOE increased the Award 2 to a total of $81 million for Phase II of its Fulton Project. This is in addition to a renegotiated Phase I funding for development of the biorefinery of approximately $7 million out of the previously announced $10 million total. This brought the DOE’s total award to the Fulton project to approximately $88 million. The Company is currently drawing down on funds for Phase II of its Fulton Project.
As of December 31, 2013, the Company has received reimbursements of approximately $11,914,906 under these awards.
Since 2009, our operations had been financed to a large degree through funding provided by the DOE. We rely on access to this funding as a source of liquidity for capital requirements not satisfied by the cash flow from our operations. If we are unable to access government funding our ability to finance our projects and/or operations and implement our strategy and business plan will be severely hampered. Awards 1 and 2 consisted of a total reimbursable amount of approximately $87,560,000, and through April 15, 2014, and assuming the appeal is unsuccessful, we have an unreimbursed amount of approximately $843,998 available to us under the awards. The reduction in unreimbursed amounts is further discussed below. We cannot guarantee that we will continue to receive grants, loan guarantees, or other funding for our projects from the DOE.
In June 2011, it was determined that the Company had received an overpayment of approximately $354,000 from the cumulative reimbursements of the DOE grants under Award 1 for the period from inception of the award through December 31, 2010. The overpayment was a result of estimates made on the indirect rate during the reimbursement process over the course of the award. The DOE and the Company reached a tentative agreement during that time, that in combination, as a result of the unused grant award money left in Award 1 of approximately $366,000, the Company would not be required to refund any overpayment to the DOE and the Company could proceed towards completion of Award 1. While completion of the award under the above terms was tentatively agreed to, the method and process was uncertain. During the fourth quarter of 2011, Management did not believe it was in the Company’s best interest to close the award. However, in 2012 the situation was reassessed and the Company proceeded with the close out of Award 1. As of September 12, 2012 Award 1 was officially closed and the overpayment was deobligated. The Company was notified of the deobligation in the fourth quarter of 2012.
On December 23, 2013, the Company received notice from the DOE indicating that the DOE would no longer provide funding under Award 2 due to the Company’s inability to comply with certain deadlines related to providing certain information to the DOE with respect to the Company’s future financing arrangements for the Fulton Project. The Company is seeking to re-establish funding under Award 2 and has initiated the appeals process with the DOE. The Company shall exhaust all options available to it in order to reverse the DOE’s decision. Until the Company is notified of the outcome of its appeal, we still have approximately $843,998 available under the grant until September 30, 2014.
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NOTE 4 – PROPERTY AND EQUIPMENT
Property and Equipment consist of the following:
| December 31, 2013 | December 31, 2012 | |||||||
| Construction in progress | $ | - | $ | 1,104,192 | ||||
| Land | 109,108 | 109,108 | ||||||
| Office equipment | 63,367 | 63,367 | ||||||
| Furniture and fixtures | 44,806 | 44,806 | ||||||
| 217,281 | 1,321,473 | |||||||
| Accumulated depreciation | (106,041 | ) | (103,159 | ) | ||||
| $ | 111,240 | $ | 1,218,314 | |||||
Depreciation expense for the years ended December 31, 2013 and 2012 and for the period from inception to December 31, 2013 was $2,882, $14,909, and $106,398, respectively.
During the year ended December 31, 2013, the Company invested approximately $58,000 in construction activities at our Fulton Project, compared with $45,500 in 2012 net of DOE reimbursements.
Asset Impairments
In light of the no-go decision by the DOE on December 23, 2013 (Note 3) which discontinued funding under Award 2, the Company determined that the construction-in-progress related to the Fulton Project within property and equipment was impaired. The Company made this determination on the basis that without the availability of funding from the DOE as both a source of funds for the project and as an incentive to potential debt or equity investors since the DOE funds were to cover a substantial portion of construction costs, the probability of completion of the Fulton Project has become remote. In addition there are no other sources of financing currently committed to the project. Accordingly, without the funding necessary to finish the Fulton Project, the future cash flows from the asset are less than the carrying value and a full impairment of $1,162,148 was deemed necessary. The impairment charge is reflected on the statement of operations as an impairment of property and equipment.
Purchase of Lancaster Land
On November 9, 2007, the Company purchased approximately 10 acres of land in Lancaster, California for approximately $109,000, including certain site surveying and other acquisition costs. The Company originally intended to use the land for the construction of their first cellulosic ethanol refinery plant. The Company is now considering using this land for a facility to produce products other than cellulosic ethanol, such as higher value chemicals that would yield fuel additives that that could improve the project economics for a smaller facility.
NOTE 5 – NOTES PAYABLE
Convertible Notes Payable - 2007
On July 13, 2007, the Company issued several convertible notes aggregating a total of $500,000 with eight accredited investors including $25,000 from the Company’s then Chief Financial Officer. Under the terms of the notes, the Company was to repay any principal balance and interest, at 10% per annum within 120 days of the note. The holders also received warrants to purchase common stock at $5.00 per share. The warrants vested immediately and expired in five years. The total warrants issued pursuant to this transaction were 200,000 on a pro-rata basis to investors. The convertible promissory notes were only convertible into shares of the Company’s common stock in the event of a default. The conversion price was determined based on one third of the average of the last-trade prices of the Company’s common stock for the ten trading days preceding the default date.
The fair value of the warrants was $990,367 as determined by the Black-Scholes option pricing model using the following weighted-average assumptions: volatility of 113%, risk-free interest rate of 4.94%, dividend yield of 0%, and a term of five years.
The proceeds were allocated between the convertible notes payable and the warrants issued to the convertible note holders based on their relative fair values which resulted in $167,744 allocated to the convertible notes and $332,256 allocated to the warrants. The amount allocated to the warrants resulted in a discount to the convertible notes. The Company amortized the discount over the term of the convertible notes. During the year ended December 31, 2007, the Company amortized $332,256 of the discount to interest expense.
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The Company calculated the value of the beneficial conversion feature to be approximately $332,000 of which $167,744 was allocated to the convertible notes. However, since the notes were convertible upon a contingent event, the value was recorded when such event was triggered during the year ended December 31, 2007.
On November 7, 2007, the Company re-paid the 10% convertible promissory notes totaling approximately $516,000 including interest of approximately $16,000. This included approximately $800 of accrued interest to the Company’s then Chief Financial Officer.
Convertible Notes Payable – 2012 and 2013
On July 31, 2012, the Company issued a convertible note of $63,500 to Asher Enterprises, Inc. Under the terms of the notes, the Company was to repay any principal balance and interest, at 8% per annum at maturity date of May 2, 2013. The Company may prepay the convertible promissory note prior to maturity at varying prepayment penalty rates specified under the agreement. The convertible promissory note was convertible into shares of the Company’s common stock after six months. The conversion price was calculated by multiplying 58% (42% discount to market) by the average of the lowest three closing bid prices during the 10 days prior to the conversion date. The Company determined that since the conversion price was variable and did not contain a floor, the conversion feature represented a derivative liability upon the ability to convert the loan, which commenced on approximately January 27, 2013.
The Company calculated the derivative liability using the Black-Scholes pricing model for the note upon the initial date the note became convertible and recorded the fair market value of the derivative liability of approximately $47,000, resulting in a discount to the note. The discount was amortized over the term of the note and accelerated as the note was converted. During the year ended December 31, 2013, all of the discount was amortized to interest expense, with no remaining unamortized discount. See below for assumptions used in valuing the derivative liability. As of December 31, 2013, all amounts outstanding in relation to this note have been converted to equity through the issuance of 1,642,578 shares of common stock.
On October 11, 2012, the Company issued a convertible note of $37,500 to Asher Enterprises, Inc. Under the terms of the notes, the Company was to repay any principal balance and interest, at 8% per annum at maturity date of July 15, 2013. The Company may prepay the convertible promissory note prior to maturity at varying prepayment penalty rates specified under the agreement. The convertible promissory note was convertible into shares of the Company’s common stock after six months. The conversion price was calculated by multiplying 58% (42% discount to market) by the average of the lowest three closing bid prices during the 10 days prior to the conversion date. The Company determined that since the conversion price was variable and did not contain a floor, the conversion feature represented a derivative liability upon the ability to convert the loan, which commenced on approximately April 9, 2013.
The Company calculated the derivative liability using the Black-Scholes pricing model for the note upon the initial date the note became convertible and recorded the fair market value of the derivative liability of approximately $66,000, resulting in a discount to the note and an additional day one charge of $28,507 for the excess value of the derivative liability over the face value of the note. The excess value was recognized as an expense in the accompanying statement of operations. The discount was being amortized over the term of the note. During the year ended December 31, 2013, all $37,500 of the discount was amortized to interest expense with no remaining unamortized discount, and the note was fully converted through the issuance of 2,262,860 shares of common stock. See below for assumptions used in valuing the derivative liability.
On December 21, 2012, the Company agreed to a convertible note of $32,500 to Asher Enterprises, Inc. Under the terms of the notes, the Company was to repay any principal balance and interest, at 8% per annum at maturity date of September 26, 2013. The Company may prepay the convertible promissory note prior to maturity at varying prepayment penalty rates specified under the agreement. The convertible promissory note was convertible into shares of the Company’s common stock after six months. The conversion price was calculated by multiplying 58% (42% discount to market) by the average of the lowest three closing bid prices during the 10 days prior to the conversion date. The Company determined that since the conversion price was variable and did not contain a floor, the conversion feature represented a derivative liability upon the ability to convert the loan, which commenced on approximately June 19, 2013.
The Company calculated the derivative liability using the Black-Scholes pricing model for the note upon the initial date the note became convertible and recorded the fair market value of the derivative liability of approximately $15,600, resulting in a discount to the note. The discount was amortized over the term of the note and accelerated as the note was converted. During the year ended December 31, 2013, the entire discount was amortized to interest expense, with no remaining unamortized discount and the note was fully converted into 4,017,599 shares of common stock. See below for assumptions used in valuing the derivative liability.
| F-37 |
On February 11, 2013, the Company agreed to a convertible note of $53,000 to Asher Enterprises, Inc. Under the terms of the notes, the Company was to repay any principal balance and interest, at 8% per annum at maturity date of November 13, 2013. The Company may prepay the convertible promissory note prior to maturity at varying prepayment penalty rates specified under the agreement. The convertible promissory note was convertible into shares of the Company’s common stock after six months. The conversion price was calculated by multiplying 58% (42% discount to market) by the average of the lowest three closing bid prices during the 10 days prior to the conversion date. The Company determined that since the conversion price was variable and did not contain a floor, the conversion feature represented a derivative liability upon the ability to convert the loan, which commenced on approximately August 10, 2013.
The Company calculated the derivative liability using the Black-Scholes pricing model for the note upon the initial date the note became convertible and recorded the fair market value of the derivative liability of approximately $49,500, resulting in a discount to the note. The discount was amortized over the term of the note and accelerated as the note was converted. During the year ended December 30, 2013, the entire discount was amortized to interest expense, with no remaining unamortized discount and the note was fully converted into 9,689,210 shares of common stock. See below for assumptions used in valuing the derivative liability.
On June 13, 2013, the Company agreed to a convertible note of $32,500 to Asher Enterprises, Inc. Under the terms of the notes, the Company is to repay any principal balance and interest, at 8% per annum at maturity date of March 17, 2014. The Company may prepay the convertible promissory note prior to maturity at varying prepayment penalty rates specified under the agreement. The convertible promissory note is convertible into shares of the Company’s common stock after six months. The conversion price is calculated by multiplying 58% (42% discount to market) by the average of the lowest three closing bid prices during the 10 days prior to the conversion date. The Company determined that since the conversion price was variable and does not contain a floor, the conversion feature represented a derivative liability upon the ability to convert the loan, which commenced on approximately December 10, 2013.
The Company calculated the derivative liability using the Black-Scholes pricing model for the note upon the initial date the note became convertible and recorded the fair market value of the derivative liability of approximately $28,000, resulting in a discount to the note. The discount is being amortized over the term of the note and accelerated as the note is converted. During the year ended December 31, 2013, approximately $6,512 of the discount was amortized to interest expense, with approximately $22,100 remaining unamortized discount. As of December 31, 2013, none of the note was converted into shares of common stock. See below for assumptions used in valuing the derivative liability. Subsequent to December 31, 2013, all principal and interest outstanding in relation to this note were converted to equity.
On December 19, 2013, the Company agreed to a convertible note of $37,500 to Asher Enterprises, Inc. Under the terms of the notes, the Company is to repay any principal balance and interest, at 8% per annum at maturity date of December 23, 2014. The Company may prepay the convertible promissory note prior to maturity at varying prepayment penalty rates specified under the agreement. The convertible promissory note is convertible into shares of the Company’s common stock after six months. The conversion price is calculated by multiplying 58% (42% discount to market) by the average of the lowest three closing bid prices during the 10 days prior to the conversion date. Since the conversion feature is only convertible after six months, there is no derivative liability. However, the Company will account for the derivative liability upon the passage of time and the note becoming convertible if not extinguished, as defined above. Derivative accounting applies upon the conversion feature being available to the holder, as it is variable and does not have a floor as to the number of common shares in which could be converted. Since the funds were not transferred until January 2014, due to the investor not wanting to fund until after the new year, the note was recorded as a subsequent event and is not reflected on the financials for the year ended December 31, 2013.
Using the Black-Scholes pricing model, with the range of inputs listed below, we calculated the fair market value of the conversion feature at inception of the conversion feature and at each conversion event. The Company revalued the conversion feature at December 31, 2013 in the same manner with the inputs listed below and recognized a gain on the change in fair value of the derivative liability on the accompanying statement of operations of $18,010.
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During the year ended December 31, 2013, the range of inputs used to calculate derivative liabilities noted above were as follows:
| Year
ended December 31, 2013 | ||||
| Annual dividend yield | - | |||
| Expected life (years) | 0.0 - 0.25 | |||
| Risk-free interest rate | 0.02% - 0.12% | |||
| Expected volatility | 61.34% - 159% | |||
In addition, fees paid to secure the convertible debt were accounted for as deferred financing costs and capitalized in the accompanying balance sheet or considered and on-issuance discount to the notes. The deferred financing costs and discounts, as applicable, are being amortized over the term of the notes. As of December 31, 2013, the Company amortized approximately $6,806 with $1,031 in deferred financing costs remaining.
See Note 12 for additional issuances and conversions of these notes subsequent to December 31, 2013.
Senior Secured Convertible Notes Payable
On August 21, 2007, the Company issued senior secured convertible notes aggregating a total of $2,000,000 with two institutional accredited investors. Under the terms of the notes, the Company was to repay any principal balance and interest, at 8% per annum, due August 21, 2010. On a quarterly basis, the Company has the option to pay interest due in cash or in stock. The senior secured convertible notes were secured by substantially all of the Company’s assets. The total warrants issued pursuant to this transaction were 1,000,000 on a pro-rata basis to investors. These include class A warrants to purchase 500,000 common stock at $5.48 per share and class B warrants to purchase an additional 500,000 shares of common stock at $6.32 per share. The warrants vested immediately and expired in three years. The senior secured convertible note holders had the option to convert the note into shares of the Company’s common stock at $4.21 per share at any time prior to maturity. If, before maturity, the Company consummated a Financing of at least $10,000,000 then the principal and accrued unpaid interest of the senior secured convertible notes would be automatically converted into shares of the Company’s common stock at $4.21 per share.
The fair value of the warrants was approximately $3,500,000 as determined by the Black-Scholes option pricing model using the following weighted-average assumptions: volatility of 118%, risk-free interest rate of 4.05%, dividend yield of 0% and a term of three years. The proceeds were allocated between the senior secured convertible notes and the warrants issued to the convertible note holders based on their relative fair values and resulted in $728,571 being allocated to the senior secured convertible promissory notes and $1,279,429 allocated to the warrants. The resulting discount was to be amortized over the life of the notes.
The Company calculated the value of the beneficial conversion feature to be approximately $1,679,000 of which approximately $728,000 was allocated to the beneficial conversion feature resulting in 100% discount to the convertible promissory notes. During the year ended December 31, 2007, the Company amortized approximately $312,000 of the discount related to the warrants and beneficial conversion feature to interest expense and $1,688,000 to loss on extinguishment, see below for discussion.
In addition, the Company entered into a registration rights agreement with the holders of the senior secured convertible notes agreement whereby the Company was required to file an initial registration statement with the Securities and Exchange Commission in order to register the resale of the maximum amount of common stock underlying the secured convertible notes within 120 days of the Exchange Agreement (December 19, 2007). The registration statement was filed with the SEC on December 19, 2007. The registration statement was then declared effective on March 27, 2008. The Company incurred no liquidated damages.
Debt Issuance Costs
During 2010, debt issuance costs of $123,800 were incurred, net of DOE reimbursement in connection with the Company submitting an application for a $250 million dollar DOE loan guarantee for the Company’s planned cellulosic ethanol biorefinery in Fulton, Mississippi. This compares to 2009 debt issuance costs of $150,000 incurred in connection with an application for a $58 million dollar DOE loan guarantee for the Company’s planned cellulosic ethanol biorefinery in Lancaster, California. These applications were filed under the Department of Energy (“DOE”) Program DE-FOA-0000140 (“DOE LGPO”), which provides federal loan guarantees for projects that employ innovative energy efficiency, renewable energy, and advanced transmission and distribution technologies.
In 2010, the Company was informed that the loan guarantee for the planned biorefinery in Lancaster, California, was rejected by the DOE due to a lack of definitive contracts for feedstock and off-take at the time of submittal of the loan guarantee for the Lancaster Biorefinery, as well as the fact that the Company was also pursuing a much larger project in Fulton, Mississippi. As a result of this DOE loan guarantee rejection for the Lancaster, California project, the Company wrote off $150,000 of capitalized debt issuance cost to expense in 2010.
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In February 2011, the Company received notice from the DOE LGPO staff that the Fulton Project’s application will not move forward until such time as the project has raised the remaining equity necessary for the completion of funding. As a result of this DOE loan guarantee rejection for the Fulton Project, the Company wrote off $123,800 of capitalized debt issuance cost to expense in 2010 as there were indicating factors the loan would not be approved prior to year end.
In August 2010, BlueFire submitted an application for a $250 million loan guarantee for the Fulton Project with the U.S. Department of Agriculture under Section 9003 of the 2008 Farm Bill (“USDA LG”). During 2011 debt issuance costs for the USDA loan guarantee totaled approximately $114,000, compared to $298,000 in fiscal 2010.
In October 2011, the Company was informed that the USDA would not move forward with the USDA LG; however, appeal processes were provided to afford the Company a chance to change certain aspects of the application. Because of the initial rejection, the Company expensed all related debt costs totaling approximately $309,000 to general and administrative in the statement of operations during the year ended December 31, 2011. As of December 31, 2012, the Company has abandoned the pursuit of the USDA Loan Guarantee program.
From the period of Inception through December 31, 2013, the Company has expensed $583,634 of previously capitalized debt issue costs due to unsuccessful debt financings.
Tarpon Bay Convertible Notes
Pursuant to a 3(a)10 transaction with Tarpon Bay Partners LLC (“Tarpon”), on November 4, 2013, the Company issued to Tarpon a convertible promissory note in the principal amount of $25,000 (the “Tarpon Initial Note”). Under the terms of the Tarpon Initial Note, the Company shall pay Tarpon $25,000 on the date of maturity which is January 30, 2014. This note is convertible by Tarpon into the Company’s Common Shares at a 50% discount to the lowest closing bid price for the Common Stock for the twenty (20) trading days ending on the trading day immediately before the conversion date.
Also pursuant to the the 3(a)10 transaction with Tarpon, on December 23, 2013, the Company issued a convertible promissory note in the principal amount of $50,000 in favor of Tarpon as a success fee (the “Tarpon Success Fee Note”). The Tarpon Success Fee Note is due on June 30, 2014. The Tarpon Success Fee Note is convertible into shares of the Company’s common stock at a conversion price for each share of Common Stock at a 50% discount from the lowest closing bid price in the twenty (20) trading days prior to the day that Tarpon requests conversion
Each of the above notes were issued without funds being received. Accordingly, the notes were issued with a full on-issuance discount that will be amortized over the term of the notes. During the year ended December 31, 2013, amortization of approximately $23,000 was recognized to interest expense related to the discounts on the notes.
Because the conversion price is variable and does not contain a floor, the conversion feature represents a derivative liability upon issuance. Accordingly, the Company calculated the derivative liability using the Black-Sholes pricing mode for the notes upon inception, resulting in a day one loss of approximately $96,000. The derivative liability was marked to market as of December 31, 2013 which resulted in a gain of approximately $9,000. The Company used the following assumptions as of December 31, 2013 and each of the notes inception:
| December 31, 2013 | Notes Inception | |||||||
| Annual dividend yield | 0 | % | 0 | % | ||||
| Expected life (years) | 0.08 | 0.17 - 0.52 | ||||||
| Risk-free interest rate | 0.02 | % | 0.05-0.10 | % | ||||
| Expected volatility | 159 | % | 159 | % | ||||
NOTE 6 - OUTSTANDING WARRANT LIABILITY
Effective January 1, 2009 we adopted the provisions of ASC 815 “Derivatives and Hedging” (ASC 815). ASC 815 applies to any freestanding financial instruments or embedded features that have the characteristics of a derivative and to any freestanding financial instruments that are potentially settled in an entity’s own common stock. As a result of adopting ASC 815, 6,962,963 of our issued and outstanding common stock purchase warrants previously treated as equity pursuant to the derivative treatment exemption were no longer afforded equity treatment. These warrants had an exercise price of $2.90; 5,962,563 warrants were set to expire in December 2012 and 1,000,000 expired August 2010 (See Note 7). As such, effective January 1, 2009 we reclassified the fair value of these common stock purchase warrants, which have exercise price reset features, from equity to liability status as if these warrants were treated as a derivative liability since their date of issue in August 2007 and December 2007. On January 1, 2009, we reclassified from additional paid-in capital, as a cumulative effect adjustment, $15.7 million to beginning retained earnings and $2.9 million to a long-term warrant liability to recognize the fair value of such warrants on such date.
The Company assesses the fair value of the warrants quarterly based on the Black-Scholes pricing model. See below for variables used in assessing the fair value.
In connection with the 5,962,963 warrants to expire in December 2012, which were later exercised by Court Order, the Company recognized gains of approximately $0, $1,000, and $2,516,000 from the change in fair value of these warrants during the years ended December 31, 2013 and 2012 and the period from Inception to December 31, 2013.
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On October 19, 2009, the Company cancelled 673,200 warrants for $220,000 in cash. These warrants were part of the 1,000,000 warrants issued in August 2007, and were set to expire August 2010. Prior to October 19, 2009, the warrants were previously accounted for as a derivative liability and marked to their fair value at each reporting period in 2009. The Company valued these warrants the day immediately preceding the cancellation date which indicated a gain on the changed in fair value of $208,562 and a remaining fair value of $73,282. Upon cancellation the remaining value was extinguished for payment of $220,000 in cash, resulting in a loss on extinguishment of $146,718. In connection with the remaining 326,800 warrants that expired in August 2010, the Company recognized a gain of $117,468 for the change in fair value of these warrants during the year ended December 31, 2009.
These common stock purchase warrants were initially issued in connection with two private offerings, our August 2007 issuance of 689,655 shares of common stock and our December 2007 issuance of 5,740,741 shares of common stock. The common stock purchase warrants were not issued with the intent of effectively hedging any future cash flow, fair value of any asset, liability or any net investment in a foreign operation. The warrants do not qualify for hedge accounting, and as such, changes in the fair value of these warrants are recognized in earnings until such time as the warrants are exercised or expire. These common stock purchase warrants do not trade in an active securities market, and as such, we estimate the fair value of these warrants using the Black-Scholes option pricing model using the below assumptions, for the year ended December 31, 2011. These all warrants either expired or were exercised in 2012 and accordingly no revaluation was necessary as of December 31, 2013 or 2012. See Note 9.
The Company issued 428,571 warrants to purchase common stock in connection with the Stock Purchase Agreement entered into on January 19, 2011 with Lincoln Park Capital, LLC (see Note 9). These warrants are accounted for as a liability under ASC 815. The Company assesses the fair value of the warrants quarterly based on the Black-Scholes pricing model. See below for variables used in assessing the fair value.
| December 31, 2013 | December 31, 2012 | |||||||
| Annual dividend yield | - | - | ||||||
| Expected life (years) | 2.05 | 3.05 | ||||||
| Risk-free interest rate | 0.38 | % | 0.72 | % | ||||
| Expected volatility | 150 | % | 117 | % | ||||
In connection with these warrants, the Company recognized a gain on the change in fair value of warrant liability of $22,542, $11,498, and $125,477 during the years ended December 31, 2013 and 2012, and for the period from Inception to December 31, 2013.
Expected volatility is based primarily on historical volatility. Historical volatility was computed using weekly pricing observations for recent periods that correspond to the expected life of the warrants. The Company believes this method produces an estimate that is representative of our expectations of future volatility over the expected term of these warrants. The Company currently has no reason to believe future volatility over the expected remaining life of these warrants is likely to differ materially from historical volatility. The expected life is based on the remaining term of the warrants. The risk-free interest rate is based on U.S. Treasury securities rates.
NOTE 7 - COMMITMENTS AND CONTINGENCIES
Employment Agreements
On June 27, 2006, the Company entered into employment agreements with three key employees. The employment agreements were for a period of three years, which expired in 2010, with prescribed percentage increases beginning in 2007 and could have been cancelled upon a written notice by either employee or employer (if certain employee acts of misconduct are committed). The total aggregate annual amount due under the employment agreements was approximately $586,000 per year. These contracts have not been renewed. Each of the executive officers are currently working for the Company on a month to month basis under the same terms.
On March 31, 2008, the Board of Directors of the Company replaced our Chief Financial Officer’s previously existing at-will Employment Agreement with an updated employment agreement, effective February 1, 2008, which terminated on May 31, 2009. The updated agreement contained the following material terms: (i) initial annual salary of $120,000, paid monthly; and (ii) standard employee benefits; (iii) limited termination provisions; (iv) rights to Invention provisions; and (v) confidentiality and non-compete provisions upon termination of employment. This employment agreement expired on May 31, 2009. Our now former Chief Financial Officer served until September 2011, at which time he entered into a month-to-month part-time consulting contract with the Company, for $7,500 per month, payable in cash or stock at the consultant’s option, at predetermined conversion rates. As of April 15, 2014, the Company has brought him back on as a part-time compliance consultant.
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Board of Director Arrangements
On July 23, 2009, the Company renewed all of its existing Directors’ appointment, issued 6,000 shares to each and paid $5,000 to the three outside members. Pursuant to the Board of Director agreements, the Company’s “in-house” board members (CEO and Vice-President) waived their annual cash compensation of $5,000. The value of the common stock granted was determined to be approximately $26,400 based on the fair market value of the Company’s common stock of $0.88 on the date of the grant. During the year ended December 31, 2009 the Company expensed approximately $41,400 related to these agreements.
On July 15, 2010, the Company renewed all of its existing Directors’ appointment, issued 6,000 shares to each and paid $5,000 to two of the three outside members. Pursuant to the Board of Director agreements, the Company’s “in-house” board members (CEO and Vice-President) waived their annual cash compensation of $5,000. The value of the common stock granted was determined to be approximately $7,200 based on the fair market value of the Company’s common stock of $0.24 on the date of the grant. During the year ended December 31, 2010, the Company expensed approximately $17,000 related to these agreements.
During the years ended December 31, 2012 and 2011, the Company accrued $10,000 each year related to the agreements for the two remaining board members. The Company also did not issue the shares issuable for compensation in 2011 to its Board Members, but later issued them in 2012.
On November 19, 2013, the Company renewed all of its existing Directors’ appointment, and accrued $5,000 to two of the three outside members. Pursuant to the Board of Director agreements, the Company’s “in-house” board members (CEO and Vice-President) waived their annual cash compensation of $5,000. As of April 15, 2014, the Company had not yet issued the 6,000 shares issuable for compensation in 2013 to each of its Board Members.
Investor Relations Agreements
On November 9, 2006, the Company entered into an agreement with a consultant. Under the terms of the agreement, the Company was to receive investor relations and support services in exchange for a monthly fee of $7,500, 150,000 shares of common stock, warrants to purchase 200,000 shares of common stock at $5.00 per share, expiring in five years, and the reimbursement of certain travel expenses. The common stock and warrants vested in equal amounts on November 9, 2006, February 1, 2007, April 1, 2007 and June 1, 2007.
At December 31, 2006, the consultant was vested in 37,500 shares of common stock. The shares were valued at $112,000 based upon the closing market price of the Company’s common stock on the vesting date. The warrants were valued on the vesting date at $100,254 based on the Black-Scholes option pricing model using the following assumptions: volatility of 88%, expected life of five years, risk free interest rate of 4.75% and no dividends. The value of the common stock and warrants was recorded in general and administrative expense on the accompanying consolidated statement of operations during the year ended December 31, 2006.
The Company revalued the shares on February 1, 2007, vesting date, and recorded an additional adjustment of $138,875. On February 1, 2007 the warrants were revalued at $4.70 per share based on the Black-Scholes option pricing method using the following assumptions: volatility of 102%, expected life of five years, risk free interest rate of 4.96% and no dividends. The Company recorded an additional expense of $158,118 related to these vested warrants during the year ended December 31, 2007.
On March 31, 2007, the fair value of the vested common stock issuable under the contract based on the closing market price of the Company’s common stock was $7.18 per share and thus expensed $269,250. As of March 31, 2007, the Company estimated the fair value of the vested warrants issuable under the contract to be $6.11 per share. The warrants were valued on March 31, 2007 based on the Black-Scholes option pricing model using the following assumptions: volatility of 114%, expected life of five years, risk free interest rate of 4.58% and no dividends. The Company recorded an additional estimated expense of approximately $305,000 related to the remaining unvested warrants during the year ended December 31, 2007.
The Company revalued the shares on June 1, 2007, vesting date, and recorded an additional adjustment of $234,375. On June 1, 2007 the warrants were revalued at $5.40 per share based on the Black-Scholes option pricing method using the following assumptions: volatility of 129%, expected life of four and a half years, risk free interest rate of 4.97% and no dividends. The Company recorded an additional expense of $269,839 related to these vested warrants during the year ended December 31, 2007.
On November 21, 2011, these warrants expired without exercise.
| F-42 |
Fulton Project Lease
On July 20, 2010, the Company entered into a 30 year lease agreement with Itawamba County, Mississippi for the purpose of the development, construction, and operation of the Fulton Project. At the end of the primary 30 year lease term, the Company shall have the right for two additional 30 year terms. The current lease rate is computed based on a per acre rate per month that is approximately $10,300 per month. The lease stipulates the lease rate is to be reduced at the time of the construction start by a Property Cost Reduction Formula which can substantially reduce the monthly lease costs. The lease rate shall be adjusted every five years to the Consumer Price Index. The below payout schedule does not contemplate reductions available upon the commencement of construction and commercial operations.
Future annual minimum lease payments under the above lease agreements, at December 31, 2013 are as follows:
| Years ending | |||||
| December 31, | |||||
| 2014 | $ | 123,504 | |||
| 2015 | 125,976 | ||||
| 2016 | 125,976 | ||||
| 2017 | 125,976 | ||||
| 2018 | 125,976 | ||||
| Thereafter | 2,775,520 | ||||
| Total | $ | 3,402,928 | |||
Rent expense under non-cancellable leases was approximately $123,000, $123,000, and $431,000 during the years ended December 31, 2013 and 2012 and the period from Inception to December 31, 2013, respectively. As of December 31, 2013 and 2012, $233,267, and $205,840 of the monthly lease payments were included in accounts payable on the accompanying balance sheets. During 2013 the County of Itawamba forgave approximately $96,000 in lease payments. As of December 31, 2013, the Company was in technical default of the lease due to non-payment. Subsequent to December 31,2013 the Company made lease payments of approximately $140,000. In addition subsequent to year end, the County of Itawamba gave the Company credit for past site preparation reimbursements. Accordingly the remaining balance due was relieved and the Company is no longer deemed to be in default.
Legal Proceedings
On February 26, 2013, the Company received notice that the Orange County Superior Court (the “Court”) issued a Minute Order (the “Order”) in connection with certain shareholders’ claims of breach of contract and declaratory relief related to 5,740,741 warrants (the “Warrants”) issued by the Company.
Pursuant to the Order, the Court ruled in favor of the shareholders on the two claims, finding that the Warrants contain certain anti-dilution protective provisions which provide for the re-adjustment of the exercise price of such Warrants upon certain events and that such exercise price per share of the Warrants must be decreased to $0.00.
The Company has considered these warrants exercised based on the notice of exercise received from the respective shareholders in December 2012.
On March 7, 2013, the shareholders making claims provided their request for judgment based on the Order received, which has been initially refused by the Court via a second minute order received by the Company on April 8, 2013. On April 15, 2013, the Company’s counsel submitted a proposed judgment to the Court as per the Courts request, which followed the Order and provided for no monetary damages against the Company. On May 14, 2013, this proposed judgment was approved by the Court (“Judgment”).
On June 20, 2013, the Company filed motions to vacate the Judgment, a motion for a new trial, and a motion to stay enforcement of the Judgment, all of which were denied on June 27, 2013.
On August 2, 2013, pursuant to the exercise notice of the Warrants, and the Order, the Company issued 5,740,741 shares to certain shareholders. See Note 9 for additional information.
Other than the above, we are currently not involved in litigation that we believe will have a materially adverse effect on our financial condition or results of operations. There is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of our company or any of our subsidiaries, threatened against or affecting our company, our common stock, any of our subsidiaries or of our company’s or our company’s subsidiaries’ officers or directors in their capacities as such, in which an adverse decision is expected to have a material adverse effect.
| F-43 |
NOTE 8 - REDEEMABLE NONCONTROLLING INTEREST
On December 23, 2010, the Company sold a one percent (1%) membership interest in its operating subsidiary, BlueFire Fulton Renewable Energy, LLC (“BlueFire Fulton” or the “Fulton Project”), to an accredited investor for a purchase price of $750,000 (“Purchase Price”). The Company maintains a 99% ownership interest in the Fulton Project. In addition, the investor received a right to require the Company to redeem the 1% interest for $862,500, or any pro-rata amount thereon. The redemption is based upon future contingent events based upon obtaining financing for the construction of the Fulton Project. The third party equity interests is reflected as redeemable noncontrolling interests in the Company’s consolidated financial statements outside of equity. The Company accreted the redeemable noncontrolling interest for the total redemption price of $862,500 through the forecasted financial close, estimated to be the end of the third quarter of 2011. On October 5, 2011, the Company received a rejection letter for the USDA loan guarantee, on which was the financing the Company was basing estimates. During the years ended December 31, 2013 and 2012 and the period from Inception to December 31, 2013, the Company recognized the accretion of the redeemable noncontrolling interest of $0, $0, and $112,500, respectively which was charged to additional paid-in capital.
Net income attributable to the redeemable noncontrolling interest during the year ended December 31, 2013 was $6,099 which netted against the value of the redeemable non-controlling interest in temporary equity. The allocation of net income was presented on the statement of operations.
NOTE 9 - STOCKHOLDERS’ DEFICIT
Stock Purchase Agreement
On January 19, 2011, the Company signed a $10 million purchase agreement (the “Purchase Agreement”) with Lincoln Park Capital Fund, LLC (“LPC”), an Illinois limited liability company. The Company also entered into a registration rights agreement with LPC whereby we agreed to file a registration statement related to the transaction with the U.S. Securities & Exchange Commission (“SEC”) covering the shares that may be issued to LPC under the Purchase Agreement within ten days of the agreement. Although under the Purchase Agreement the registration statement was to be declared effective by March 31, 2011, LPC did not terminate the Purchase Agreement. The registration statement was declared effective on May 10, 2011, without any penalty.
After the SEC had declared effective the registration statement related to the transaction, the Company has the right, in their sole discretion, over a 30-month period to sell the shares of common stock to LPC in amounts from $35,000 and up to $500,000 per sale, depending on the Company’s stock price as set forth in the Purchase Agreement, up to the aggregate commitment of $10 million.
There are no upper limits to the price LPC may pay to purchase our common stock and the purchase price of the shares related to the $10 million funding will be based on the prevailing market prices of the Company’s shares immediately preceding the time of sales without any fixed discount, and the Company controls the timing and amount of any future sales, if any, of shares to LPC. LPC shall not have the right or the obligation to purchase any shares of our common stock on any business day that the price of our common stock is below $0.15. The Purchase Agreement contains customary representations, warranties, covenants, closing conditions and indemnification and termination provisions by, among and for the benefit of the parties. LPC has covenanted not to cause or engage in any manner whatsoever, any direct or indirect short selling or hedging of the Company’s shares of common stock. The Purchase Agreement may be terminated by us at any time at our discretion without any cost to us. Except for a limitation on variable priced financings, there are no financial or business covenants, restrictions on future fundings, rights of first refusal, participation rights, penalties or liquidated damages in the agreement.
Upon signing the Purchase Agreement, BlueFire received $150,000 from LPC as an initial purchase under the $10 million commitment in exchange for 428,571 shares of our common stock and warrants to purchase 428,571 shares of our common stock at an exercise price of $0.55 per share. The warrants contain a ratchet provision in which the exercise price will be adjusted based on future issuances of common stock, excluding certain issuances; if issuances are at prices lower than the current exercise price (see Note 6). The warrants have an expiration date of January 2016.
| F-44 |
Concurrently, in consideration for entering into the $10 million agreement, we issued to LPC 600,000 shares of our common stock as a commitment fee and shall issue up to 600,000 more shares pro rata as LPC purchases up to the remaining $9.85 million.
During the year ended December 31, 2011, the Company drew $200,000 under the Purchase Agreement and issued 1,119,377 shares of common stock, including 12,183 commitment shares that were earned on a pro-rata basis as described above.
During the year ended December 31, 2012, the Company drew approximately $35,000 under the Purchase Agreement and issued 235,465 shares of common stock, including 2,132 commitment shares that were earned on a pro-rata basis as described above. The Company still has approximately $9,615,000 available on the Purchase Agreement as of December 31, 2012, assuming the Company can meet the requirements contained within the Purchase Agreement.
During the year ended December 31, 2013, the Company did not draw any amount under the Purchase Agreement and issued no shares of common stock. The Purchase Agreement expired in July 2013.
The Company accounted for the 428,571 common stock warrants with ratchet provisions in accordance with ASC 815 whereby the warrants require liability classification. As the warrants are considered a cost of permanent equity, the value of the warrants netted against the equity recognized in additional paid-in capital. See Note 6 for valuation of warrants. The 600,000 shares of common stock issued in connection with the agreement were also considered a cost of permanent equity. However, because the value of the shares both add to additional paid-in capital for the value of shares issued and net against it as a cost of capital, they were recorded at par value with a corresponding reduction to additional-paid-in capital.
The remaining 600,000 shares that were to be issued pro-rata as the Company draws on the Purchase Agreement were also a cost of capital and are recorded as earned by LPC. The value of the shares both add to additional paid-in capital for the value of shares issued and net against it as a cost of capital; accordingly, they are recorded at par value with a corresponding reduction to additional-paid-in capital when earned.
Amended and Restated 2006 Incentive and Nonstatutory Stock Option Plan
On December 14, 2006, the Company established the 2006 incentive and nonstatutory stock option plan (the “Plan”). The Plan is intended to further the growth and financial success of the Company by providing additional incentives to selected employees, directors, and consultants. Stock options granted under the Plan may be either “Incentive Stock Options” or “Nonstatutory Options” at the discretion of the Board of Directors. The total number of shares of Stock which may be purchased through exercise of Options granted under this Plan shall not exceed ten million (10,000,000) shares, they become exercisable over a period of no longer than five (5) years and no less than 20% of the shares covered thereby shall become exercisable annually.
On October 16, 2007, the Board reviewed the Plan. As such, it determined that the Plan was to be used as a comprehensive equity incentive program for which the Board serves as the Plan administrator; and therefore added the ability to grant restricted stock awards under the Plan.
Under the amended and restated Plan, an eligible person in the Company’s service may acquire a proprietary interest in the Company in the form of shares or an option to purchase shares of the Company’s common stock. The amendment includes certain previously granted restricted stock awards as having been issued under the amended and restated Plan. As of December 31, 2013, 3,307,159 options and 1,747,111 shares have been issued under the plan. As of December 31, 2013, 4,945,730 shares are still issuable under the Plan.
Stock Options
On December 14, 2006, the Company granted options to purchase 1,990,000 shares of common stock to various employees and consultants having a $2.00 exercise price. The value of the options granted was determined to be approximately $4,900,000 based on the Black-Scholes option pricing model using the following assumptions: volatility of 99%, expected life of five (5) years, risk free interest rate of 4.73%, market price per share of $3.05, and no dividends. The Company expensed the value of the options over the vesting period of two years for the employees. For non-employees the Company revalued the fair market value of the options at each reporting period under the provisions of ASC 505. On December 14, 2011, 1,970,000 of these options expired while 20,000 were exercised in a prior year.
| F-45 |
On December 20, 2007, the Company granted options to purchase 1,038,750 shares of the Company’s common stock to various employees and consultants having an exercise price of $3.20 per share. In addition, on the same date, the Company granted its President and Chief Executive Officer 250,000 and 28,409 options to purchase shares of the Company’s common stock having an exercise price of $3.20 and $3.52, respectively. The value of the options granted was determined to be approximately $3,482,000 based on the Black-Scholes option pricing model using the following assumptions: volatility of 122.9%, expected life of five (5) years, risk free interest rate of 3.09%, market price per share of $3.20, and no dividends. Of the total 1,317,159 options granted on December 20, 2007, 739,659 vested immediately and 27,500 issued to consultants vested monthly over a one year period, and 550,000 of the options vested upon two contingent future events. Management’s belief at the time of the grant was that the events were probable to occur and were within their control, and thus accounted for the remaining vesting under ASC 718 by straight-lining the vesting through the expected date on which the future events were to occur. At the time, management believed that future date was June 30, 2008. This determination was based on the fact that the Company appeared to be on track to receive the permits and the related funding was available. In June 2008, the Company determined that the June 30, 2008 estimate would not be met due to delays in receiving the necessary permits and thus modified the date to September 30, 2008. In September 2008, the Company determined that the September 30, 2008 deadline would not be met due to the difficulty in obtaining financing due to the pending collapse of the capital markets. At that point the remaining unamortized portion was immaterial and thus, the Company expensed the remaining amounts. Although the options were expensed according to ASC 718, the recipients are still not fully vested as the triggering events have not yet occurred. The original grant date fair value of the 550,000 unvested options was $2.70. As of December 20, 2012, all 1,317,159 of these options, less 20,000 that were exercised, have expired.
The Company accounts for the stock options to consultants under the provisions of ASC 505. In accordance with ASC 505, the options awarded to consultants under the 2006 and 2007 Stock Option Grant were re-valued periodically using the Black-Scholes option pricing model over the vesting period. As of December 31, 2011 stock options to consultants were fully vested and expensed. As of December 31, 2012 all options remaining expired without exercise.
In connection with the Company’s 2007 and 2006 stock option awards, during the years ended December 31, 2013, and 2012 and for the period from March 28, 2006 (Inception) to December 31, 2013, the Company recognized stock based compensation, including consultants, of approximately $0, $0, and $4,487,000 to general and administrative expenses and $0, $0, and $4,368,000 to project development expenses, respectively. There is no additional future compensation expense to record at December 31, 2013 based on previous awards.
A summary of the status of the stock option grants under the Plan as of the years ended December 31, 2007, 2008, 2009, 2010, 2011 2012, and 2013 and changes during this period are presented as follows:
| Options | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (Years) | ||||||||||
| Outstanding January 1, 2007 | 1,990,000 | $ | 2.00 | |||||||||
| Granted during the year | 1,317,159 | 3.21 | ||||||||||
| Exercised during the year | (20,000 | ) | 2.00 | |||||||||
| Outstanding December 31, 2007 | 3,287,159 | $ | 2.48 | 4.40 | ||||||||
| Granted during the year | - | - | ||||||||||
| Exercised during the year | - | - | ||||||||||
| Outstanding December 31, 2008 | 3,287,159 | $ | 2.48 | 3.40 | ||||||||
| Granted during the year | - | - | ||||||||||
| Exercised during the year | - | - | ||||||||||
| Outstanding December 31, 2009 | 3,287,159 | $ | 2.48 | 2.40 | ||||||||
| Granted during the year | - | - | ||||||||||
| Exercised during the year | - | - | ||||||||||
| Outstanding December 31, 2010 | 3,287,159 | $ | 2.48 | 1.40 | ||||||||
| Granted during the year | - | - | ||||||||||
| Exercised during the year | - | - | ||||||||||
| Expired during the year | (2,057,500 | ) | 2.00 | |||||||||
| Outstanding December 31, 2011 | 1,229,659 | $ | 3.21 | 1.00 | ||||||||
| Granted during the year | - | - | ||||||||||
| Exercised during the year | - | - | ||||||||||
| Expired during the year | (1,229,659 | ) | 3.21 | |||||||||
| Outstanding December 31, 2012 | - | $ | - | - | ||||||||
| Exercised during the year | - | - | ||||||||||
| Expired during the year | - | - | ||||||||||
| Outstanding December 31, 2013 | - | $ | - | - | ||||||||
| F-46 |
There were no amounts received for the exercise of stock options in 2013 or 2012.
Private Offerings
On January 5, 2007, the Company completed a private offering of its stock, and entered into subscription agreements with four accredited investors. In this offering, the Company sold an aggregate of 278,500 shares of the Company’s common stock at a price of $2.00 per share for total proceeds of $557,000. The shares of common stock were offered and sold to the investors in private placement transactions made in reliance upon exemptions from registration pursuant to Section 4(2) under the Securities Act of 1933. In addition, the Company paid $12,500 in cash and issued 6,250 shares of their common stock as a finder’s fee.
On December 3, 2007 and December 14, 2007, the Company issued an aggregate of 5,740,741 shares of common stock at $2.70 per share and issued warrants to purchase 5,740,741 shares of common stock for gross proceeds of $15,500,000. The warrants have an exercise price of $2.90 per share and expire five years from the date of issuance. See Note 7 for additional information on these warrants.
The original value of the warrants was determined to be approximately $15,968,455 based on the Black-Scholes option pricing model using the following assumptions: volatility of 122.9%, expected life of five (5) years, risk free interest rate of 3.28%, market price per share of $3.26, and no dividends. The relative fair value of the warrants did not have an impact on the financial statements as they were issued in connection with a capital raise and recorded as additional paid-in capital.
The warrants were subject to “full-ratchet” anti-dilution protection in the event the Company (other than excluded issuances, as defined) issued any additional shares of stock, stock options, warrants or securities exchangeable into common stock at a price of less than $2.90 per share. If the Company issued securities for less $2.90 per share then the exercise price for the warrants shall be adjusted to equal the lower price. See Note 6, for additional information regarding these warrants.
In connection with the capital raise, the Company paid $1,050,000 to placement agents, $90,000 in legal fees and issued warrants for the purchase of 222,222 shares of common stock. The warrants were valued at $618,133 based on the Black-Scholes assumptions above as recorded as a cost of the capital raised by the Company.
Issuance of Common Stock related to Employment Agreements
In January 2007, the Company issued 10,000 shares of common stock to an employee in connection with an employment agreement. The shares were valued on the initial date of employment at $40,000 based on the closing market of the Company’s common stock on that date.
On February 12, 2007, the Company entered into an employment agreement with a key employee, and simultaneously entered into a consulting agreement with an entity controlled by such employee; both agreements were effective March 16, 2007. Under the terms of the consulting agreement, the consulting entity received 50,000 restricted shares of the Company’s common stock. The common stock was valued at approximately $275,000 based on the closing market price of the Company’s common stock on the date of the agreement. The shares vested in equal quarterly installments on February 12, 2007, June 1, December 1, and December 1, 2007. The Company amortized the entire fair value of the common stock of $275,000 over the vesting period during the year ended December 31, 2007. No additional issuances were made in 2008, 2009, 2010, 2011, 2013 and 2013.
| F-47 |
Shares Issued for Services
Throughout the year ended December 31, 2013, the Company issued 75,000 shares of common stock for legal services provided, which compares to 389,752 shares for the same services in 2012. In connection with this issuance the Company recorded approximately $9,100 in legal expense which is included in general and administrative expense, which compares to approximately $83,000 in 2012.
Throughout the year ended December 31, 2013, the company issued no shares of common stock for consulting services provided, which compares to 13,889 shares for consulting services in 2012. In connection, the Company recorded approximately zero in consulting expenses, which compares to approximately $2,100 in 2012.
Shares Issued for Settlement of Accrued Expenses
On December 27, 2012, the Company issued 527,980 shares of common stock in lieu of cash for back rent owed of $93,528. In connection with this issuance the Company recorded a gain on the settlement of accrued rent expenses of $24,891 which is included in the accompanying statement of operations.
On October 14, 2013, the Company issued 9,847,501 shares of common stock in lieu of cash for back pay owed to Company employees of approximately $123,000. In connection with this issuance the Company recorded a gain on the settlement of accrued payroll expenses of $24,619 which is included in the accompanying statement of operations.
Private Placement Agreements
During the year ended December 31, 2007, the Company entered into various placement agent agreements, whereby payments are only ultimately due if capital is raised. Nothing has been paid on these, other than as previously disclosed. As of December 31, 2013, all of these placement agent agreements have expired.
Warrants Issued
See Notes 5, 6, 9 and 10 for warrants issued with debt and equity financings.
On August 27, 2009, the Company entered into a six month consulting agreement. Pursuant to the agreement, the Company granted the consultant a warrant to purchase 100,000 shares of common stock at an exercise price of $3.00 per share. The value of the warrant issued was determined to be approximately $8,300 based on the Black-Scholes option pricing model using the following assumptions: volatility of 108%, expected life of one (1) year, risk free interest rate of 2.48%, market price per share of $0.80, and no dividends. The value of the warrants was expensed during the year ended December 31, 2009. These warrants expired on August 27, 2010.
On December 15, 2010, the Company issued to Arnold Klann, a Director and Executive at the Company, a warrant to purchase 500,000 shares of common stock at an exercise price of $0.50 per share pursuant to a loan agreement. See Note 10.
On January 19, 2011, the Company issued to Lincoln Park Capital, a warrant to purchase 428,571 shares of common stock at an exercise price of $0.55 per share pursuant to a stock purchase agreement. See Note 9.
Warrants Cancelled
On October 19, 2009, the Company cancelled 673,200 warrants for $220,000 in cash. (see Note 6).
Warrants Exercised
Some of our warrants contain a provision in which the exercise price is to be adjusted for future issuances of common stock at prices lower than their current exercise price.
In 2012, certain shareholders’ owning an aggregate of 5,740,741 warrants made claims of the Company that the exercise price of their warrants should have been adjusted due to a certain issuance of common shares by the Company. The Company believed that said issuance would not trigger adjustment based on the terms of the respective agreements.
| F-48 |
On December 4, 2012, these shareholders presented exercise forms to the Company to exercise all 5,740,741 warrants for a like amount of common shares. The warrants were exercised at $0.00, which is the amount the shareholders’ believed the new exercise price should be based the ratchet provision and their claims.
On February 26, 2013, the Company received notice that the Court issued an Order in connection with these certain shareholders’ claims of breach of contract and declaratory relief related to 5,740,741 warrants issued by the Company (see Note 7).
Pursuant to the Order, the Court ruled in favor of the shareholders on the two claims, finding that the Warrants contain certain anti-dilution protective provisions which provide for the re-adjustment of the exercise price of such Warrants upon certain events and that such exercise price per share of the Warrants must be decreased to $0.00.
The Company has considered these warrants exercised based on the notice of exercise received from the respective shareholders in December 2012. The Company determined, that based on the Order by the Court a ratchet event had taken place based on the Order and claims made. The Company used December 4, 2012 as the date in which the new terms were considered to be in force based on the Shareholders’ notice to exercise on that date and the Courts subsequent Order that allowed the Shareholders to do so.
As such, the modification of the exercise price was treated as an extinguishment of the warrants under the previous terms, with a revaluation of the warrants with new terms. As such, the warrant liability was valued immediately before extinguishment with the gain/loss recognized through earnings and remaining value reclassified to equity. Because there was only approximately one week of remaining life under the unmodified terms and because the previous exercise price was out of the money ($2.90) compared to the price of our common stock on the day of extinguishment ($0.14), the warrant value upon extinguishment was considered to be near zero based on a Black-Scholes calculation, which also used volatility of 104.2% and risk-free rate of 0.07%. Because the warrant liability was also valued near zero as of December 31, 2012, there was no value transferred to equity.
Warrants Outstanding
A summary of the status of the warrants for the years ended December 31, 2007, 2008, 2009, 2010, 2011, 2012, and 2013 changes during the periods is presented as follows:
| Warrants | Weighted Average Exercise Price | Weighted Average | ||||||||||
| Outstanding January 1, 2007 (with 50,000 warrants exercisable) | 200,000 | $ | 5.00 | |||||||||
| Issued during the year | 7,186,694 | 2.96 | ||||||||||
| Outstanding and exercisable at December 31, 2007 | 7,386,694 | $ | 3.02 | 4.60 | ||||||||
| Issued during the year | - | - | ||||||||||
| Outstanding and exercisable at December 31, 2008 | 7,386,694 | $ | 3.02 | 3.60 | ||||||||
| Issued during the year | 100,000 | 3.00 | ||||||||||
| Cancelled during the year | (673,200 | ) | 2.90 | |||||||||
| Outstanding and exercisable at December 31, 2009 | 6,813,494 | $ | 3.03 | 2.76 | ||||||||
| Issued during the year | 500,000 | 0.50 | ||||||||||
| Cancelled during the year | (426,800 | ) | 2.92 | |||||||||
| Outstanding and exercisable at December 31, 2010 | 6,886,694 | $ | 2.85 | 1.98 | ||||||||
| Issued during the year | 428,581 | 0.55 | ||||||||||
| Expired during the year | (200,000 | ) | 5.00 | |||||||||
| Outstanding and exercisable at December 31, 2011 | 7,115,275 | $ | 2.65 | 1.20 | ||||||||
| Issued during the year | - | - | ||||||||||
| Exercised during the year | (5,740,741 | ) | 0.00 | |||||||||
| Expired during the year | (445,963 | ) | 0.28 | |||||||||
| Outstanding and exercisable at December 31, 2012 | 928,571 | 0.52 | 1.92 | |||||||||
| Issued during the year | - | |||||||||||
| Exercised during the year | - | - | ||||||||||
| Expired during the year | (500,000 | ) | 0.50 | |||||||||
| Outstanding and exercisable at December 31, 2012 | 428,571 | $ | 0.55 | 2.04 | ||||||||
| F-49 |
Equity Facility Agreement
On March 28, 2012, BlueFire finalized a committed equity facility (the “Equity Facility”) with TCA Global Credit Master Fund, LP, a Cayman Islands limited partnership (“TCA”), whereby the parties entered into (i) a committed equity facility agreement (the “Equity Agreement”) and (ii) a registration rights agreement (the “Registration Rights Agreement”). Pursuant to the terms of the Equity Agreement, for a period of twenty-four (24) months commencing on the date of effectiveness of the Registration Statement (as defined below), TCA shall commit to purchase up to $2,000,000 of BlueFire’s common stock, par value $0.001 per share (the “Shares”), pursuant to Advances (as defined below), covering the Registrable Securities (as defined below). The purchase price of the Shares under the Equity Agreement is equal to ninety-five percent (95%) of the lowest daily volume weighted average price of BlueFire’s common stock during the five (5) consecutive trading days after BlueFire delivers to TCA an Advance notice in writing requiring TCA to advance funds (an “Advance”) to BlueFire, subject to the terms of the Equity Agreement. The “Registrable Securities” include (i) the Shares; and (ii) any securities issued or issuable with respect to the Shares by way of exchange, stock dividend or stock split or in connection with a combination of shares, recapitalization, merger, consolidation or other reorganization or otherwise. As further consideration for TCA entering into and structuring the Equity Facility, BlueFire shall pay to TCA a fee by issuing to TCA that number of shares of BlueFire’s common stock that equal a dollar amount of $110,000 (the “Facility Fee Shares”). It is the intention of BlueFire and TCA that the value of the Facility Fee Shares shall equal $110,000. In the event the value of the Facility Fee Shares issued to TCA does not equal $110,000 after a nine month evaluation date, the Equity Agreement provides for an adjustment provision allowing for necessary action (either the issuance of additional shares to TCA or the return of shares previously issued to TCA to BlueFire’s treasury) to adjust the number of Facility Fee Shares issued. BlueFire also entered into the Registration Rights Agreement with TCA. Pursuant to the terms of the Registration Rights Agreement, BlueFire was obligated to file a registration statement (the “Registration Statement”) with the U.S. Securities and Exchange Commission (the “SEC’) to cover the Registrable Securities within 45 days of closing. BlueFire must use its commercially reasonable efforts to cause the Registration Statement to be declared effective by the SEC by a date that is no later than 90 days following closing. Penalty for not getting the registration statement effective is capped at $20,000. Although no assurances can be made, Management does not believe penalties will be incurred as the delay in registration was caused by the terms of the agreement, which were substantially provided by and approved by TCA.
In connection with the issuance of approximately 280,000 shares for the $110,000 facility fee as described above, the Company capitalized said amount within deferred financings costs in the accompanying balance sheet as of March 31, 2012, along with other costs incurred as part Equity Facility and the Convertible Note described below. Additional costs related to the Equity Facility and paid from the funds of the Convertible Note described below, were approximately $60,000. Aggregate costs of the Equity Facility were $170,000. Because these costs were to access the Equity Facility, earned by TCA regardless of the Company drawing on the Equity Facility, and not part of a funding, they are treated akin to debt costs The deferred financings costs related to the Equity Facility were to be amortized over one (1) year on a straight-line basis. The Company believed the accelerated amortization, which is less than the two year Equity Facility term, was appropriate based on substantial doubt about the Company’s ability to continue as a going concern. As of December 31, 2012 and through the date of this filing, the ability to draw on the equity facility was restricted due to the delay in getting the related registration statement effective. Because the Company is unable to draw on the equity facility, and because the effectiveness of the registration statement is uncertain through the date of this filing, the Company determined that the remaining deferred financing costs of approximately $27,000 should be written off as of December 31, 2012.
On March 28, 2012, BlueFire entered into a security agreement (the “Security Agreement”) TCA, related to a $300,000 convertible promissory note issued by BlueFire in favor of TCA (the “Convertible Note”). The Security Agreement grants to TCA a continuing, first priority security interest in all of BlueFire’s assets, wheresoever located and whether now existing or hereafter arising or acquired. On March 28, 2012, BlueFire issued the Convertible Note in favor of TCA. The maturity date of the Convertible Note is March 28, 2013, and the Convertible Note bears interest at a rate of twelve percent (12%) per annum. The Convertible Note is convertible into shares of BlueFire’s common stock at a price equal to ninety-five percent (95%) of the lowest daily volume weighted average price of BlueFire’s common stock during the five (5) trading days immediately prior to the date of conversion. The Convertible Note may be prepaid in whole or in part at BlueFire’s option without penalty. The proceeds received by the Company under the purchase agreement are expected to be used for general working capital purposes which include costs expected to be reimbursed under the DOE cost share program.
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In connection with the Convertible Note, approximately $93,000 was withheld and immediately disbursed to cover costs of the Convertible Note and Equity Facility described above. The costs related to the Convertible Note were $24,800 which are capitalized as deferred financing costs in the accompanying balance sheet as of December 31, 2012; and will be amortized on a straight-line basis over the term of the Convertible Note. In addition, $7,500 was dispersed to cover second quarter 2012 legal fees. After said costs, the Company received approximately $207,000 in cash from the Convertible Note.
This note contains an embedded conversion feature whereby the holder can convert the note at a discount to the fair value of the Company’s common stock price. Based on applicable guidance the embedded conversion feature is considered a derivative instrument and bifurcated. This liability is recorded on the face of the financial statements as “derivative liability”, and must be revalued each reporting period. During the years ended December 31, 2013, and 2012, the Company amortized deferred financing costs and recorded as expenses approximately $21,000 and $63,000, respectively, related to the convertible note financing costs.
The Company discounted the note by the fair market value of the derivative liability upon inception of the note. This discount will be accreted back to the face value of the note over the note term. During the years ended December 31, 2013, and 2012, the Company recorded approximately $39,000 and $123,000, respectively, in discount amortization and approximately $66,000 and $27,000, respectively, in interest expense related to the note.
Using the Black-Scholes pricing model, with the inputs listed below, we calculated the fair market value of the conversion feature to be approximately $162,000 at the notes inception. The Company revalued the conversion feature at December 31, 2012, and December 31, 2013, in the same manner with the inputs listed below and recognized a gain on the change in fair value of the derivative liability on the accompanying statement of operations for the periods ending December 31, 2013, and 2012, of approximately $44,000, and $102,000, respectively.
| December 31, 2013 | December 31, 2012 | March 28, 2012 | ||||||||||
| Annual dividend yield | - | - | - | |||||||||
| Expected life (years) | 0.00 | 0.24 | 1.00 | |||||||||
| Risk-free interest rate | 0.01 | % | 0.16 | % | 0.19 | % | ||||||
| Expected volatility | 159 | % | 77 | % | 119 | % | ||||||
Liability Purchase Agreement
On December 9, 2013, The Circuit Court of the Second Judicial Circuit in and for Leon County, Florida (the “Court”), entered an order (the “Order”) approving, among other things, the fairness of the terms and conditions of an exchange pursuant to Section 3(a)(10) of the Securities Act of 1933, in accordance with a stipulation of settlement (the “Settlement Agreement”) between the Company, and Tarpon Bay Partners, LLC, a Florida limited liability company (“Tarpon”), in the matter entitled Tarpon Bay Partners, LLC v. BlueFire Renewables, Inc., Case No. 2013-CA-2975 (the “Action”). Tarpon commenced the Action against the Company on November 21, 2013 to recover an aggregate of $583,710 of past-due accounts payable of the Company, which Tarpon had purchased from certain creditors of the Company pursuant to the terms of separate receivable purchase agreements between Tarpon and each of such vendors (the “Assigned Accounts”), plus fees and costs (the “Claim”). The Assigned Accounts relate to certain legal, accounting, financial services, and the repayment of aged debt. The Order provides for the full and final settlement of the Claim and the Action. The Settlement Agreement became effective and binding upon the Company and Tarpon upon execution of the Order by the Court on December 9, 2013. Notwithstanding anything to the contrary in the Stipulation, the number of shares beneficially owned by Tarpon will not exceed 9.99% of the Company’s Common Stock. In connection with the Settlement Agreement, the Company relied on the exemption from registration provided by Section 3(a)(10) under the Securities Act.
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Pursuant to the terms of the Settlement Agreement approved by the Order, the Company shall issue and deliver to Tarpon shares (the “Settlement Shares”) of the Company’s Common Stock in one or more tranches as necessary, and subject to adjustment and ownership limitations, sufficient to generate proceeds such that the aggregate Remittance Amount (as defined in the Settlement Agreement) equals the Claim. In addition, pursuant to the terms of the Settlement Agreement, the Company issued to Tarpon a convertible promissory note in the principal amount of $25,000 (the “Tarpon Initial Note”). Under the terms of the Tarpon Initial Note, the Company shall pay Tarpon $25,000 on the date of maturity which is January 30, 2014. This Note is convertible by Tarpon into the Company’s Common Shares (See Note 5).
Pursuant to the fairness hearing, the Order, and the Company’s agreement with Tarpon, on December 23, 2013, the Company issued the Tarpon Success Fee Note in the principal amount of $50,000 in favor of Tarpon as a commitment fee. The Tarpon Success Fee Note is due on June 30, 2014. The Tarpon Success Fee Note is convertible into shares of the Company’s common stock (See Note 5).
In connection with the settlement, on December 18, 2013 the Company issued 6,619,835 shares of Common Stock to Tarpon in which gross proceeds of $29,802 were generated from the sale of the Common Stock. In connection with the transaction, Tarpon received fees of $7,450 and providing payments of $22,352 to settle outstanding vendor payables. Subsequent to December 31, 2013, the Company issued Tarpon 61,010,000 shares of Common Stock. The Company cannot reasonably estimate the amount of proceeds Tarpon expects to receive from the sale of these shares which will be used to satisfy the liabilities. Any shares not used by Tarpon are subject to return to the Company. Accordingly, the Company accounts for these shares as issued but not outstanding until the shares have been sold by Tarpon and the proceeds are known. Net proceeds received by Tarpon are included as a reduction to accounts payable or other liability as applicable, as such funds are legally required to be provided to the party Tarpon purchased the debt from. As of December 31, 2013, only 2,075,540 of the initial 6,619,835 shares had been sold by Tarpon, for gross proceeds of $12,560, of which $9,420 was used to settle outstanding liabilities and the remainder applied to Tarpon fees, and charged to stock compensation in the accompanying consolidated financial statements. Shares in which are held by Tarpon at each reporting period are accounted for as issued but not outstanding.
NOTE 10 - RELATED PARTY TRANSACTIONS
Technology Agreement with Arkenol, Inc.
On March 1, 2006, the Company entered into a Technology License agreement with Arkenol, Inc. (“Arkenol”), in which the Company’s majority shareholder and other family members hold an interest. Arkenol has its own management and board separate and apart from the Company. According to the terms of the agreement, the Company was granted an exclusive, non-transferable, North American license to use and to sub-license the Arkenol technology. The Arkenol Technology, converts cellulose and waste materials into Ethanol and other high value chemicals. As consideration for the grant of the license, the Company shall make a one time payment of $1,000,000 at first project construction funding and for each plant make the following payments: (1) royalty payment of 4% of the gross sales price for sales by the Company or its sub licensees of all products produced from the use of the Arkenol Technology (2) and a one time license fee of $40 per 1,000 gallons of production capacity per plant. According to the terms of the agreement, the Company made a one-time exclusivity fee prepayment of $30,000 during the period ended December 31, 2006. The agreement term is for 30 years from the effective date.
During 2008, due to the receipt of proceeds from the Department of Energy, the Board of Directors determined that the Company had triggered its obligation to incur the full $1,000,000 Arkenol License fee. The Board of Directors determined that the receipt of these proceeds constituted “First Project Construction Funding” as established under the Arkenol technology agreement. As such, the consolidated statement of operations for the year ended December 31, 2008 reflected the one-time license fee of $1,000,000. The Company paid the net amount due of $970,000 to the related party on March 9, 2009.
Asset Transfer Agreement with Ark Entergy, Inc.
On March 1, 2006, the Company entered into an Asset Transfer and Acquisition Agreement with ARK Energy, Inc. (“ARK Energy”), which is owned (50%) by the Company’s CEO. ARK Energy has its own management and board separate and apart from the Company. Based upon the terms of the agreement, ARK Energy transferred certain rights, assets, work-product, intellectual property and other know-how on project opportunities that may be used to deploy the Arkenol technology (as described in the above paragraph). In consideration, the Company has agreed to pay a performance bonus of up to $16,000,000 when certain milestones are met. These milestones include transferee’s project implementation which would be demonstrated by start of the construction of a facility or completion of financial closing whichever is earlier. The payment is based on ARK Energy’s cost to acquire and develop 19 sites which are currently at different stages of development. As of December 31, 2013 and 2012, the Company had not incurred any liabilities related to the agreement.
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Related Party Lines of Credit
In March 2007, the Company obtained a line of credit in the amount of $1,500,000 from its Chairman/Chief Executive Officer and majority shareholder to provide additional liquidity to the Company as needed. Under the terms of the note, the Company is to repay any principal balance and interest, at 10% per annum, within 30 days of receiving qualified investment financing of $5,000,000 or more. As of December 31, 2007, the Company repaid its outstanding balance on line of credit of approximately $631,000 which included interest of $37,800. This line of credit was terminated with the closing of the private placement in December 2007 and the subsequent line of credit balance repayment.
In February 2009, the Company obtained a line of credit in the amount of $570,000 from Arkenol Inc, its technology licensor, to provide additional liquidity to the Company as needed. In October 2009, $175,000 was utilized from the line of credit, and in November 2009, the balance was paid in full along with approximately $500 interest. As of December 31, 2010, there were no amounts outstanding, and the line of credit was deemed cancelled as the Company did not anticipate utilizing funds from the line of credit.
On November 10, 2011, the Company obtained a line of credit in the amount of $40,000 from its Chairman/Chief Executive Officer and majority shareholder to provide additional liquidity to the Company as needed, at his sole discretion. Under the terms of the note, the Company is to repay any principal balance and interest, at 12% per annum, within 30 days of receiving qualified investment financing of $100,000 or more. As of December 31, 2013 and 2012, the outstanding balance on the line of credit was approximately $11,230 and $15,230 with $28,770 and $24,770 remaining under the line, respectively. Although the Company has received over $100,000 in financing since this agreement was put into place, Mr. Klann does not hold the Company in default.
Purchase of Property and Equipment
During the year ended December 31, 2007, the Company purchased various office furniture and equipment from ARK Energy costing approximately $39,000. All such property and equipment is fully depreciated as of December 31, 2012.
Loan Agreement
On December 15, 2010, the Company entered into a loan agreement (the “Loan Agreement”) by and between Arnold Klann, the Chief Executive Officer, Chairman of the board of directors and majority shareholder of the Company, as lender (the “Lender”), and the Company, as borrower. Pursuant to the Loan Agreement, the Lender agreed to advance to the Company a principal amount of Two Hundred Thousand United States Dollars ($200,000) (the “Loan”). The Loan Agreement requires the Company to (i) pay to the Lender a one-time amount equal to fifteen percent (15%) of the Loan (the “Fee Amount”) in cash or shares of the Company’s common stock at a value of $0.50 per share, at the Lender’s option; and (ii) issue the Lender warrants allowing the Lender to buy 500,000 common shares of the Company at an exercise price of $0.50 per common share, such warrants to expire on December 15, 2013. The Company has promised to pay in full the outstanding principal balance of any and all amounts due under the Loan Agreement within thirty (30) days of the Company’s receipt of investment financing or a commitment from a third party to provide One Million United States Dollars ($1,000,000) to the Company or one of its subsidiaries (the “Due Date”), to be paid in cash or shares of the Company’s common stock, at the Lender’s option.
The fair value of the warrants was $83,736 as determined by the Black-Scholes option pricing model using the following weighted-average assumptions: volatility of 112.6%, risk-free interest rate of 1.1%, dividend yield of 0%, and a term of three (3) years.
The proceeds were allocated to the warrants issued to the note holder based on their relative fair values which resulted in $83,736 allocated to the warrants. The amount allocated to the warrants resulted in a discount to the note. The Company amortized the discount over the estimated term of the Loan using the straight line method due to the short term nature of the Loan. The Company estimated the Loan would be paid back during the quarter ended September 30, 2011. The discount was fully amortized during the year ended December 31, 2011.
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NOTE 11 – INCOME TAXES
The following table presents the current and deferred tax provision for federal and state income taxes for the years ended December 31, 2013 and 2012.
| Year Ended December 31, | ||||||||
| 2013 | 2012 | |||||||
| Current Tax Provision | ||||||||
| Federal | $ | - | $ | - | ||||
| State | 2,400 | 2,400 | ||||||
| Total | $ | 2,400 | $ | 2,400 | ||||
| Deferred tax provision (benefit) | ||||||||
| Federal | (6,937,891 | ) | (6,646,663 | ) | ||||
| State | (614,642 | ) | (796,294 | ) | ||||
| Valuation Allowance | 7,552,533 | 7,442,957 | ||||||
| Total | - | |||||||
| Total Provision for income taxes | $ | 2,400 | $ | 2,400 | ||||
Current taxes in 2013 and 2012 consist of minimum taxes to the State of California..
Reconciliations of the U.S. federal statutory rate to the actual tax rate for the years ended December 31, 2013 and 2012 are as follows:
| Year Ended December 31, | ||||||||
| 2013 | 2012 | |||||||
| US federal statutory income tax rate | 30 | % | 30 | % | ||||
| State tax - net of benefit | 4 | % | 4 | % | ||||
| 34 | % | 34 | % | |||||
| Permanent differences | -10 | % | -11 | % | ||||
| Reserves and accruals | 0 | % | -7 | % | ||||
| Changes in deferred tax assets | -16 | % | 4 | % | ||||
| Increase in valuation allowance | -8 | % | -20 | % | ||||
| Effective tax rate | 0 | % | 0 | % | ||||
The components of the Company’s deferred tax assets for federal and state income taxes as of December 31, 2013 and 2012 consisted of the following:
| 2013 | 2012 | |||||||
| Deferred income tax assets | ||||||||
| Net operating loss carryforwards | $ | 7,552,533 | $ | 7,327,107 | ||||
| Reserves and accruals | - | 115,850 | ||||||
| Valuation allowance | (7,552,533 | ) | (7,442,957 | ) | ||||
| $ | - | $ | - | |||||
The Company’s deferred tax assets consist primarily of net operating loss (“NOL”) carry forwards of approximately $7,553,000 and $7,327,000 at December 31, 2013 and 2012, respectively. At December 31, 2013, the Company had NOL carry forwards for Federal and California income tax purposes totaling approximately $23.1 million and $15.4 million, respectively. At December 31, 2012, the Company had NOL carry forwards for Federal and California income tax purposes, totaling approximately $21.8 million and $19.6 million, respectively. Federal and California NOL’s have begun to expire and fully expire in 2033 and 2023, respectively. For federal tax purposes these carry forwards expire in twenty years beginning in 2026 and for the State purposes they expired beginning in 2012.
Income tax reporting primarily relates to the business of the parent company Blue Fire Ethanol Fuels, Inc. which experienced a change in ownership on June 27, 2006. A change in ownership requires management to compute the annual limitation under Section 382 of the Internal Revenue Code. The amount of benefits the Company may receive from the operating loss carry forwards for income tax purposes is further dependent, in part, upon the tax laws in effect, the future earnings of the Company, and other future events, the effects of which cannot be determined.
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The Company has identified the United States Federal tax returns as its “major” tax jurisdiction. The United States Federal return years 2009 through 2013 are still subject to tax examination by the United States Internal Revenue Service; however, we do not currently have any ongoing tax examinations. The Company is subject to examination by the California Franchise Tax Board for the years ended 2009 through 2013 and currently does not have any ongoing tax examinations.
In addition, the Company is not current in their federal and state income tax filings prior to the reverse acquisition. The Company has assessed and determined that the effect of non filing is not expected to be significant, as Sucre has not had active operations for a significant period of time.
NOTE 12 – SUBSEQUENT EVENTS
On December 19, 2013, the Company signed a convertible note of $37,500 with Asher Enterprises, Inc., however this note did not fund until January 8, 2014. Under the terms of the note, the Company is to repay any principal balance and interest, at 8% per annum at maturity date of December 23, 2014. The convertible promissory note is convertible into shares of the Company’s common stock after six months as disclosed in Note 5.
Subsequent to December 31, 2013, the holder of various convertible notes, converted $32,500 in principal and $1,300 of accrued interest into 22,207,699 shares of common stock. See Note 5 for more information on the conversion features of the notes.
Subsequent to year end, the Company paid the remaining $140,639 in lease payments on its Fulton Project that were past due, so as of April 15, 2014, the Company is out of default and is current on the lease payments for the Fulton Project.
Subsequent to year end, the Company paid off the senior secured convertible note and accrued interest thereon, along with other fees due TCA for total payment of approximately $459,000.
Subsequent to year end, the Company received investments totaling $350,000 from an investor in the form of a debenture with warrants.
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BLUEFIRE RENEWABLES, INC.
SHARES OF COMMON STOCK
PRELIMINARY PROSPECTUS
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR THAT WE HAVE REFERRED YOU TO. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT. THIS PROSPECTUS IS NOT AN OFFER TO SELL COMMON STOCK AND IS NOT SOLICITING AN OFFER TO BUY COMMON STOCK IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
The Date of This Prospectus is , 2015
PART II – INFORMATION NOT REQUIRED IN THE PROSPECTUS
Other Expenses of Issuance and Distribution.
| Securities and Exchange Commission registration fee | $ | 1,743.00 | ||
| Transfer Agent Fees | $ | - | ||
| Accounting fees and expenses | $ | 5,000 | ||
| Legal fees and expense | $ | 10,000 | ||
| Total | $ | 16,743.00 |
All amounts are estimates other than the Commission’s registration fee. We are paying all expenses of the offering listed above. No portion of these expenses will be borne by the selling security holders. The selling security holders, however, will pay any other expenses incurred in selling their common stock, including any brokerage commissions or costs of sale.
Indemnification of Directors and Officers.
Our certificate of incorporation and bylaws provide that we will indemnify an officer, director, or former officer or director, to the full extent permitted by law. We have been advised that in the opinion of the U.S. Securities and Exchange Commission indemnification for liabilities arising under the Securities Act is against public policy as expressed in the Securities Act, and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities is asserted by one of our directors, officers, or controlling persons in connection with the securities being registered, we will, unless in the opinion of our legal counsel the matter has been settled by controlling precedent, submit the question of whether such indemnification is against public policy to a court of appropriate jurisdiction. We will then be governed by the court’s decision.
Recent Sales of Unregistered Securities.
Equity Facility Agreement
On March 28, 2012, BlueFire finalized a committed equity facility (the “Equity Facility”) with TCA Global Credit Master Fund, LP, a Cayman Islands limited partnership (“TCA”), whereby the parties entered into (i) a committed equity facility agreement (the “Equity Agreement”) and (ii) a registration rights agreement (the “Registration Rights Agreement”). Pursuant to the terms of the Equity Agreement, for a period of twenty-four (24) months commencing on the date of effectiveness of the Registration Statement (as defined below), TCA committed to purchase up to $2,000,000 of BlueFire’s common stock, par value $0.001 per share (the “Shares”), pursuant to Advances (as defined below), covering the Registrable Securities (as defined below). The purchase price of the Shares under the Equity Agreement was equal to ninety-five percent (95%) of the lowest daily volume weighted average price of BlueFire’s common stock during the five (5) consecutive trading days after BlueFire delivers to TCA an Advance notice in writing requiring TCA to advance funds (an “Advance”) to BlueFire, subject to the terms of the Equity Agreement. The “Registrable Securities” include (i) the Shares; and (ii) any securities issued or issuable with respect to the Shares by way of exchange, stock dividend or stock split or in connection with a combination of shares, recapitalization, merger, consolidation or other reorganization or otherwise. As further consideration for TCA entering into and structuring the Equity Facility, BlueFire paid to TCA a fee by issuing to TCA shares of BlueFire’s common stock that equal a dollar amount of $110,000 (the “Facility Fee Shares”). It was the intention of BlueFire and TCA that the value of the Facility Fee Shares shall equal $110,000. In the event the value of the Facility Fee Shares issued to TCA did not equal $110,000 after a nine month evaluation date, the Equity Agreement provided for an adjustment provision allowing for necessary action (either the issuance of additional shares to TCA or the return of shares previously issued to TCA to BlueFire’s treasury) to adjust the number of Facility Fee Shares issued. BlueFire also entered into the Registration Rights Agreement with TCA. Pursuant to the terms of the Registration Rights Agreement, BlueFire was obligated to file a registration statement (the “Registration Statement”) with the U.S. Securities and Exchange Commission (the “SEC’) to cover the Registrable Securities within 45 days of closing. BlueFire must use its commercially reasonable efforts to cause the Registration Statement to be declared effective by the SEC by a date that is no later than 90 days following closing.
On March 28, 2012, BlueFire entered into a security agreement (the “Security Agreement”) with TCA, related to a $300,000 convertible promissory note issued by BlueFire in favor of TCA (the “Convertible Note”). The Security Agreement granted to TCA a continuing, first priority security interest in all of BlueFire’s assets, wheresoever located and whether now existing or hereafter arising or acquired. On March 28, 2012, BlueFire issued the Convertible Note in favor of TCA. The maturity date of the Convertible Note was March 28, 2013, and the Convertible Note bore interest at a rate of twelve percent (12%) per annum with a default rate of eighteen percent (18%) per annum. The Convertible Note was convertible into shares of BlueFire’s common stock at a price equal to ninety-five percent (95%) of the lowest daily volume weighted average price of BlueFire’s common stock during the five (5) trading days immediately prior to the date of conversion. The Convertible Note had the option to be prepaid in whole or in part at BlueFire’s option without penalty. The proceeds received by the Company under the purchase agreement were used for general working capital purposes which include costs reimbursed under the DOE cost share program.
On April 11, 2014, the Convertible Note with TCA was repaid in full.
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Convertible Notes Payable – 2012 and 2013
As further described below, the Company has entered into several convertible notes with Asher Enterprises, Inc. Under the terms of these notes, the Company is to repay any principal balance and interest, at 8% per annum at a given maturity date which is generally less than one year. The Company had the option to prepay the convertible promissory notes prior to maturity at varying prepayment penalty rates specified under such notes. Each of the convertible promissory notes were convertible into shares of the Company’s common stock after six months as calculated by multiplying 58% (42% discount to market) by the average of the lowest three closing bid prices during the 10 days prior to the conversion date.
On July 31, 2012, the Company issued a convertible note in favor of Asher Enterprises, Inc. in the principal amount of $63,500 pursuant to the terms above, with a maturity date of May 2, 2013. In accordance with the terms of the note, the note became convertible on January 27, 2013. As of September 30, 2014, the note was fully converted into 1,642,578 shares of common stock.
On October 11, 2012, the Company issued a convertible note in favor of Asher Enterprises, Inc. in the principal amount of $37,500 pursuant to the terms above, with a maturity date of July 15, 2013. In accordance with the terms of the note, the note became convertible on April 9, 2013. As of September 30, 2014, the note was fully converted into 2,262,860 shares of common stock.
On December 21, 2012, the Company issued a convertible note in favor of Asher Enterprises, Inc. in the principal amount of $32,500 pursuant to the terms above, with a maturity date of September 26, 2013. In accordance with the terms of the note, the note became convertible on June 19, 2013. As of September 30, 2014, the note was fully converted into 4,017,599 shares of common stock.
On February 11, 2013, the Company issued a convertible note in favor of Asher Enterprises, Inc. in the principal amount of $53,000 pursuant to the terms above, with a maturity date of November 13, 2013. In accordance with the terms of the note, the note became convertible on August 10, 2013. As of September 30, 2014, the note was fully converted into 9,689,210 shares of common stock.
On June 13, 2013, the Company issued a convertible note in favor of Asher Enterprises, Inc. in the principal amount of $32,000 pursuant to the terms above, with a maturity date of March 17, 2014. In accordance with the terms of the note, the note became convertible on December 10, 2013. As of September 30, 2014, the note was fully converted into 22,207,699 shares of common stock.
On December 19, 2013, the Company issued a convertible note in favor of Asher Enterprises, Inc. in the principal amount of $37,500 which was funded and effective in January 2014 with terms identified above and had a maturity date of December 23, 2014. The conversion feature was not triggered until July 2014 due to the effective date of the note being in January 2014. As of September 30, 2014, the note was fully converted into 24,537,990 shares of common stock.
Liability Purchase Agreement
On December 9, 2013, The Circuit Court of the Second Judicial Circuit in and for Leon County, Florida (the “Court”), entered an order (the “Order”) approving, among other things, the fairness of the terms and conditions of an exchange pursuant to Section 3(a)(10) of the Securities Act of 1933, in accordance with a stipulation of settlement (the “Settlement Agreement”) between the Company, and Tarpon Bay Partners, LLC, a Florida limited liability company (“Tarpon”), in the matter entitled Tarpon Bay Partners, LLC v. BlueFire Renewables, Inc., Case No. 2013-CA-2975 (the “Action”). Tarpon commenced the Action against the Company on November 21, 2013 to recover an aggregate of $583,710 of past-due accounts payable of the Company, which Tarpon had purchased from certain creditors of the Company pursuant to the terms of separate receivable purchase agreements between Tarpon and each of such vendors (the “Assigned Accounts”), plus fees and costs (the “Claim”). The Assigned Accounts relate to certain legal, accounting, financial services, and the repayment of aged debt. The Order provides for the full and final settlement of the Claim and the Action. The Settlement Agreement became effective and binding upon the Company and Tarpon upon execution of the Order by the Court on December 9, 2013. Notwithstanding anything to the contrary in the Stipulation, the number of shares beneficially owned by Tarpon will not exceed 9.99% of the Company’s Common Stock. In connection with the Settlement Agreement, the Company relied on the exemption from registration provided by Section 3(a)(10) under the Securities Act.
Pursuant to the terms of the Settlement Agreement approved by the Order, the Company shall issue and deliver to Tarpon shares (the “Settlement Shares”) of the Company’s Common Stock in one or more tranches as necessary, and subject to adjustment and ownership limitations, sufficient to generate proceeds such that the aggregate Remittance Amount (as defined in the Settlement Agreement) equals the Claim. In addition, pursuant to the terms of the Settlement Agreement, the Company issued to Tarpon the Tarpon Initial Note in the principal amount of $25,000. Under the terms of the Tarpon Initial Note, the Company shall pay Tarpon $25,000 on the date of maturity which was January 30, 2014. This Note was convertible by Tarpon into the Company’s Common Shares (See below).
Pursuant to the fairness hearing, the Order, and the Company’s agreement with Tarpon, on December 23, 2013, the Company issued the Tarpon Success Fee Note in the principal amount of $50,000 in favor of Tarpon as a commitment fee. The Tarpon Success Fee Note was due on June 30, 2014. The Tarpon Success Fee Note was convertible into shares of the Company’s common stock (See below).
In connection with the settlement, on December 18, 2013 the Company issued 6,619,835 shares of Common Stock to Tarpon in which gross proceeds of $29,802 were generated from the sale of the Common Stock. In connection with the transaction, Tarpon received fees of $7,450 and providing payments of $22,352 to settle outstanding vendor payables. During the nine months ended September 30, 2014, the Company issued Tarpon 61,010,000 shares of Common Stock from which gross proceeds of $163,406 were generated from the sale of the Common Stock. In connection with the transaction, Tarpon received fees of $42,402 and providing payments of $121,004 to settle outstanding vendor payables. Any shares not used by Tarpon are subject to return to the Company.
Tarpon Bay Convertible Notes
Pursuant to the 3(a)10 transaction with Tarpon, on November 4, 2013, the Company issued to Tarpon a convertible promissory note in the principal amount of $25,000 (the “Tarpon Initial Note”). Under the terms of the Tarpon Initial Note, the Company shall pay Tarpon $25,000 on the date of maturity which was January 30, 2014. This note was convertible by Tarpon into the Company’s Common Shares at a 50% discount to the lowest closing bid price for the Common Stock for the twenty (20) trading days ending on the trading day immediately before the conversion date.
Also pursuant to the 3(a)10 transaction with Tarpon, on December 23, 2013, the Company issued a convertible promissory note in the principal amount of $50,000 in favor of Tarpon as a success fee (the “Tarpon Success Fee Note”). The Tarpon Success Fee Note was due on June 30, 2014. The Tarpon Success Fee Note was convertible into shares of the Company’s common stock at a conversion price for each share of Common Stock at a 50% discount from the lowest closing bid price in the twenty (20) trading days prior to the day that Tarpon requests conversion.
As of September 30, 2014, the Tarpon Initial Note and the Tarpon Success Fee Note were repaid in full.
AKR Promissory Note
On April 8, 2014, the Company issued a promissory note in favor of AKR Inc, (“AKR”) in the principal aggregate amount of $350,000 (the “AKR Note”). The AKR Note is due on April 8, 2015, and requires the Company to (i) incur interest at five percent (5%) per annum; (ii) issue on April 8, 2014 to AKR warrants allowing them to buy 7,350,000 common shares of the Company at an exercise price of $0.007 per common share, such warrants to expire on April 8, 2016 (“AKR Warrant A”); (iii) issue on August 8, 2014 to AKR warrants allowing them to buy 7,350,000 common shares of the Company at an exercise price of $0.007 per common share, such warrants to expire on April 8, 2016 (“AKR Warrant B”); and (iv) issue on November 8, 2014 to AKR warrants allowing them to buy 8,400,000 common shares of the Company at an exercise price of $0.007 per common share, such warrants to expire on April 8, 2016 (“AKR Warrant C”, together with AKR Warrant A and AKR Warrant B the “AKR Warrants”). The Company may prepay the debt, prior to maturity with no prepayment penalty.
| 50 |
Exhibits and Financial Statement Schedules
| Exhibit No. | Description | |
| 2.1 | Stock Purchase Agreement and Plan of Reorganization, dated May 31, 2006 (Incorporated by reference to the Company’s Form 10-SB, as filed with the SEC on December 13, 2006). | |
| 3.1 | Amended and Restated Articles of Incorporation, dated July 2, 2006 (Incorporated by reference to the Company’s Form 10-SB, as filed with the SEC on December 13, 2006). | |
| 3.2 | Amended and Restated Bylaws, dated May 27, 2006 (Incorporated by reference to the Company’s Form 10-SB, as filed with the SEC on December 13, 2006). | |
| 3.3 | Second Amended and Restated Bylaws, dated April 24, 2008 (Incorporated by reference to the Company’s Form 8-K, as filed with the SEC on April 29, 2008). | |
| 3.4 | Amended and Restated Articles of Incorporation, dated July 20, 2010 (Incorporated by reference to the Company’s Form 8-K, as filed with the SEC on July 26, 2010). | |
| 3.5 | Amendment to the Articles of Incorporation, dated November 25, 2013 (Incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on December 4,2013) | |
| 5.1* | Legal Opinion of Lucosky Brookman LLP | |
| 10.1 | Arkenol Technology License Agreement, dated March 1, 2006 (Incorporated by reference to the Company’s Form 10-SB, as filed with the SEC on December 13, 2006). | |
| 10.2 | ARK Energy Asset Transfer and Acquisition Agreement, dated March 1, 2006 (Incorporated by reference to the Company’s Form 10-SB, as filed with the SEC on December 13, 2006). | |
| 10.3 | Amended and Restated 2006 Incentive and Non-Statutory Stock Option Plan, dated December 13, 2006 (Incorporated by reference to the Company’s Form S-8, as filed with the SEC on December 17, 2007). | |
| 10.4 | Purchase Agreement, dated as of January 19, 2011, by and between the Company and Lincoln Park Capital Fund, LLC (Incorporated by reference to the Company’s Form 8-K, as filed with the SEC on January 24, 2011). | |
| 10.5 | Registration Rights Agreement, dated as of January 19, 2011, by and between the Company and Lincoln Park Capital Fund, LLC (Incorporated by reference to the Company’s Form 8-K, as filed with the SEC on January 24, 2011). | |
| 10.6 | Promissory Note issued in favor of AKR, Inc, dated April 8, 2014 (Incorporated by reference to the Company’s Form 8-K, as filed with the SEC on April 16, 2014). | |
| 10.7 | Subscription Agreement by and between the Company and a subscriber, dated as of April 8, 2014 (Incorporated by reference to the Company’s Form 8-K, as filed with the SEC on April 16, 2014). | |
| 10.8 | Promissory Note issued in favor of Kodiak Capital Group, LLC, dated December 17, 2014 (Incorporated by reference to the Company’s Form 8-K, as filed with the SEC on December 22, 2014). | |
| 10.9 | Equity Purchase Agreement by and between the Company and Kodiak Capital Group, LLC, dated as of December 17, 2014 (Incorporated by reference to the Company’s Form 8-K, as filed with the SEC on December 22, 2014). | |
| 10.10 | Registration Rights Agreement by and between the Company and Kodiak Capital Group, LLC, dated as of December 17, 2014 (Incorporated by reference to the Company’s Form 8-K, as filed with the SEC on December 22, 2014). | |
| 14.1 | Code of Ethics (Incorporated by reference to the Company’s Form 8-K, as filed with the SEC on March 6, 2009). | |
| 23.1* | Consent of dbbmckennon | |
| 23.2 | Consent of Lucosky Brookman LLP (filed as Exhibit 5.1 herewith) | |
| * Filed herewith |
| 51 |
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements of filing on Form S-1 and authorizes this registration statement to be signed on its behalf by the undersigned, in the City of Irvine, California, on January 27, 2015.
| BLUEFIRE RENEWABLES, INC. | ||
| By: | /s/ Arnold Klann | |
| Name: | Arnold Klann | |
| Title: | Chief Executive Officer (Principal Executive Officer) (Principal Financial Officer) (Principal Accounting Officer) | |
In accordance with the requirements of the Securities Act of 1933, as amended, this Registration Statement on Form S-1 has been signed by the following persons in the capacities and on the dates indicated.
| Signature | Title | Date | ||
| /s/ Arnold Klann | Chairman of the Board, President and Chief Executive Officer | January 27, 2015 | ||
| Arnold Klann | (Principal Executive Officer) (Principal Financial Officer) | |||
| (Principal Accounting Officer) | ||||
| /s/ Necitas Sumait | Director, Secretary and Senior Vice President | January 27, 2015 | ||
| Necitas Sumait | ||||
| /s/ John Cuzens | Chief Technology Officer and Senior Vice President | January 27, 2015 | ||
| John Cuzens | ||||
| /s/ Chris Nichols | Director | January 27, 2015 | ||
| Chris Nichols | ||||
| /s/ Joseph Sparano | Director | January 27, 2015 | ||
| Joseph Sparano |
| 52 |
January 27, 2015
BlueFire Renewables, Inc.
31 Musick
Irvine, CA 92618
Re: Registration Statement on Form S-1
Ladies and Gentlemen:
We have acted as counsel to BlueFire Renewables, Inc., a Nevada corporation (the “Company”), in connection with the preparation and filing by the Company of a registration statement on Form S-1 (the “Registration Statement”) with the U.S. Securities and Exchange Commission (the “Commission”) under the Securities Act of 1933, as amended (the “Securities Act”), with respect to the registration of 50,000,000 shares of the Company’s common stock, par value $0.001 per share (the “Registered Shares”) that are issuable pursuant to the terms and conditions of the following agreements (collectively, the “Agreements”): (i) that certain equity purchase agreement between Kodiak Capital Group, LLC (“Kodiak”) and the Company entered into on December 17, 2014; (ii) that certain promissory note issued by the Company to Kodiak on December 17, 2014; and (iii) that certain registration rights agreement between Kodiak and the Company entered into on December 17, 2014.
This opinion is being furnished in accordance with the requirements of Item 601(b)(5) of Regulation S-K under the Securities Act.
In connection with this opinion, we have examined and relied upon the originals or copies of such documents, corporate records, and other instruments as we have deemed necessary or appropriate for the purpose of this opinion, including, without limitation, the following: (a) the articles of incorporation of the Company, as amended; (b) the bylaws of the Company; (c) the Agreements; and (d) the Registration Statement, including all exhibits thereto.
In our examination, we have assumed the genuineness of all signatures, the legal capacity of all natural persons, the authenticity of all documents submitted to us as originals, the conformity to original documents of all documents submitted to us as certified or photostatic copies and the authenticity of the originals of such documents, and the accuracy and completeness of the corporate records made available to us by the Company. As to any facts material to the opinions expressed below, with your permission we have relied solely upon, without independent verification or investigation of the accuracy or completeness thereof, any certificates and oral or written statements and other information of or from public officials, officers or other representatives of the Company and others.
Based upon the foregoing, and in reliance thereon, we are of the opinion that the Registered Shares have been duly authorized, and when sold pursuant to the terms described in the Registration Statement, will be legally issued, fully paid and non-assessable.
The opinion expressed herein is limited to the laws of the State of Nevada, including the Nevada Constitution, all applicable provisions of the statutory provisions, and reported judicial decisions interpreting those laws. This opinion is limited to the laws in effect as of the date the Registration Statement is declared effective by the Commission and is provided exclusively in connection with the public offering contemplated by the Registration Statement.
We hereby consent to the filing of this opinion as an exhibit to the Registration Statement and to the reference of this firm under the caption “Legal Matters” in the prospectus which is made part of the Registration Statement. In giving this consent, we do not thereby admit that we come within the category of persons whose consent is required under Section 7 of the Securities Act or the rules and regulations of the Commission thereunder.
| Very truly yours, | |
| LUCOSKY BROOKMAN LLP | |
| /s/ Lucosky Brookman LLP |
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
BlueFire Renewables, Inc.
We hereby consent to the use, in this Registration Statement of BlueFire Renewables, Inc. on Form S-1, of our report dated April 15, 2014, related to the consolidated financial statements of BlueFire Renewables, Inc. and subsidiaries as of December 31, 2013 and 2012 and for the years then ended, and for the period from March 28, 2006 (“Inception”) to December 31, 2013. Our report dated April 15, 2014, related to the consolidated financial statements includes an explanatory paragraph relating to the uncertainty as to the Company’s ability to continue as a going concern.
We also consent to the references to us in the Experts section of the Registration Statement.
| /s/ dbbmckennon | |
| Newport Beach, California | |
| January 27, 2015 |
|
Outstanding Warrant Liability - Schedule of Black-Scholes Option Pricing Model Assumptions to Estimate Fair Value of Warrants (Details)
|
0 Months Ended | 1 Months Ended | 9 Months Ended | 12 Months Ended | ||
|---|---|---|---|---|---|---|
|
Jul. 13, 2007
|
Dec. 31, 2010
|
Aug. 21, 2007
|
Sep. 30, 2014
|
Dec. 31, 2013
|
Dec. 31, 2012
|
|
| Class of Warrant or Right [Line Items] | ||||||
| Annual dividend yield | 0.00% | 0.00% | 0.00% | |||
| Expected life (years) | 5 years | 3 years | ||||
| Risk-free interest rate | 4.94% | 1.10% | 4.05% | |||
| Expected volatility | 113.00% | 112.60% | 118.00% | 234.68% | ||
| Warrant [Member] | ||||||
| Class of Warrant or Right [Line Items] | ||||||
| Annual dividend yield | ||||||
| Expected life (years) | 1 year 3 months 18 days | 2 years 18 days | 3 years 18 days | |||
| Risk-free interest rate | 0.13% | 0.38% | 0.72% | |||
| Expected volatility | 236.00% | 150.00% | 117.00% | |||
|
Income Taxes (Details Narrative) (USD $)
|
12 Months Ended | |
|---|---|---|
|
Dec. 31, 2013
|
Dec. 31, 2012
|
|
| Income Tax Disclosure [Abstract] | ||
| Deferred tax assets, operating loss carryforwards | $ 7,552,533 | $ 7,327,107 |
| Deferred tax assets, operating loss carryforwards, foreign | 23,100,000 | 21,800,000 |
| Deferred tax assets, operating loss carryforwards, domestic | $ 15,400,000 | $ 19,600,000 |
| Operating loss carryforwards, expiration dates | Federal and California NOL’s have begun to expire and fully expire in 2033 and 2023, respectively |