NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1 - ORGANIZATION AND BUSINESS
BlueFire
Ethanol, Inc. (“BlueFire” or the “Company”) was incorporated in the state of Nevada on March 28, 2006.
BlueFire was established to deploy the commercially ready and patented process for the conversion of cellulosic waste materials
to ethanol (“Arkenol Technology”) under a technology license agreement with Arkenol, Inc. (“Arkenol”).
BlueFire’s use of the Arkenol Technology positions it as a cellulose-to-ethanol company with demonstrated production of
ethanol from urban trash (post-sorted “MSW”), rice and wheat straws, wood waste and other agricultural residues. The
Company’s goal is to develop and operate high-value carbohydrate-based transportation fuel production facilities in North
America, and to provide professional services to such facilities worldwide. These “biorefineries” will convert widely
available, inexpensive, organic materials such as agricultural residues, high-content biomass crops, wood residues, and cellulose
from MSW into ethanol.
On
September 30, 2015, the Company filed an amendment to the Company’s articles of incorporation with the Secretary of State
of the State of Nevada, which, among other things, established the designation, powers, rights, privileges, preferences and restrictions
of the Series A Preferred Stock, no par value per share (the “Series A Preferred Stock”). Among other things, each
one (1) share of the Series A Preferred Stock shall have voting rights equal to(x) 0.019607 multiplied by the total issued and
outstanding shares of common stock of the Company eligible to vote at the time of the respective vote (the “Numerator”),
divided by (y) 0.49, minus (z) the Numerator. For purposes of illustration only, if the total issued and outstanding shares of
common stock of the Company eligible to vote at the time of the respective vote is 5,000,000, the voting rights of one share of
the Series A Preferred Stock shall be equal to 102,036 (0.019607 x 5,000,000) / 0.49) – (0.019607 x 5,000,000) = 102,036).
The
Series A Preferred Stock has no dividend rights, no liquidation rights and no redemption rights, and was created primarily to
be able to obtain a quorum and conduct business at shareholder meetings. All shares of the Series A Preferred Stock shall rank
(i) senior to the Company’s common stock and any other class or series of capital stock of the Company hereafter created,
(ii) pari passu with any class or series of capital stock of the Company hereafter created and specifically ranking, by its terms,
on par with the Series A Preferred Stock and (iii) junior to any class or series of capital stock of the Company hereafter created
specifically ranking, by its terms, senior to the Series A Preferred Stock, in each case as to distribution of assets upon liquidation,
dissolution or winding up of the Company, whether voluntary or involuntary.
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 Chief Executive Officer, the private placement of the Company’s common stock in
December 2007 for net proceeds of approximately $14,500,000, the issuance of convertible notes with warrants in July and in August
2007, various convertible notes, and Department of Energy reimbursements from 2009 to 2015. 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, 2016, the Company has negative working capital of approximately $2,673,000. Management has estimated that operating
expenses for the next 12 months will be approximately $1,450,000 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. The Company
intends to fund its operations with any additional funding that can be secured in the form of equity or debt. As of May 16, 2016,
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 or at all. 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 engineering and design package for its Lancaster plant allows for almost immediate construction, upon receipt
of funding and the renewal of its permits, and only requires minimal capital to maintain until funding is obtained for its construction.
With no immediate funding sources in place, the Company sees this project on hold.
As
of December 31, 2010, the Company completed the detailed engineering on our proposed Fulton Project (Note 3), procured all necessary
permits for construction of the plant, and began site clearing and preparation work, signaling the beginning of construction.
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 through such date 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.
Risks
and Uncertainties
The
Company has a limited operating history and has not generated revenues from our planned principal operations.
The
Company’s business and operations are very sensitive to general business and economic conditions in the U.S. and worldwide.
Specifically, these conditions include short-term and long-term interest rates, inflation, fluctuations in debt and equity capital
markets and the general price of crude oil and gasoline.
The
risks related to the Company’s plans to sell engineering services are that the Company currently has no sales and limited
marketing capabilities. The Company has limited experience in developing, training or managing a sales force and will incur substantial
additional expenses if we decide to market any of our services. Developing a marketing and sales force is also time consuming
and could delay launch of our future bio-ethanol plants. In addition, the Company will compete with other engineering companies
that currently have extensive and well-funded marketing and sales operations. Our marketing and sales efforts may be unable to
compete successfully against these companies. In addition, the Company has limited capital to devote sales and marketing.
The
Company’s business and industry is also subject to new innovations in technology. Significant technical changes can have
an adverse effect on product lives. Design and development of new products and services are important elements to achieve profitability
in the Company’s industry segment. As a result, the Company’s products may quickly become obsolete and unmarketable.
The Company’s future success will depend on its ability to adapt to technological advances, anticipate customer demands,
develop new products and services and enhance our current products on a timely and cost-effective basis.
The
Company’s products must remain competitive with those of other companies with substantially greater resources. The Company
may experience technical or other difficulties that could delay or prevent the development, introduction or marketing of new products
or enhanced versions of existing products. Also, the Company may not be able to adapt new or enhanced products to emerging industry
standards, and the Company’s new products may not be favorably received. Nor may we have the capital resources to further
the development of existing and/or new ones.
Lastly,
the Company may be subject to federal, state and local environmental laws and regulations. The Company does not anticipate material
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.
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 consolidated 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, 2015. The results of operations for the three months ended March 31,
2016 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 the three months ended March 31, 2016 and 2015, research and development costs included in Project Development were approximately
$100,000, and $211,000, 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 on the associated debt instrument when the modification does not result in
a debt extinguishment.
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, 2016 or December 31, 2015.
As
of March 31, 2016 and December 31, 2015, the Company’s derivative and warrant liabilities are considered a level 2 item
(see Notes 4 and 5).
As
of March 31, 2016 and December 31, 2015 the Company’s redeemable noncontrolling interest is considered a level 3 item and
changed during the three months ended March 31, 2016 as follows.
Balance at December 31, 2015
|
|
$
|
865,614
|
|
Net loss attributable to noncontrolling interest
|
|
|
1,479
|
|
Balance at March 31, 2016
|
|
$
|
864,135
|
|
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, 2016 and 2015, the Company had 23,100,000 and 23,528,571 warrants, respectively,
for which, in 2015, 428,571 warrants had an exercise price which was in excess of the average closing price of the Company’s
common stock during the corresponding quarter, and thus 23,100,000 and 23,100,000 warrants, respectively, are considered dilutive
under the treasury stock method of accounting. However, due to the net loss in the periods presented, the warrants’ effects
are antidilutive and therefore, excluded from diluted EPS calculations.
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
The
Financial Accounting Standards Board (“FASB”) issues Accounting Standard Updates (“ASU”) to amend the
authoritative literature in ASC. There have been a number of ASUs to date that amend the original text of ASC. The Company believes
those issued to date either (i) provide supplemental guidance, (ii) are technical corrections, (iii) are not applicable to the
Company or (iv) are not expected to have a significant impact on the Company.
In
August 2014, the FASB issued ASU No. 2014-15, “Presentation of Financial Statements Going Concern”, which requires
management to evaluate, at each annual and interim reporting period, whether there are conditions or events that raise substantial
doubt about the entity’s ability to continue as a going concern within one year after the date the financial statements
are issued and provide related disclosures. ASU 2014-15 is effective for annual periods ending after December 15, 2016 and interim
periods thereafter. The guidance is not expected to have a material impact on the Company’s financial statements.
In
April 2015, FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs, which changes the presentation of debt
issuance costs in financial statements. ASU 2015-03 requires an entity to present such costs in the balance sheet as a direct
deduction from the related debt liability rather than as an asset. Amortization of debt issuance costs will continue to be reported
as interest expense. ASU 2015-03 is effective for annual reporting periods beginning after December 15, 2015. The adoption did
not have a material impact on the Company’s financial statements.
In
November 2015, the FASB issued ASU 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes. The amendments
in this update simplify the presentation of deferred taxes by requiring deferred tax assets and liabilities be classified as noncurrent
on the balance sheet. These amendments may be applied either prospectively to all deferred tax liabilities and assets or retrospectively
to all periods presented. The amendments are effective for financial statements issued for annual periods beginning after December
15, 2016, and interim periods within those annual periods. Earlier application is permitted for all entities as of the beginning
of an interim or annual reporting period. The guidance is not expected to have a material impact
on
the Company’s financial statements.
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 840), to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities
on the balance sheet and disclosing key information about leasing arrangements. The amendments in this standard are effective
for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, for a public entity.
Early adoption of the amendments in this standard is permitted for all entities and the Company must recognize and measure leases
at the beginning of the earliest period presented using a modified retrospective approach. The Company is currently in the process
of evaluating the effect this guidance will have on its financial statements and related disclosures.
Management
does not believe that any recently issued, but not yet effective accounting pronouncements, if adopted, would have a material
effect on the accompanying financial statements.
NOTE
3 - DEVELOPMENT 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 Award 2 to a total of $81 million
for Phase II of its Fulton Project. This is in addition to a renegotiated Phase I funding for development of the biorefinery of
approximately $7 million out of the previously announced $10 million total. This brought the DOE’s total award to the Fulton
project to approximately $88 million. In September 2012, Award 1 was officially closed.
Since
2009, our operations had been financed to a large degree through funding provided by the DOE. We have relied on access to this
funding as a source of liquidity for capital requirements not satisfied by the cash flow from our operations. If we are unable
to access government funding our ability to finance our projects and/or operations and implement our strategy and business plan
will be severely hampered.
On
December 23, 2013, the Company received notice from the DOE indicating that the DOE would no longer provide funding under Award
2 due to the Company’s inability to comply with certain deadlines related to providing certain information to the DOE with
respect to the Company’s future financing arrangements for the Fulton Project. On March 17, 2015, the Company received a
letter from the DOE stating that because of the upcoming September 2015 expiration date for expending American Recovery and Reinvestment
Act (ARRA) funding, it cannot reconsider its decision, and the Company considers such decision to be final. In June of 2015, the
DOE obligated additional funds totaling $873,332 for costs incurred but not reimbursed prior to September 30, 2014 as well as
for program required compliance audits for years 2011-2014.
As
of September 30, 2015 the Company submitted all final invoices and final documents related to the termination of the grant by
the DOE. The Company considers the grant closed out and completed.
NOTE
4 - NOTES PAYABLE
From
time-to-time, the Company enters into convertible notes with third parties as indicated below. 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.
For
the below convertible notes, 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.
Vis
Vires Group, Inc.
On
May 12, 2015, the Company issued a convertible note in favor of Vis Vires Group, Inc. in the principal amount of $59,000 with
a $4,000 on-issuance discount pursuant to the terms identified above, with a maturity date of February 14, 2016. In accordance
with the terms of the note, the note became convertible on November 8, 2015. As of December 31, 2015, the entire discount, including
the on issuance discount, was amortized to interest expense, with no remaining unamortized discount and the note was fully converted
into 26,072,727 shares of common stock.
JMJ
Convertible Note
On
April 2, 2015, the Company issued a convertible note in favor of JMJ Financial in the principal amount of $100,000 out of a total
of a possible $250,000, with a maturity date of April 1, 2017 (the “JMJ Note”). The JMJ Note was issued with a 10%
original issue discount, and is convertible at any time. The $10,000 on-issuance discount will be amortized over the life of the
note. The Company is to repay any principal balance due under the note including a one-time charge of 12% interest on the principal
balance outstanding if not repaid within 90 days. The Company has the option to prepay the JMJ Note prior to maturity. The JMJ
Note is convertible into shares of the Company’s common stock as calculated by multiplying 60% of the lowest trade price
in the 25 trading days prior to the conversion date.
Due
to the variable conversion feature of the note, derivative accounting is required. The Company valued the derivative upon issuance
and at each conversion, and reporting date. The initial value of the derivative liability was $412,212, resulting in a day one
loss $312,212. The discount on the convertible note is being amortized over the life of the note. During the three months ended
March 30, 2016, amortization of the discount was $32,866 with $0 remaining.
|
|
March 31, 2016
|
|
|
April 2, 2015
|
|
Annual dividend yield
|
|
|
-
|
|
|
|
-
|
|
Expected life (years)
|
|
|
1.00
|
|
|
|
2.00
|
|
Risk-free interest rate
|
|
|
0.73
|
%
|
|
|
0.55
|
%
|
Expected volatility
|
|
|
188.24
|
%
|
|
|
301.07
|
%
|
During
the three months ended March 31, 2016, the Company issued 96,830,000 shares of common stock for the conversion of approximately
$60,650, including approximately $52,950 of principal and $7,700 of accrued interest. Subsequent to March 31, 2016, a portion
of the JMJ Note was converted into shares of Company stock and repaid in full (See Note 10).
AKR
Promissory Note
On
April 8, 2014, the Company issued a promissory note in favor of AKR Inc, (“AKR”) in the principal aggregate amount
of $350,000 (the “AKR Note”). The AKR Note was due on April 8, 2015, but was subsequently extended to June 30, 2016,
and requires the Company to (i) incur interest at five percent (5%) per annum; (ii) issue on April 8, 2014 to AKR warrants allowing
them to buy 7,350,000 common shares of the Company at an exercise price of $0.007 per common share, such warrants to expire on
April 8, 2016 (“AKR Warrant A”); (iii) issue on August 8, 2014 to AKR warrants allowing them to buy 7,350,000 common
shares of the Company at an exercise price of $0.007 per common share, such warrants to expire on April 8, 2016 (“AKR Warrant
B”); and (iv) issue on November 8, 2014 to AKR warrants allowing them to buy 8,400,000 common shares of the Company at an
exercise price of $0.007 per common share, such warrants to expire on April 8, 2016 (“AKR Warrant C”, together with
AKR Warrant A and AKR Warrant B the “AKR Warrants”). The Company may prepay the debt, prior to maturity with no prepayment
penalty.
The
Company valued the AKR Warrants as of the date of the note and recorded a discount of $42,323 based on the relative fair value
of the AKR Warrants compared to the debt. During the quarter ended March 31, 2016, the Company amortized $0 of the discount to
interest expense. As of March 31, 2016 unamortized discount of $0 remains. The Company assessed the fair value of the AKR Warrants
based on the Black-Scholes pricing model. See below for variables used in assessing the fair value.
|
|
April 8, 2014
|
|
Annual dividend yield
|
|
|
-
|
|
Expected life (years) of
|
|
|
1.41
- 2.00
|
|
Risk-free interest rate
|
|
|
0.40%
|
|
Expected volatility
|
|
|
183%
- 206%
|
|
On
April 24, 2014, the Company issued a promissory note in favor of AKR in the principal aggregate amount of $30,000 (“2
nd
AKR Note”). The 2
nd
AKR Note was due on July 24, 2014, but was subsequently extended to June 30, 2016.
Pursuant to the terms of the 2
nd
AKR Note, the Company is to repay any principal balance and interest, at 5% per annum
at maturity. The Company may prepay the debt prior to maturity with no prepayment penalty.
Kodiak
Promissory Note
On
December 17, 2014, the Company entered into the equity Purchase Agreement with Kodiak. Pursuant to the terms of the Purchase Agreement,
for a period of twenty-four (24) months commencing on the date of effectiveness of the registration statement, Kodiak shall commit
to purchase up to $1,500,000 of Put Shares, pursuant to Puts (as defined in the Purchase Agreement), covering the Registered Securities
(as defined in the Purchase Agreement). See Note 9 for more information.
As
further consideration for Kodiak entering into and structuring the Purchase Agreement, the Company issued Kodiak a promissory
note in the principal aggregate amount of $60,000 (the “Kodiak Note”) that bears no interest and has maturity date
of July 17, 2015. No funds were received for this note. As of March 31, 2016, the balance outstanding on the Kodiak Note was $40,000.
Because the note was issued for no cash consideration, there was a full on-issuance discount, of which $60,000 was amortized as
of March 31, 2016, and $0 remains to be amortized.
NOTE
5 - OUTSTANDING WARRANT LIABILITY
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.
The
Company issued 428,571 warrants to purchase common stock in connection with a Stock Purchase Agreement entered into on January
19, 2011 with Lincoln Park Capital, LLC. These warrants expired in January 2016 and were accounted for as a liability under ASC
815 as they 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. 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.
|
|
January 19, 2016
|
|
|
December 31, 2015
|
|
Annual dividend yield
|
|
|
-
|
|
|
|
-
|
|
Expected life (years) of
|
|
|
0
|
|
|
|
0.05
|
|
Risk-free interest rate
|
|
|
0
|
%
|
|
|
0.14
|
%
|
Expected volatility
|
|
|
0
|
%
|
|
|
216
|
%
|
In
connection with these warrants, the Company recognized a gain on the change in fair value of warrant liability of approximately
$199 and $13,200 during the three months ended March 31, 2016 and 2015, respectively.
Expected
volatility is based primarily on historical volatility. Historical volatility was computed using weekly pricing observations for
recent periods that correspond to the expected life of the warrants. The Company believes this method produces an estimate that
is representative of our expectations of future volatility over the expected term of these warrants. The Company currently has
no reason to believe future volatility over the expected remaining life of these warrants is likely to differ materially from
historical volatility. The expected life is based on the remaining term of the warrants. The risk-free interest rate is based
on U.S. Treasury securities rates.
NOTE
6 - COMMITMENTS AND CONTINGENCIES
Board
of Director Arrangements
On
November 19, 2013, the Company renewed all of its existing Directors’ appointment, and accrued $5,000 to both of the two
outside members. Pursuant to the Board of Director agreements, the Company’s “in-house” board members (CEO and
Vice-President) waived their annual cash compensation of $5,000. As of May 16, 2016, the Company had not yet issued the 6,000
shares issuable for compensation in 2013, 2014 or 2015 to each of its Board Members.
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, and $30,900 during the three months ended March 31, 2016 and 2015,
respectively.
As
of March 31, 2016 and 2015, $205,840 and $82,336 of the monthly lease payments were included in accounts payable on the accompanying
consolidated balance sheets, respectively. During 2014, the County of Itawamba forgave approximately $96,000 in lease payments.
The
Company is currently in default of the lease due to non payment and could be subject to lease cancellation if it cannot make payments
or other arrangements with the County of Itawamba. As of March 31, 2016, the Company has accrued $16,033 of default interest due
to the nonpayment of the lease. As of the date of this filing there have been no formal letters of default or demands from the
County of Itawamba.
NOTE
7 - RELATED PARTY TRANSACTIONS
Loan
Agreement
On
December 15, 2010, the Company entered into a loan agreement (the “Loan Agreement”) by and between Arnold Klann, the
Chief Executive Officer, Chairman of the board of directors and majority shareholder of the Company, as lender (the “Lender”),
and the Company, as borrower. Pursuant to the Loan Agreement, the Lender agreed to advance to the Company a principal amount of
Two Hundred Thousand United States Dollars ($200,000) (the “Loan”). The Loan Agreement requires the Company to (i)
pay to the Lender a one-time amount equal to fifteen percent (15%) of the Loan (the “Fee Amount”) in cash or shares
of the Company’s common stock at a value of $0.50 per share, at the Lender’s option; and (ii) issue the Lender warrants
allowing the Lender to buy 500,000 common shares of the Company at an exercise price of $0.50 per common share. 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.
Related
Party Lines of Credit
On
November 10, 2011, the Company obtained a line of credit in the amount of $40,000 from its Chairman/Chief Executive Officer and
majority shareholder to provide additional liquidity to the Company as needed, at his sole discretion. Under the terms of the
note, the Company is to repay any principal balance and interest, at 12% per annum, within 30 days of receiving qualified investment
financing of $100,000 or more. On April 10, 2014 the line of credit was increased to $55,000. On March 13, 2016, the line of credit
was increased to $125,000. As of March 31, 2016 and December 31, 2015, the outstanding balance on the line of credit was approximately
$69,230 and $45,230, respectively. On March 31, 2016, there was approximately $55,770 remaining under the line. Although the Company
has received over $100,000 in financing since this agreement was put into place, Mr. Klann does not hold the Company in default
at this time.
As
of March 31, 2016, $16,707 in accrued interest is owed under this line of credit and included with accrued liabilities.
Accrued
Salaries
As
of March 31, 2016 and December 31, 2015, accrued salary due to the Chief Executive Officer included within accrued liabilities
was $188,333.
NOTE
8 - REDEEMABLE NONCONTROLLING INTEREST
On
December 23, 2010, the Company sold a one percent (1%) membership interest in its operating subsidiary, BlueFire Fulton Renewable
Energy, LLC (“BlueFire Fulton” or the “Fulton Project”), to an accredited investor for a purchase price
of $750,000 (“Purchase Price”). The Company maintains a 99% ownership interest in the Fulton Project. In addition,
the investor received a right to require the Company to redeem the 1% interest for $862,500, or any pro-rata amount thereon. The
redemption is based upon future contingent events based upon obtaining financing for the construction of the Fulton Project. The
third party equity interests in the consolidated joint ventures are reflected as redeemable noncontrolling interests in the Company’s
consolidated financial statements outside of equity. The Company accreted the redeemable noncontrolling interest for the total
redemption price of $862,500 through the estimated forecasted financial close, originally estimated to be the end of the third
quarter of 2011.
Net
loss attributable to the redeemable noncontrolling interest during for the three months ended March 31, 2016 and 2015 was $1,479
and $1,189, respectively which netted against the value of the redeemable non-controlling interest in temporary equity. The allocation
of net loss was presented on the consolidated statements of operations.
NOTE
9 - STOCKHOLDERS’ DEFICIT
Series
A Preferred Stock
We
have authorized the issuance of a total of 1,000,000 shares of our Series A Preferred Stock. See Note 1 for rights and preferences.
Kodiak
Purchase Agreement and Registration Rights Agreement
On
December 17, 2014, the Company entered into the equity Purchase Agreement with Kodiak. Pursuant to the terms of the Purchase Agreement,
for a period of twenty-four (24) months commencing on the date of effectiveness of the registration statement, Kodiak shall commit
to purchase up to $1,500,000 of Put Shares, pursuant to Puts (as defined in the Purchase Agreement), covering the Registered Securities
(as defined below).
The
“Registered Securities” means the (a) Put Shares, and (b) any securities issued or issuable with respect to any of
the foregoing 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 to any particular Registered Securities, once issued such securities
shall cease to be Registered Securities when (i) a Registration Statement has been declared effective by the SEC and such Registered
Securities have been disposed of pursuant to a Registration Statement, (ii) such Registered Securities have been sold under circumstances
under which all of the applicable conditions of Rule 144 are met, (iii) such time as such Registered Securities have been otherwise
transferred to holders who may trade such shares without restriction under the Securities Act or (iv) in the opinion of counsel
to the Company, which counsel shall be reasonably acceptable to Investor, such Registered Securities may be sold without registration
under the Securities Act or the need for an exemption from any such registration requirements and without any time, volume or
manner limitations pursuant to Rule 144(b)(i) (or any similar provision then in effect) under the Securities Act.
As
further consideration for Kodiak entering into and structuring the Purchase Agreement, the Company issued Kodiak a promissory
note for no consideration, in the principal aggregate amount of $60,000 (the “Kodiak Note”) that bears no interest
and has maturity date of July 17, 2015. See Note 4 for additional information.
Concurrently
with the Purchase Agreement, on December 17, 2014, the Company also entered into a registration rights agreement (the “Registration
Rights Agreement”) with Kodiak. Pursuant to the terms of the Registration Rights Agreement, the Company is obligated to
file a registration statement (the “Registration Statement”) with the SEC to cover the Registered Securities, within
thirty (30) days of closing, and must use its commercially reasonable efforts to cause the Registration Statement to be declared
effective by the SEC. The Registration was filed on January 2, 2015, and declared effective on February 11, 2015.
On
February 12, 2015, the Company issued a Put for 20,000,000 put shares. The lowest closing bid price during the valuation period
was $0.0098. For the quarter ended March 31, 2016 and 2015, the Company received total funds, net of Kodiak’s 25% discount,
of $0 and $147,000, respectively.
The
Purchase Agreement, will terminate on the earlier of (i) on the date on which Kodiak shall have purchased Put Shares pursuant
to this Agreement for an aggregate Purchase Price of the Maximum Commitment Amount or (ii) December 31, 2016.
NOTE
10 - SUBSEQUENT EVENTS
Subsequent
to March 31, 2016, the Company has issued a total of 8,911,400 shares of common stock to JMJ under the terms of the JMJ Note for
conversion of approximately $5,347 in accrued interest. The JMJ Note is fully repaid as of April 5, 2016.
Subsequent
to March 31, 2016, the Company reached a settlement with James G Speirs and James N. Speirs in regards to the lawsuit filed in
Orange County Superior Court and subsequently appealed by the Company. Under the settlement agreement, James G Speirs and James
N Speirs have returned the 5,740,741 shares to the Company and they have been subsequently retired to treasury. The request to
dismiss the case has been sent by both parties to the Orange County Superior Court and is awaiting the formal dismissal.