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 (“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.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Management’s Plans
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 a 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, and Department of Energy reimbursements from 2009 through the present. The Company may encounter difficulties in
establishing operations due to the time frame of developing, constructing and ultimately operating the planned bio-refinery
projects.
As of March
31, 2013, the Company has negative working capital of approximately $
2,586,000
. 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 2013, the Company intends to fund its operations with reimbursements under the
Department of Energy contract, as well as seek additional funding in the form of equity or debt. However, the Company's ability
to get reimbursed under the DOE contract is dependent on the availability of cash to pay for the related costs. As of May 15, 2013,
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.
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, 2012, 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. However, as additional capital and/or cost share funds become available, additional work may be completed, such as retaining
wall construction, utility infrastructure placement, and the preparation of construction staging areas.
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 cannot continue significant development or furtherance of the Fulton project until financing
for the construction of the Fulton plant is obtained, however the Company has continued to improve and modify plans to for construction in contemplation of different configurations
that would be advantageous for potential investors.
Basis of Presentation
The accompanying unaudited 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 financial statements should be read in conjunction
with the audited financial statements of the Company for the year ended December 31, 2012. The results of operations for the three
months ended March 31, 2013 are not necessarily indicative of the results that may be expected for the full year.
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 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 three months ended
March 31, 2013 and 2012 and for the period from March 28, 2006 (Inception) to March 31, 2013, research and development costs included
in Project Development were approximately $
118,000,
$139,000, and $15,057,000, respectively.
Convertible Debt
Convertible debt is accounted for under
the guidelines established by Accounting Standards Codification (“ASC”) 470 “Debt with Conversion and Other Options”. 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.
The Company accounts for modifications
of its BCF’s in accordance with ASC 470-50 “Modifications and Extinguishments”. 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 March 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.
Fair Value of Financial Instruments
The Company follows the guidance of
ASC 820 – "Fair Value Measurement and Disclosure". 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.
The Company did not have any level 1 financial
instruments at March 31, 2013 or December 31, 2012.
As of March
31, 2013, the Company’s warrant liability and derivative liability are considered level 2 items, see Note
5
.
As of March 31, 2013 and December 31,
2012 the Company’s redeemable noncontrolling interest is considered a level 3 item and changed during and changed during
the three months ended March 31, 2013 as follows.
Balance at December 31, 2012
|
|
$
|
849,945
|
|
Net loss attributable to noncontrolling interest
|
|
|
(2,057
|
)
|
Balance at March 31, 2013
|
|
$
|
847,888
|
|
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 March 31, 2013 and 2012, the Company had
0 and
1,229,659 options and
928,571
and
7,115,265 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 quarter 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.
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 - 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, “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.
New Accounting Pronouncements
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 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 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 brings 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 May 15, 2013, the Company has received reimbursements of approximately $
10,458,000
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 consist of a total reimbursable amount of approximately $87,560,000, and through May 15, 2013,
we have an unreimbursed amount of approximately $
76,736,000
available to us under the awards. 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. 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.
NOTE 4 – CONVERTIBLE 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.
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
is 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 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 is variable and does not contain a floor, the conversion feature represents
a derivative liability upon the ability to convert the loan, which commenced on approximately January 27, 2013. See below
for assumptions used in valuing the derivative liability. As of March 31, 2013, $50,000 in principal has been converted, and
$13,500 plus interest of $2,540 remained outstanding. As of May 15
, 2013, all amounts outstanding
in relation to this note have been converted to equity.
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 is
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 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.
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
is 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 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.
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
is 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 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.
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 is being amortized over the term of the note. During the three months ended March 31, 2013, $41,425
of the discount was amortized to interest expense, with $5,124 remaining unamortized discount.
Upon
conversion of all or a portion of the convertible note, the derivative liability associated with the principal converted
is valued immediately before conversion using the Black-Scholes model. The change in fair value of the derivative liability
associated with the principal converted is recorded as a gain/loss on fair value of derivative liability in the accompanying
statement of operation, with the remaining value of that portion of the derivative liability written off with a corresponding
credit to additional paid-in capital. During the three months ended March 31, 2013, the holder of the convertible notes
converted $50,000 of principal into common stock. The derivative liability of approximately $47,000 associated with the
converted principal was credited to additional paid-in capital at the time of conversion. As of March 31, 2013,
the derivative liability associated with this note was valued at approximately $13,000. The Company used the following inputs
to the Black-Shcoles pricing model for each valuation.
Using
the Black-Scholes pricing model, with the inputs listed below, we calculated the fair market value of the conversion feature at
each conversion event. The Company revalued the conversion feature at March 31, 2013 in the same manor with the inputs listed below
and recognized a loss on the change in fair value of the derivative liability on the accompanying statement of operations of $
10,345
.
|
|
March 31, 2013
|
|
|
March 18, 2013
|
|
|
March 4, 2013
|
|
|
February 19, 2013
|
|
|
January 27, 2013
|
|
Annual dividend yield
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Expected life (years)
|
|
|
0.09
|
|
|
|
0.12
|
|
|
|
0.16
|
|
|
|
0.20
|
|
|
|
0.26
|
|
Risk-free interest rate
|
|
|
0.07
|
%
|
|
|
0.07
|
%
|
|
|
0.11
|
%
|
|
|
0.12
|
%
|
|
|
0.08
|
%
|
Expected volatility
|
|
|
120.44
|
%
|
|
|
107.81
|
%
|
|
|
97.80
|
%
|
|
|
61.34
|
%
|
|
|
65.21
|
%
|
In
addition, fees paid to secure the convertible debt were accounted for as deferred financing costs and
capitalized in the accompanying balance sheet. The deferred financing costs are being amortized over the term of the notes. As
of March 31, 2013, the Company amortized $
1,966
with $
2,478
in deferred financing costs remaining.
NOTE 5 - OUTSTANDING WARRANT LIABILITY
As a result of adopting ASC 815 "Derivatives and Hedging" effective January 1, 2009,
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 6
).
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
set to expire in December 2012, the Company recognized gains of approximately $0, $18,000, and $2,516,000 from the change
in fair value of these warrants during the quarter ended March 31, 2013 and 2012 and the period from Inception to March 31,
2013. As of December 31, 2012 none of these warrants remained outstanding.
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 warrants either expired or were exercised in 2012 and accordingly no revaluation
was necessary as of March 31, 2013 or December 31, 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.
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
Annual dividend yield
|
|
|
-
|
|
|
|
-
|
|
Expected life (years) of
|
|
|
2.80
|
|
|
|
3.05
|
|
Risk-free interest rate
|
|
|
0.36
|
%
|
|
|
0.72
|
%
|
Expected volatility
|
|
|
124.29
|
%
|
|
|
116.79
|
%
|
In connection with these
warrants, the Company recognized a gain/(loss) on the change in fair value of warrant liability of approximately $14,000,
$(86,000), and $117,000 during the three months ended March 31, 2013 and 2012, and for the period from Inception to March 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 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
, and $
338,900
,
during the three months ended March 31, 2013 and 2012 and the period from March 28, 2006 (Inception) to March 31, 2013, respectively.
The
Company is not current on lease payments due to Itawamba County, and as of March 31, 2013, we were in technical default of the
lease due to non-payment. Accordingly, approximately $
236,700
has been accrued in accounts payable in the accompanying consolidated balance sheet. The Company is in constant communication with
Itawamba County officials, and we are working on alternative mechanisms for payment of the outstanding amounts due. The Company
does not believe there is a significant risk that Itawamba County will void the lease for non-payment. As of May 15, 2013, we have
not received a notice of 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. However, as of May 15, 2013,
the Company has not issued these shares, but is required to do so based on current information from the Court, the shareholders
raising the claim and the related exercise of these warrants in December 2012. The Company has valued the shares based on their
market price on the date the warrants were exercised. As such, the consolidated statement of operations reflects the required issuance
of $803,704 as a warrant modification expense which is reflected as shares committed to be issued on the accompanying consolidated
balance sheets as of March 31, 2013 and December 31, 2012.
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, other than as disclosed below. 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, other than
as disclosed below.
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. While the Company
believes that the original Order did not provide for monetary damages and will vigorously defend such, the ultimate resolution
of this matter, which is expected to occur within one year, is uncertain. If an unfavorable outcome is rendered, it is expected
that monetary damages, if any, could potentially be absorbed by the Company’s Directors and Officers insurance policy in
full, at no additional loss to the Company. However, facts and circumstances may change based on future claims, filings, and appeals,
if any, and accordingly, no assurances can be made. The Company is currently reviewing the Order and exploring all of its options
including an appeal, if necessary. See Note 9 in the accompanying notes to consolidated financial statements for additional information.
NOTE 7 - RELATED PARTY TRANSACTIONS
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.
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. During the three months ended March 31, 2013 and 2012,
and for the period from March 28, 2006 (Inception) to March 31, 2013, the Company amortized the discount to interest expense of
approximately $0, $
0
, and $83,736, respectively.
During the three months ended March 31,
2013 and 2012, and for the period from March 28, 2006 (Inception) to March 31, 2013, the Company recognized interest expense of
approximately $0, $0, and $30,000, respectively.
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 in the consolidated
joint ventures are 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 estimated
forecasted financial close, originally estimated to be the end of the third quarter of 2011.
Net loss attributable
to the redeemable noncontrolling interest during for the three months ended March 31, 2013 and 2012 and for the period from Inception
to March 31, 2013 was $
2,057
, $
2,951
, and $
14,613
,
respectively which netted against the value of the redeemable non-controlling interest in temporary equity. The allocation of net
loss was presented on the statement of operations.
NOTE 9 -STOCKHOLDERS’ DEFICIT
Stock-Based Compensation
During
the three months ended March 31, 2013 and 2012, and for the period from March 28, 2006 (Inception) to March 31, 2013, the Company
recognized stock-based compensation, including consultants, of approximately $9,100
,
$
11,250
,
and $6,482,000
to general and administrative expenses and $0, $0, and $4,468,000
to project development expenses, respectively. There is no additional future compensation expense to record as of March 31, 2013
based on the previous awards.
Shares Issued for Services
During
the three months ended March 31, 2013, the Company issued
75,000
shares of common stock for legal services provided. In connection with this issuance the Company recorded
$9,075 in legal expense which is included in general and administrative expense. The Company valued the shares using the closing market
price on the date of issuance.
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.
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
shares pro rata as LPC purchases up to the remaining $9.85 million.
During the three months ended March 31,
2013 and 2012 and the period from Inception to March 31, 2012 the Company drew $0, $35,000, and $385,000 on the Purchase Agreement.
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 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 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 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 is 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.
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 amortized over one (1) year on a straight-line basis. The Company
believed this 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, the Company determined that it was not probable the Registration Statement would become effective
under the original structure of the agreement and accordingly, wrote off all remaining deferred financing costs related to
the Equity Agreement. Amortization of the deferred financing
costs during the quarter ended March 31, 2013 was $0
.
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 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 with a default rate of eighteen percent
(18%) 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.
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 quarter ended March 31, 2013 and 2012 was
approximately $
38,600 and $0
,
respectively.
As of March 31, 2013, there were no remaining deferred financing costs.
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.
The Company discounted the note by the
fair market value of the derivative liability upon inception of the note. This discount was accreted back to the face value
of the note over the note term.
Using
the Black-Scholes pricing model, with the inputs listed below, we calculated the fair market value of the conversion feature to
be $161,570 at the notes inception. The Company revalued the conversion feature at March 31, 2013 in the same manor 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 $137,000.
|
|
March 31, 2013
|
|
|
December 31, 2012
|
|
|
March 28, 2012
|
|
Annual dividend yield
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Expected life (years)
|
|
|
0.01
|
|
|
|
0.24
|
|
|
|
1.00
|
|
Risk-free interest rate
|
|
|
0.04
|
%
|
|
|
0.16
|
%
|
|
|
0.19
|
%
|
Expected volatility
|
|
|
120.44
|
%
|
|
|
76.50
|
%
|
|
|
119.00
|
%
|
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. No final judgment has been entered by the Court. 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 is 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 would be 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
September 30, 2012, there was no value transferred to equity.
In addition, the new warrant liability
was valued immediately after the modification but prior to the exercise by the Shareholders with the new value being recognized
through earnings. The “new” warrants have a fixed price, fixed number of shares, and effectively no ratchet provision
based on the court order. There are no circumstances at this time that would require or allow for net cash settlement. As such,
the warrants qualify for equity accounting under ASC 815. The Company valued the warrants with new terms at approximately $804,000
based on the fair value of the Company’s common stock on December 4, 2012 ($0.14) as it was considered an immediate exercise
and therefore, the value of the shares was known on the date of exercise. As of May 15, 2013, the Company has not
issued these shares, but is required to do so based on the current information from the Court, the shareholders raising the claim,
and the shareholders’ exercise notice which is deemed correct based on the subsequent Order. Accordingly, the warrants are
considered committed shares to be issued in the consolidated balance sheets.
NOTE 10 -SUBSEQUENT EVENTS
On
July 31, 2012, the Company borrowed $63,500, under a short-term convertible note with a third party. Under the terms of the
agreement, the note incurs interest at 8% per annum and was due on March 28, 2013. Subsequent to March 31, 2013, the holder
converted the remaining $13,500 principal and accrued interest theron into 525,906 shares of common stock. See Note
4
for more information on the conversion features of the notes.