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.
On
November 25, 2013, the Company filed an amendment to the Company’s articles of incorporation with the Secretary of State
of the State of Nevada, to increase the Company’s authorized common stock from one hundred million (100,000,000) shares
of common stock, par value $0.001 per share, to five hundred million (500,000,000) shares of common stock, par value $0.001 per
share.
NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Management’s
Plans
Going
Concern
The
Company has 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 June 30, 2014, the Company has negative working capital of approximately $1,560,000. 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 August 11,
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
and only requires minimal capital to maintain until funding is obtained for the construction. This project shall continue once
we receive the funding necessary to construct the facility.
As
of December 31, 2010, the Company completed the detailed engineering on our proposed Fulton Project, procured all necessary permits
for construction of the plant, and began site clearing and preparation work, signaling the beginning of construction. As of June
30, 2014, all site preparation activities have been completed, including clearing and grating of the site, building access roads,
completing railroad tie-ins to connect the site to the rail system, and finalizing the layout plan to prepare for the site foundation.
As of December 31, 2013, the construction-in-progress was deemed impaired due to the discontinuance of future funding from the
DOE further described in Note 3.
We
estimate the total construction cost of the bio-refineries to be in the range of approximately $300 million for the Fulton Project
and approximately $100 million to $125 million for the Lancaster Biorefinery. These cost approximations do not reflect any increase/decrease
in raw materials or any fluctuation in construction cost that would be realized by the dynamic world metals markets or inflation
of general costs of construction. The Company is currently in discussions with potential sources of financing for these facilities
but no definitive agreements are in place. The Company cannot continue significant development or furtherance of the Fulton project
until financing for the construction of the Fulton plant is obtained.
Basis
of Presentation
The
accompanying unaudited consolidated interim financial statements have been prepared by the Company pursuant to the rules and regulations
of the United States Securities Exchange Commission. Certain information and disclosures normally included in the annual financial
statements prepared in accordance with the accounting principles generally accepted in the Unites States of America have been
condensed or omitted pursuant to such rules and regulations. In the opinion of management, all adjustments and disclosures necessary
for a fair presentation of these financial statements have been included. Such adjustments consist of normal recurring adjustments.
These interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements
of the Company for the year ended December 31, 2013. The results of operations for the three and six months ended June 30, 2014
are not necessarily indicative of the results that may be expected for the full year.
In
July 2014, the Company elected to early adopt Accounting Standards Update No. 2014-10, Development Stage Entities (Topic 915):
Elimination of Certain Financial Reporting Requirements. The adoption of this ASU allows the company to remove the inception to
date information and all references to development stage.
Principles
of Consolidation
The
consolidated financial statements include the accounts of BlueFire Renewables, Inc., and its wholly-owned subsidiaries, BlueFire
Ethanol, Inc., and Sucre Source LLC. BlueFire Ethanol Lancaster, LLC, and BlueFire Fulton Renewable Energy LLC (excluding 1% interest
sold) are wholly-owned subsidiaries of BlueFire Ethanol, Inc. All intercompany balances and transactions have been eliminated
in consolidation.
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses
during the reported periods. Actual results could materially differ from those estimates.
Project
Development
Project
development costs are either expensed or capitalized. The costs of materials and equipment that will be acquired or constructed
for project development activities, and that have alternative future uses, both in project development, marketing or sales, will
be classified as property and equipment and depreciated over their estimated useful lives. To date, project development costs
include the research and development expenses related to the Company’s future cellulose-to-ethanol production facilities.
During three and six-months ended June 30, 2014 and 2013, research and development costs included in Project Development were
approximately $202,000, $128,000, $415,000, and $247,000, 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 $2,000,000 Equity Facility with TCA on March 28, 2012, the Company agreed to file a registration
statement related to the transaction with the Securities and Exchange Commission (“SEC”) covering the shares that
may be issued to TCA under the Equity Facility within 45 days of closing. Although under the Registration Rights Agreement the
registration statement was to be declared effective within 90 days following closing, it was not declared effective. The Company
was working with TCA to resolve this issue and, on April 11, 2014, the Equity Facility was canceled and related convertible note
repaid in full. No penalties were incurred as part of the repayment.
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 June 30, 2014 or December 31, 2013.
As
of June 30, 2014, the Company’s warrant liability and derivative liability are considered level 2 items (see Notes 4 and
5).
As
of June 30, 2014 and December 31, 2013 the Company’s redeemable non-controlling interest is considered a level 3 item and
changed during the six months ended June 30, 2014 as follows.
Balance at December 31, 2013
|
|
$
|
856,044
|
|
Net income attributable to non-controlling interest
|
|
|
2,373
|
|
Balance at June 30, 2014
|
|
$
|
858,417
|
|
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.
Income
(loss) per Common Share
The
Company presents basic income (loss) per share (“EPS”) and diluted EPS on the face of the consolidated statement of
operations. Basic income (loss) per share is computed as net income (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 June 30, 2014 and 2013, the Company had 7,778,571 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 period and thus no shares are considered dilutive under the treasury stock method of accounting and their
effects would have been antidilutive due to the loss in certain of the periods presented.
Derivative
Financial Instruments
We
do not use derivative financial instruments to hedge exposures to cash-flow risks or market-risks that may affect the fair values
of our financial instruments. However, under the provisions ASC 815 – “Derivatives and Hedging” certain financial
instruments that have characteristics of a derivative, as defined by ASC 815, such as embedded conversion features on our Convertible
Notes, that are potentially settled in the Company’s own common stock, are classified as liabilities when either (a) the
holder possesses rights to net-cash settlement or (b) physical or net-share settlement is not within our control. In such instances,
net-cash settlement is assumed for financial accounting and reporting purposes, even when the terms of the underlying contracts
do not provide for net-cash settlement. Derivative financial instruments are initially recorded, and continuously carried, at
fair value each reporting period.
The
value of the embedded conversion feature is determined using the Black-Scholes option pricing model. All future changes in the
fair value of the embedded conversion feature will be recognized currently in earnings until the note is converted or redeemed.
Determining the fair value of derivative financial instruments involves judgment and the use of certain relevant assumptions including,
but not limited to, interest rate risk, credit risk, volatility and other factors. The use of different assumptions could have
a material effect on the estimated fair value amounts.
Redeemable
- Non-controlling Interest
Redeemable
interest held by third parties in subsidiaries owned or controlled by the Company is reported on the consolidated balance sheets
outside permanent equity. As these redeemable non-controlling 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 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 loss available to the Company. The Company accreted the redemption value of the redeemable
non-controlling interest over the redemption period using the straight-line method.
New
Accounting Pronouncements
In
June 2014, the FASB issued ASU No. 2014-10, which eliminates the concept of a development stage entity, or DSE, in its entirety
from GAAP. Under existing guidance, DSEs are required to report incremental information, including inception-to-date financial
information, in their financial statements. A DSE is an entity devoting substantially all of its efforts to establishing a new
business and for which either planned principal operations have not yet commenced or have commenced but there has been no significant
revenues generated from that business. Entities classified as DSEs will no longer be subject to these incremental reporting requirements
after adopting ASU No. 2014-10. ASU No. 2014-10 is effective for fiscal years beginning after December 15, 2014, with early adoption
permitted. Retrospective application is required for the elimination of incremental DSE disclosures. Prior to the issuance of
ASU No. 2014-10, the Company had met the definition of a DSE since its inception. The Company elected to adopt this ASU early,
and therefore it has eliminated the incremental disclosures previously required of DSEs, starting with this Quarterly Report on
Form 10-Q.
Management
does not believe that any other recently issued, but not yet effective accounting pronouncements, if adopted, would have a material
effect on the accompanying financial statements.
NOTE
3 – DEVELOPMENT CONTRACTS
Department
of Energy Awards 1 and 2
In
February 2007, the Company was awarded a grant for up to $40 million from the U.S. Department of Energy’s (“DOE”)
cellulosic ethanol grant program to develop a solid waste biorefinery project at a landfill in Southern California. During October
2007, the Company finalized Award 1 for a total approved budget of just under $10,000,000 with the DOE. This award was a 60%/40%
cost share, whereby 40% of approved costs may be reimbursed by the DOE pursuant to the total $40 million award announced in February
2007.
In
December 2009, as a result of the American Recovery and Reinvestment Act, the DOE increased the Award 2 to a total of $81 million
for Phase II of its Fulton Project. This is in addition to a renegotiated Phase I funding for development of the biorefinery of
approximately $7 million out of the previously announced $10 million total. This brought the DOE’s total award to the Fulton
project to approximately $88 million. The Company is currently drawing down on funds for Phase II of its Fulton Project. In September
2012 Award 1 was officially closed.
Since
2009, our operations had been financed to a large degree through funding provided by the DOE. We 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, and as of August 11, 2014, we
still have approximately $418,000 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 June 30, 2014, the Company has received reimbursements of approximately $12,670,000 under these awards.
NOTE
4 – NOTES PAYABLE
On
March 28, 2012 the Company entered into a $300,000 promissory note with a third party. See Note 9 for additional information.
As
further described below, the Company has entered into several convertible notes with Asher Enterprises, Inc. Under the terms of
these notes, the Company is to repay any principal balance and interest, at 8% per annum at a given maturity date which is generally
less than one year. The Company has the option to prepay the convertible promissory notes prior to maturity at varying prepayment
penalty rates specified under 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. pursuant to the terms above, with a
maturity date of May 2, 2013. In accordance with the terms of the note, the note became convertible on January 27, 2013
.
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 June 30, 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. pursuant to the terms above, with
a maturity date of July 15, 2013. In accordance with the terms of the note, the note became convertible on April 9, 2013.
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 June 30, 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 in January
2013, such note had an interest rate of 8% per annum with a maturity date of September 26, 2013. In accordance with the terms
of the note, the note became convertible on 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 June 30, 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. pursuant to the terms above,
with a maturity date of November 13, 2013. In accordance with the terms of the note, the note became convertible on August 10,
2013.
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 June 30, 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. pursuant to the terms above, with
a maturity date of March 17, 2014. In accordance with the terms of the note, the note became convertible on December 10, 2013.
The
Company calculated the derivative liability using the Black-Scholes pricing model for the note upon the initial date the note
became convertible and recorded the fair market value of the derivative liability of approximately $28,000, resulting in a discount
to the note. The discount was amortized over the term of the note and accelerated as the note was converted. As of June 30, 2014,
the entire discount was amortized to interest expense, with no remaining unamortized discount and the note was fully converted
into 22,207,699 shares of common stock. 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. The conversion feature was not triggered
until after quarter end due to the effective date of the note being in January 2014. Subsequent to June 30, 2014, all of the principal
and accrued interest outstanding in relation to this note were converted to equity through the issuance of 24,537,990 shares of
common stock.
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 six
months and at June 30, 2014 of derivative liabilities related to Asher Enterprises, Inc. notes, the Company recognized a gain
on derivative liabilities of $86,527, which is included in the accompanying statement of operations within Gain (loss) from change
in fair value of derivative liabilities.
During
the six months ending June 30, 2014, the range of inputs used to calculate derivative liabilities noted above were as follows:
|
|
|
Six
months ended
|
|
|
|
|
June
30, 2014
|
|
Annual dividend yield
|
|
|
-
|
|
Expected life (years)
|
|
|
0.04
- 0.18
|
|
Risk-free interest rate
|
|
|
0.04
- 0.07
|
%
|
Expected volatility
|
|
|
197
|
%
|
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.
As
of June 30, 2014, the Company amortized on-issuance discounts totaling $1,250 with approximately $1,250 remaining.
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 was 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 was amortized over the term of the notes. During the six months ended June 30, 2014, amortization of approximately $51,960
was recognized to interest expense related to the discounts on the notes.
As
of June 30, 2014, both the Tarpon Initial Note and the Tarpon Success Fee Note were in default. Subsequent to quarter end, the
Company paid the Tarpon Initial Note (See Note 10), although the Tarpon Success Fee Note is still in default as of August 11,
2014.
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 June 30, 2014 which
resulted in a loss of approximately $20,000. The Company used the following assumptions as of June 30, 2014 and December 31, 2013:
|
|
June
30, 2014
|
|
|
December
31, 2013
|
|
Annual dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected life (years)
|
|
|
0.00
- 0.01
|
|
|
|
0.8
|
|
Risk-free interest rate
|
|
|
0.02
|
%
|
|
|
0.02
|
%
|
Expected volatility
|
|
|
234
|
%
|
|
|
159
|
%
|
During
the six months ended June 30, 2014, the Company paid $12,500 in cash on the Tarpon Initial Note, and subsequent to June 30, 2014,
the Company paid the remaining $12,500 in cash.
AKR
Promissory Note
On
April 8, 2014, the Company finalized a $350,000 promissory note in favor of AKR Inc (“AKR Note”). Under the terms
of the agreement, the note is due on April 8, 2015, and requires the Company to (i) incur interest at five percent (5%) per annum;
(ii) issue on April 8, 2014 to AKR warrants allowing them to buy 7,350,000 common shares of the Company at an exercise price of
$0.007 per common share, such warrants to expire on April 8, 2016 (“AKR Warrant A”); (iii) issue on August 8, 2014
to AKR warrants allowing them to buy 7,350,000 common shares of the Company at an exercise price of $0.007 per common share, such
warrants to expire on April 8, 2016 (“AKR Warrant B”); and (iv) issue on November 8, 2014 to AKR warrants allowing
them to buy 8,400,000 common shares of the Company at an exercise price of $0.007 per common share, such warrants to expire on
April 8, 2016 (“AKR Warrant C”). The Company may prepay the debt, prior to maturity with no prepayment penalty.
The
Company valued the warrants as of the date of the note and recorded a discount of $42,380 based the relative fair value of the
warrants compared to the debt. During the six months ended June 30, 2014 the Company amortized $9,681 of the discount to interest
expense. As of June 30, 2014 unamortized discount of $32,699 remains. The Company assessed the fair value of the warrants based
on the Black-Scholes pricing model. See below for variables used in assessing the fair value.
|
|
April 8, 2014
|
|
Annual dividend yield
|
|
|
-
|
|
Expected life (years) of
|
|
|
1.41
- 2.00
|
|
Risk-free interest rate
|
|
|
0.40
|
%
|
Expected volatility
|
|
|
183%
- 206
|
%
|
On
April 24, 2014, the Company finalized an additional $30,000 promissory note in favor of AKR Inc (“2nd AKR Note”).
Under the terms of the agreement, the note is due on July 24, 2014, although the Company and AKR Inc extended the maturity date
as disclosed in Note 10. Under the terms of this note, the Company is to repay any principal balance and interest, at 5% per annum
at maturity. Company may prepay the debt, prior to maturity with no prepayment penalty.
NOTE
5 – OUTSTANDING WARRANT LIABILITY
The
Company issued 428,571 warrants to purchase common stock in connection with the Stock Purchase Agreement entered into on January
19, 2011 with Lincoln Park Capital, LLC (See Note 9). These warrants are accounted for as a liability under ASC 815. The Company
assesses the fair value of the warrants quarterly based on the Black-Scholes pricing model. See below for variables used in assessing
the fair value.
|
|
June 30, 2014
|
|
|
December 31, 2013
|
|
Annual dividend yield
|
|
|
-
|
|
|
|
-
|
|
Expected life (years) of
|
|
|
1.55
|
|
|
|
2.05
|
|
Risk-free interest rate
|
|
|
0.47
|
%
|
|
|
0.38
|
%
|
Expected volatility
|
|
|
214
|
%
|
|
|
150
|
%
|
In
connection with these warrants, the Company recognized a gain/(loss) on the change in fair value of warrant liability of $174,
$7,736, ($238), and $21,855 from the change in fair value of these warrants during the three and six-months ended June 30, 2014
and 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, $61,800, and $61,800 during the three and six-months
ended June 30, 2014 and 2013, respectively.
As
of June 30, 2014 and December 31, 2013, $0, and $233,267 of the monthly lease payments were included in accounts payable on the
accompanying balance sheets During the first half of 2014, the County of Itawamba gave the Company credit for past site preparation
reimbursements provided to the County through DOE reimbursements totaling approximately $96,000 which was recorded as a gain in
the accompanying statement of operations. The remaining past due balances from December 31, 2013 were paid in full.
Legal
Proceedings
On
February 26, 2013, the Company received notice that the Orange County Superior Court (the “Court”) issued a Minute
Order (the “Order”) in connection with certain shareholders’ claims of breach of contract and declaratory relief
related to 5,740,741 warrants (the “Warrants”) issued by the Company.
Pursuant
to the Order, the Court ruled in favor of the shareholders on the two claims, finding that the Warrants contain certain anti-dilution
protective provisions which provide for the re-adjustment of the exercise price of such Warrants upon certain events and that
such exercise price per share of the Warrants must be decreased to $0.00.
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 (“CEO”), 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 expired 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.
On
November 10, 2011, the Company obtained a line of credit in the amount of $40,000 from its CEO to provide additional liquidity
to the Company as needed, at his sole discretion. Under the terms of the note, the Company is to repay any principal balance and
interest, at 12% per annum, within 30 days of receiving qualified investment financing of $100,000 or more. During the three months
ended June 30, 2014, the CEO loaned the Company an additional $40,000 under the line of credit, bringing the balance to $51,230,
which is in excess of the line of credit limit, however, subsequent to June 30, 2014, the Company and the CEO amended this line
of credit so that the maximum amount that could be borrowed is $55,000 (See Note 10).
NOTE
8 – REDEEMABLE NON-CONTROLLING INTEREST
On
December 23, 2010, the Company sold a one percent (1%) membership interest in its operating subsidiary, BlueFire Fulton Renewable
Energy, LLC (“BlueFire Fulton” or the “Fulton Project”), to an accredited investor for a purchase price
of $750,000 (“Purchase Price”). The Company maintains a 99% ownership interest in the Fulton Project. In addition,
the investor received a right to require the Company to redeem the 1% interest for $862,500, or any pro-rata amount thereon. The
redemption is based upon future contingent events based upon obtaining financing for the construction of the Fulton Project. The
third party equity interests in the consolidated joint ventures are reflected as redeemable non-controlling interests in the Company’s
consolidated financial statements outside of equity. The Company accreted the redeemable non-controlling interest for the total
redemption price of $862,500 through the estimated forecasted financial close, originally estimated to be the end of the third
quarter of 2011.
Net
income (loss) attributable to the redeemable non-controlling interest during for the three and six-months ended June 30, 2014
and 2013 was $1, $(685), $2,373, and $(2,742), respectively which netted against the value of the redeemable non-controlling interest
in temporary equity. The allocation of income (loss) was presented on the statement of operations.
NOTE
9 – STOCKHOLDERS’ DEFICIT
Stock-Based
Compensation
During
the three and six-months ended June 30, 2014 and 2013, the Company recognized stock-based compensation, including consultants,
of approximately $9,700, $0, $46,700, and $9,100, to general and administrative expenses and $0, $0, $0, and $0 to project development
expenses, respectively. There is no additional future compensation expense to record as of June 30, 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. The Purchase Agreement was terminated in July 18, 2013. During the three and six-months ended June 30, 2014 and 2013
the Company drew $0, $0, $0, and $0 on the Purchase Agreement.
Upon
signing the Purchase Agreement, BlueFire received $150,000 from LPC as an initial purchase under the $10 million commitment in
exchange for 428,571 shares of our common stock and warrants to purchase 428,571 shares of our common stock at an exercise price
of $0.55 per share. The warrants contain a ratchet provision in which the exercise price will be adjusted based on future issuances
of common stock, excluding certain issuances; if issuances are at prices lower than the current exercise price (see Note 6). The
warrants have an expiration date of January 2016.
Equity
Facility Agreement
On
March 28, 2012, BlueFire finalized a committed equity facility (the “Equity Facility”) with TCA Global Credit Master
Fund, LP, a Cayman Islands limited partnership (“TCA”), whereby the parties entered into (i) a committed equity facility
agreement (the “Equity Agreement”) and (ii) a registration rights agreement (the “Registration Rights Agreement”).
Pursuant to the terms of the Equity Agreement, for a period of twenty-four (24) months commencing on the date of effectiveness
of the Registration Statement (as defined below), TCA committed to purchase up to $2,000,000 of BlueFire’s common stock,
par value $0.001 per share (the “Shares”), pursuant to Advances (as defined below), covering the Registrable Securities
(as defined below). The purchase price of the Shares under the Equity Agreement 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 granted
to TCA a continuing, first priority security interest in all of BlueFire’s assets, wheresoever located and whether now existing
or hereafter arising or acquired. On March 28, 2012, BlueFire issued the Convertible Note in favor of TCA. The maturity date of
the Convertible Note was March 28, 2013, and the Convertible Note bore interest at a rate of twelve percent (12%) per annum with
a default rate of eighteen percent (18%) per annum. The Convertible Note was convertible into shares of BlueFire’s common
stock at a price equal to ninety-five percent (95%) of the lowest daily volume weighted average price of BlueFire’s common
stock during the five (5) trading days immediately prior to the date of conversion. The Convertible Note had the option to be
prepaid in whole or in part at BlueFire’s option without penalty. The proceeds received by the Company under the purchase
agreement were used for general working capital purposes which include costs reimbursed under the DOE cost share program.
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 six months ended June 30, 2014 and 2013 was approximately $0 and $38,617, respectively.
As of June 30, 2014, there were no remaining deferred financing costs.
This
note contained an embedded conversion feature whereby the holder could convert the note at a discount to the fair value of the
Company’s common stock price. Based on applicable guidance the embedded conversion feature was considered a derivative instrument
and bifurcated. This liability was recorded on the face of the financial statements as “derivative liability”, and
was revalued each reporting period. During the three months ended June 30, 2014, the note was repaid in full along with accrued
interest and fees thereon. Accordingly, the remaining derivative liability of $13,189 was transferred to equity.
On
April 11, 2014, the Convertible Note with TCA was repaid in full.
Liability Purchase Agreement
On December 9, 2013, The Circuit Court of
the Second Judicial Circuit in and for Leon County, Florida (the “Court”), entered an order (the “Order”)
approving, among other things, the fairness of the terms and conditions of an exchange pursuant to Section 3(a)(10) of the Securities
Act of 1933, in accordance with a stipulation of settlement (the “Settlement Agreement”) between the Company, and
Tarpon Bay Partners, LLC, a Florida limited liability company (“Tarpon”), in the matter entitled Tarpon Bay Partners,
LLC v. BlueFire Renewables, Inc., Case No. 2013-CA-2975 (the “Action”). Tarpon commenced the Action against the Company
on November 21, 2013 to recover an aggregate of $583,710 of past-due accounts payable of the Company, which Tarpon had purchased
from certain creditors of the Company pursuant to the terms of separate receivable purchase agreements between Tarpon and each
of such vendors (the “Assigned Accounts”), plus fees and costs (the “Claim”). The Assigned Accounts relate
to certain legal, accounting, financial services, and the repayment of aged debt. The Order provides for the full and final settlement
of the Claim and the Action. The Settlement Agreement became effective and binding upon the Company and Tarpon upon execution
of the Order by the Court on December 9, 2013. Notwithstanding anything to the contrary in the Stipulation, the number of shares
beneficially owned by Tarpon will not exceed 9.99% of the Company’s Common Stock. In connection with the Settlement Agreement,
the Company relied on the exemption from registration provided by Section 3(a)(10) under the Securities Act.
Pursuant to the terms of the Settlement Agreement
approved by the Order, the Company shall issue and deliver to Tarpon shares (the “Settlement Shares”) of the Company’s
Common Stock in one or more tranches as necessary, and subject to adjustment and ownership limitations, sufficient to generate
proceeds such that the aggregate Remittance Amount (as defined in the Settlement Agreement) equals the Claim. In addition, pursuant
to the terms of the Settlement Agreement, the Company issued to Tarpon the Tarpon Initial Note in the principal amount of $25,000.
Under the terms of the Tarpon Initial Note, the Company shall pay Tarpon $25,000 on the date of maturity which was January 30,
2014. This Note 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 was 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 six months ended June 30, 2014, the Company issued Tarpon 61,010,000 shares
of Common Stock from which gross proceeds of $163,406 were generated from the sale of the Common Stock. In connection with the
transaction, Tarpon received fees of $42,402 and providing payments of $121,004 to settle outstanding vendor payables. Any shares
not used by Tarpon are subject to return to the Company. Accordingly, the Company accounts for these shares as issued but not
outstanding until the shares have been sold by Tarpon and the proceeds are known. Net proceeds received by Tarpon are included
as a reduction to accounts payable or other liability as applicable, as such funds are legally required to be provided to the
party Tarpon purchased the debt from.
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 June 30, 2014, the holder of various convertible notes, converted $37,500 in principal, along with $1,500 of accrued interest,
of a note with a maturity date of December 23, 2014, into 24,537,990 shares of common stock. See Note 4 for more information on
the conversion features of the notes.
Subsequent to June 30, 2014, the Company paid
the remaining $12,500 on the Tarpon Initial Note.
Subsequent to June 30, 2014, the Company issued
the AKR Warrant B, consisting of warrants to purchase 7,350,000 shares of the Company’s common stock, in connection with
the AKR Note transaction on April 8, 2014 (See Note 4).
Subsequent to June 30, 2014, the Company finalized
an extension to the 2nd AKR Note, which amends the original note so that the maturity date is now December 31, 2014 (See Note
4).
Subsequent to June 30, 2014, the Company and
the CEO amended a line of credit provided by the CEO in order to grant additional liquidity to the Company as needed from a maximum
of $40,000 to a maximum amount of $55,000. All of the other terms remained the same. See Note 7 for more information on the line
of credit.