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 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 March 31, 2014, the Company has negative working capital of approximately $1,755,000. 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 May 20, 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. 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 March
31, 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 months ended March 31, 2014 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, 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.
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, 2014 and 2013 and for the period from March 28, 2006 (Inception) to March 31, 2014, research
and development costs included in Project Development were approximately $214,000, $118,000, and $15,744,000, respectively.
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 $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 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 subsequent to March 31, 2014, the Equity Facility was canceled and related convertible
note repaid in full. No penalties were incurred as part of the repayment.
F
air
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, 2014 or December 31, 2013.
As
of March 31, 2014, the Company’s warrant liability and derivative liability are considered level 2 items (see Notes 4 and
5).
As
of March 31, 2014 and December 31, 2013 the Company’s redeemable noncontrolling interest is considered a level 3 item and
changed during the three months ended March 31, 2014 as follows.
Balance at December 31, 2013
|
|
$
|
856,044
|
|
Net loss attributable to noncontrolling interest
|
|
|
2,372
|
|
Balance at March 31, 2014
|
|
$
|
858,416
|
|
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, 2014 and 2013, the Company had 428,571 and 928,571 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
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. 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.
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 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.
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. In 2012, the Company proceeded
with the close out of Award 1, and in September 2012 Award 1 was officially closed and the overpayment was deobligated. The Company
was notified of the deobligation in the fourth quarter of 2012.
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.
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 $730,000
available under the grant prior to September 30, 2014. We cannot guarantee that we will continue to receive grants, loan guarantees,
or other funding for our projects from the DOE.
As
of March 31, 2014, the Company has received reimbursements of approximately $12,440,492 under these awards.
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.
From
time-to-time the Company enters into 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 the agreement. 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.
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
July 31, 2012, the Company issued a convertible note of $63,500 to Asher Enterprises, Inc. with terms identified above, maturity
date of May 2, 2013, and a conversion start date of 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. As of March 31, 2014,
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. with terms identified above, maturity
date of July 15, 2013, and a conversion start date of 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 amortized
over the term of the note. As of March 31, 2014 the note was fully converted through the issuance of 2,262,860 shares of common
stock.
On
December 21, 2012, the Company agreed to a convertible note of $32,500 to Asher Enterprises, Inc, which was funded and effective
in January 2013 with terms identified above, maturity date of September 26, 2013 and a conversion start date of 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. As of March 31, 2014,
the note was fully converted into 4,017,599 shares of common stock.
On
February 11, 2013, the Company agreed to a convertible note of $53,000 to Asher Enterprises, Inc. with terms identified above,
maturity date of November 13, 2013, and a conversion start date of 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. As of March 31, 2014,
the entire discount was amortized to interest expense, with no remaining unamortized discount and the note was fully converted
into 9,689,211 shares of common stock.
On
June 13, 2013, the Company agreed to a convertible note of $32,500 to Asher Enterprises, Inc. with terms identified above, maturity
date of March 17, 2014, and a conversion start date of 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 March 31, 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. See below for assumptions used in valuing the derivative liability.
On
December 19, 2013, the Company agreed to a convertible note of $37,500 to Asher Enterprises, Inc. which was funded and effective
in January 2014 with terms identified above and a maturity date of December 23, 2014. 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.
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 quarter and at March 31, 2014 of derivative liabilities related to Asher Enterprises, Inc. notes, the Company recognized a
loss on derivative liabilities of $51,741, 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 March 31, 2014, the range of inputs used to calculate derivative liabilities noted above were as follows:
|
|
Three months ending
|
|
|
|
March 31, 2014
|
|
Annual dividend yield
|
|
|
-
|
|
Expected life (years)
|
|
|
0.04
- 0.18
|
|
Risk-free interest rate
|
|
|
0.04
- 0.07
|
%
|
Expected volatility
|
|
|
196.87
|
%
|
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 an on-issuance discount to the notes. The deferred financing costs and discounts, as applicable, are
amortized over the term of the 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 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 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 three months ended March 31, 2014, amortization of approximately
$27,886 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 March 31, 2014 which
resulted in a loss of approximately $102,995. The Company used the following assumptions as of March 31, 2014 and December 31,
2013:
|
|
March
31, 2014
|
|
|
December
31, 2013
|
|
Annual dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected life (years)
|
|
|
0.001
- 0.25
|
|
|
|
0.8
|
|
Risk-free interest rate
|
|
|
0.03
- 0.05
|
%
|
|
|
0.02
|
%
|
Expected volatility
|
|
|
234.84
|
%
|
|
|
159
|
%
|
As
of March 31, 2014, the Company amortized $1,031 in deferred financing costs with $0 remaining.
As
of March 31, 2014, the Company amortized on issuance discounts totaling $50,218 with approximately $25,949 in remaining of on-issuance
discounts.
NOTE
5 - 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 that expired in December 2012, the Company recognized gains of approximately $0, $0, and
$2,516,000 from the change in fair value of these warrants during the quarters ended March 31, 2014 and 2013 and the period from
Inception to March 31, 2014.
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 change 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, 2014 or December 31, 2013. 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, 2014
|
|
|
December
31, 2013
|
|
Annual dividend yield
|
|
|
-
|
|
|
|
-
|
|
Expected life (years) of
|
|
|
1.80
|
|
|
|
2.05
|
|
Risk-free interest rate
|
|
|
0.44
|
%
|
|
|
0.38
|
%
|
Expected volatility
|
|
|
207.71
|
%
|
|
|
150
|
%
|
In
connection with these warrants, the Company recognized a gain/(loss) on the change in fair value of warrant liability of approximately
$(400), $14,000, and $125,000 during the three months ended March 31, 2014 and 2013, and for the period from Inception to March
31, 2014.
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 $462,000 during the three months ended March 31,
2014 and 2013 and the period from Inception to March 31, 2014, respectively.
As
of March 31, 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 2013, the County of Itawamba forgave approximately $96,000 in lease payments. As of March
31, 2014, the Company made lease payments of approximately $168,000. In addition, during the quarter, 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. 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.
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.
These warrants expired on December 15, 2013.
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, 2014
and 2013, and for the period from March 28, 2006 (Inception) to March 31, 2014, the Company amortized the discount to interest
expense of approximately $0, $0, and $83,736, respectively.
During
the three months ended March 31, 2014 and 2013, and for the period from March 28, 2006 (Inception) to March 31, 2014, 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
income (loss) attributable to the redeemable noncontrolling interest during for the three months ended March 31, 2014 and 2013
and for the period from Inception to March 31, 2014 was $2,372, $(2,057), and $(4,083), 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, 2014 and 2013, and for the period from March 28, 2006 (Inception) to March 31, 2014, the Company
recognized stock-based compensation, including consultants, of approximately $37,000, $9,100, and $6,522,000 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, 2014 based on the previous awards.
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 had 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
were no upper limits to the price LPC would pay to purchase our common stock and the purchase price of the shares related to the
$10 million funding were based on the prevailing market prices of the Company’s shares immediately preceding the time of
sales without any fixed discount, and the Company controlled the timing and amount of any sales of shares to LPC. LPC did 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
was below $0.15. The Purchase Agreement contained customary representations, warranties, covenants, closing conditions and indemnification
and termination provisions by, among and for the benefit of the parties. LPC had 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
was terminated in July 18, 2013.
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, 2014 and 2013 and the period from Inception to March 31, 2014 the Company drew $0, $0, 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.
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 grantsed
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 bears 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.
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 quarters ended March 31, 2014 and 2013 was approximately $0 and $38,600, respectively.
As of March 31, 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 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, 2014 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 $2,600.
|
|
March
31, 2014
|
|
|
December
31, 2013
|
|
|
March
28, 2012
|
|
Annual dividend yield
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Expected life (years)
|
|
|
0.00
|
|
|
|
0.00
|
|
|
|
1.00
|
|
Risk-free interest rate
|
|
|
0.03
|
%
|
|
|
0.01
|
%
|
|
|
0.19
|
%
|
Expected volatility
|
|
|
234.84
|
%
|
|
|
159
|
%
|
|
|
119.00
|
%
|
This
note was repaid in full subsequent to March 31, 2014; see Note 10.
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 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 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
is due on June 30, 2014. The Tarpon Success Fee Note is 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 three months ended March 31, 2014,
the Company issued Tarpon 48,110,000 shares of Common Stock from which gross proceeds of $130,668 were generated from the sale
of the Common Stock. In connection with the transaction, Tarpon received fees of $32,667 and providing payments of $98,001 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. Subsequent to March 31, 2014, the Company issued
additional shares of common stock to Tarpon. See Note 10.
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.
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%.
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 had a fixed price, fixed number of shares,
and effectively no ratchet provision based on the Order. There were no circumstances at that time that would require or allow
for net cash settlement. As such, the warrants qualified 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. Accordingly,
the warrants were considered committed shares to be issued in the consolidated balance sheets as of December 31, 2012. On August
2, 2013, the Company issued these 5,740,741 shares and the value transferred to additional paid-in capital.
NOTE
10 -SUBSEQUENT EVENTS
Subsequent
to March 31, 2014, 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. See Note 9 for more information on the note.
Subsequent
to March 31, 2014, the Company received investments totaling $350,000 from an investor in the form of a debenture with warrants.
Subsequent
to March 31, 2014 the Company issued 12,900,000 shares of common stock to Tarpon pursuant to the Settlement Agreement.