NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
1 - ORGANIZATION AND BUSINESS
BlueFire
Ethanol, Inc. (“BlueFire”) a wholly owned subsidiary of BlueFire Renewables, Inc. (the “Company”) was
incorporated in the state of Nevada on March 28, 2006. On June 27, 2006, the Company completed a reverse merger with BlueFire.
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.
The
Board is currently evaluating strategic alternatives which include, among other things, merging or selling the Company, and have
granted approval to management in order to sell the Lancaster property, if needed, in order to obtain additional capital sufficient
to continue operating and meet both our operating and financial obligations.
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 September 30, 2016, the Company has negative working capital of approximately $3,391,000. Management has estimated that operating
expenses for the next 12 months will be approximately $1,250,000 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 November 14,
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. As mentioned above, the Board is currently evaluating strategic alternatives
which include, among other things, merging or selling the Company, and have granted approval to management in order to sell the
Lancaster property, if needed, in order to obtain additional capital sufficient to continue operating and meet both our operating
and financial obligations. 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 expedited 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. Further, management has received approval from
the Board to sell the Lancaster property, if needed. However, as of September 30, 2016, the property is not listed for sale and
this asset is not considered an asset held for sale.
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 the Fulton Project
but no definitive agreements are in place. The Company cannot continue significant development or furtherance of the Fulton project
until total project 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 to 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.
Management
has received approval from the Board to sell the Lancaster property, if needed, however no formal plan is in place, and this asset
is not considered an asset held for sale. If the Lancaster property is sold, it could further delay or deter further financing
into the Company.
Due
to the continuing capital constraints at the Company, John Cuzens, our Chief Technology Officer and Senior VP, has begun employment
as an engineer in an industry that we feel does not compete with the Company. Mr Cuzens remains the Chief Technology Officer of
the Company, however, his time spent working on BlueFire projects is severely limited and is on a consulting basis. His technical
and engineering expertise, including his familiarity with the Arkenol Technology, is important to BlueFire and our failure to
retain Mr. Cuzens on a full-time basis, or to attract and retain additional qualified personnel, could adversely affect our planned
operations. We do not currently carry key-man life insurance on any of our officers.
The
long time horizon of project development and financing for the Company's intended biorefinery projects may make it difficult to
keep key project contracts active and in force with the Company's limited resources. There is no guarantee the Company can keep
them active or find suitable replacements if they do expire or are canceled.
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 (the “SEC”). 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 and nine-months ended September 30, 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 subsidiaries, BlueFire
Ethanol, Inc., and SucreSource LLC. BlueFire Ethanol Lancaster, LLC, and BlueFire Fulton Renewable Energy LLC (excluding 1% interest
sold) are wholly-owned subsidiaries of BlueFire Ethanol, Inc. All intercompany balances and transactions have been eliminated
in consolidation.
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses
during the reported periods. Actual results could materially differ from those estimates.
Project
Development
Project
development costs are either expensed or capitalized. The costs of materials and equipment that will be acquired or constructed
for project development activities, and that have alternative future uses, both in project development, marketing or sales, will
be classified as property and equipment and depreciated over their estimated useful lives. To date, project development costs
include the research and development expenses related to the Company’s future cellulose-to-ethanol production facilities.
During the three and nine months ended September 30, 2016 and 2015, research and development costs, net of stock-based compensation,
included in Project Development expense were approximately $68,000, $213,000, $238,000, and $628,000, 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.
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;
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|
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●
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Level
2. Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and
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|
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|
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●
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Level
3. Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
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The
Company did not have any Level 1 financial instruments at September 30, 2016 or December 31, 2015.
As
of September 30, 2016 and December 31, 2015, the Company’s warrant and derivative liabilities are considered Level 2 items
(see Note 4 and 5).
As
of September 30, 2016 and December 31, 2015, the Company’s redeemable non-controlling interest is considered a Level 3 item
and changed during nine months ended September 30, 2016 as follows:
Balance at December 31,
2015
|
|
$
|
865,614
|
|
Net
loss attributable to non-controlling interest
|
|
|
(3,591
|
)
|
Balance at
September 30, 2016
|
|
$
|
862,023
|
|
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 September 30, 2016 and 2015, the Company had 0 and 23,528,571 warrants,
respectively, for which all of the exercise prices were in excess of the average closing price of the Company’s common stock
during the corresponding period and thus no shares are considered dilutive under the treasury stock method of accounting and their
effects would have been antidilutive due to the loss in the periods presented. During the three months ended September 30, 2015,
45,833,333 shares were included in the diluted weighted average common shares outstanding, related to convertible debt on an if-converted
basis.
Derivative
Financial Instruments
We
do not use derivative financial instruments to hedge exposures to cash-flow risks or market-risks that may affect the fair values
of our financial instruments. However, under the provisions ASC 815 – “Derivatives and Hedging” certain financial
instruments that have characteristics of a derivative, as defined by ASC 815, such as embedded conversion features on our Convertible
Notes, that are potentially settled in the Company’s own common stock, are classified as liabilities when either (a) the
holder possesses rights to net-cash settlement or (b) physical or net-share settlement is not within our control. In such instances,
net-cash settlement is assumed for financial accounting and reporting purposes, even when the terms of the underlying contracts
do not provide for net-cash settlement. Derivative financial instruments are initially recorded, and continuously carried, at
fair value each reporting period.
The
value of the embedded conversion feature is determined using the Black-Scholes option pricing model. All future changes in the
fair value of the embedded conversion feature will be recognized currently in earnings until the note is converted or redeemed.
Determining the fair value of derivative financial instruments involves judgment and the use of certain relevant assumptions including,
but not limited to, interest rate risk, credit risk, volatility and other factors. The use of different assumptions could have
a material effect on the estimated fair value amounts.
Redeemable
- Non-controlling Interest
Redeemable
interest held by third parties in subsidiaries owned or controlled by the Company is reported on the consolidated balance sheets
outside permanent equity. All non-controlling interest reported in the consolidated statements of operations reflects the respective
interests in the income or loss after income taxes of the subsidiaries attributable to the other parties, the effect of which
is removed from the net income or loss available to the Company. The Company accretes the redemption value of the redeemable non-controlling
interest over the redemption period.
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 the Award 2 to a total of $81 million
for Phase II of its Fulton Project. This is in addition to a renegotiated Phase I funding for development of the biorefinery of
approximately $7 million out of the previously announced $10 million total. This brought the DOE’s total award to the Fulton
project to approximately $88 million. In September 2012, Award 1 was officially closed.
Since
2009, our operations had been financed to a large degree through funding provided by the DOE. We 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. 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 Department of Energy. The Company considers the grant closed out and completed.
NOTE
4 - NOTES PAYABLE
Vis
Vires Group, Inc. Convertible Note
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.
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 was 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 had the option to prepay the JMJ Note prior to maturity. The JMJ
Note was 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 was required. The Company valued the derivative upon issuance,
at each conversion and reporting date. The revaluation during the nine month ended September 30, 2016 and 2015 resulted in a gain
of $151,576 and $97,664, respectively. The initial value of the derivative liability was $412,212, resulting in a day one loss
$312,212. The discount on the convertible note was being amortized over the life of the note. During the nine months ended September
30, 2016 and 2015, amortization of the discount was $32,866 and $24,975, respectively, with $0 remaining at September 30, 2016.
See below for variables used in the Black-Scholes pricing model in assessing the fair value.
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April
5, 2016
|
|
|
December
31, 2015
|
|
Annual dividend yield
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|
|
-
|
|
|
|
-
|
|
Expected life (years)
|
|
|
0.99
|
|
|
|
1.25
|
|
Risk-free interest rate
|
|
|
0.56
|
%
|
|
|
1.06
|
%
|
Expected volatility
|
|
|
188
|
%
|
|
|
282
|
%
|
During
the nine months ended September 30, 2016, the Company issued 105,741,400 shares of common stock for the conversion of approximately
$65,500, including approximately $52,950 of principal and $12,550 of accrued interest. As of September 30, 2016, the JMJ Note
was fully converted into shares of Company stock and as such repaid in full.
AKR
Promissory Note
On
April 8, 2014, the Company issued a promissory note in favor of AKR Inc, (“AKR”) in the principal aggregate amount
of $350,000 (the “AKR Note”). The AKR Note was due on April 8, 2015, and requires the Company to (i) incur interest
at five percent (5%) per annum; (ii) issue on April 8, 2014 to AKR warrants allowing them to buy 7,350,000 common shares of the
Company at an exercise price of $0.007 per common share, such warrants to expire on April 8, 2016 (“AKR Warrant A”);
(iii) issue on August 8, 2014 to AKR warrants allowing them to buy 7,350,000 common shares of the Company at an exercise price
of $0.007 per common share, such warrants to expire on April 8, 2016 (“AKR Warrant B”); and (iv) issue on November
8, 2014 to AKR warrants allowing them to buy 8,400,000 common shares of the Company at an exercise price of $0.007 per common
share, such warrants to expire on April 8, 2016 (“AKR Warrant C”, together with AKR Warrant A and AKR Warrant B the
“AKR Warrants”). All AKR Warrants were expired as of September 30, 2016. The Company had the ability to prepay the
debt, prior to maturity, as extended, with no prepayment penalty.
On
April 24, 2014, the Company issued an additional promissory note in favor of AKR in the principal aggregate amount of $30,000
(“2nd AKR Note”). The 2nd AKR Note was due on July 24, 2014, but was subsequently extended to June 30, 2016, and recently
extended again to December 31, 2016. Pursuant to the terms of the 2nd AKR Note, the Company is to repay any principal balance
and interest, at 5% per annum at maturity. The Company may prepay the debt prior to maturity with no prepayment penalty.
Kodiak
Promissory Note
On
December 17, 2014, the Company entered into an equity purchase agreement (“Purchase Agreement”) with Kodiak Capital
Group, LLC (“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. As of September 30, 2016, the balance outstanding on the Kodiak Note was $40,000. No funds were received from
the Kodiak Note. Because the Kodiak Note was issued for no cash consideration, there was a full on-issuance discount, of which
$60,000 was amortized as of September 30, 2016, and $0 remains to be amortized. The Company is working with Kodiak in order to
pay down this note.
Tarpon
Bay Convertible Note
Pursuant
to a contemplated 3(a)10 transaction with Tarpon Bay Partners LLC (“Tarpon”), on August 31, 2016, the Company issued
to Tarpon a convertible promissory note in the principal amount of $25,000 (the “Tarpon Initial Note”). Under the
terms of the Tarpon Initial Note, the Company shall pay Tarpon $25,000 on the date of maturity which is February 28, 2017. 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.
The
Tarpon Initial Note was issued without funds being received. Accordingly, the note was issued with a full on-issuance discount
that will be amortized over the term of the note. During the three months ended September 30, 2016, amortization of approximately
$4,200 was recognized to interest expense related to the discount on the note.
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 note upon inception,
resulting in a day one loss of approximately $36,000. The derivative liability was marked to market as of September 30, 2016 which
resulted in a loss of approximately $78,000. The Company used the following assumptions as of September 30, 2016 and the Tarpon
Initial Note’s inception:
|
|
September
30, 2016
|
|
|
August
31, 2016
|
|
Annual dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected life (years)
|
|
|
0.41
|
|
|
|
0.5
|
|
Risk-free interest rate
|
|
|
0.45
|
%
|
|
|
0.47
|
%
|
Expected volatility
|
|
|
194
|
%
|
|
|
196
|
%
|
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)
|
|
|
0
|
|
|
|
0.05
|
|
Risk-free interest rate
|
|
|
0.21
|
%
|
|
|
0.14
|
%
|
Expected volatility
|
|
|
179
|
%
|
|
|
216
|
%
|
In
connection with these warrants, the Company recognized a gain on the change in fair value of warrant liability of approximately
$0, $30, $200 and $16,320 during the three and nine-months ended September 30, 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 12, 2015, 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. During the quarter ended September 30, 2016, the Company issued
a total of 18,000 shares (6,000 shares issuable for compensation for 2013, 2014 and 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, $30,900, $92,600 and $92,600 during the three and nine months
ended September 30, 2016 and 2015, respectively.
As
of September 30, 2016 and December 31, 2015, $267,592 and $174,964, respectively, of the monthly lease payments were included
in accounts payable on the accompanying consolidated balance sheets, respectively. In 2014, the County of Itawamba forgave approximately
$96,000 in lease payments.
The
Company has received notice from the County of Itawamba that it 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. As of September 30, 2016, the Company has accrued
$27,636 of default interest due to the nonpayment of the lease. The Company is working with the County of Itawamaba to resolve
this issue and hopefully ensure access to the site.
SEC
Notice and Settlement
On
May 2, 2016, the Company received a written notice from the SEC, as further described elsewhere in this quarterly report. In connection
with such notice, on August 1, 2016, the Company entered into a settlement with the SEC. Pursuant to the settlement, the Company
agreed to pay a civil penalty of $25,000 to the SEC. On July 29, 2016, the Company made an initial payment of $5,000 to the SEC.
The remaining $20,000 balance will be paid to the SEC over a nine-month period ending on or about June 30, 2017. The Company has
accrued the balance on the accompanying financial statements for such a settlement.
Delinquent
Tax Filings
The
Company has yet to file its federal and state tax returns for the year ended December 31, 2015. The Company owes the minimum $2,400
franchise tax to the State of California which has been accrued in accounts payable.
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, at the time, the 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, and then increased to $225,000 on August 30, 2016. As of September 30, 2016 and December 31,
2015, the outstanding balance on the line of credit was approximately $213,800 and $45,200, respectively. On September 30, 2016,
there was approximately $11,200 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 September 30, 2016, $25,385 in accrued interest is owed under this line of credit and included with accrued liabilities.
Accrued
Salaries
As
of September 30, 2016 and December 31, 2015, accrued salary due to the Chief Executive Officer included within accrued liabilities
was $305,703 and $133,745, respectively.
Total
accrued and unpaid salary of all employees is $1,161,142 and $576,224 as of September 30, 2016, and December 31, 2015, respectively,
representing 16 months of accrual at September 30, 2016.
NOTE
8 - REDEEMABLE NON-CONTROLLING INTEREST
On
December 23, 2010, the Company sold a one percent (1%) membership interest in its operating subsidiary, BlueFire Fulton Renewable
Energy, LLC (“BlueFire Fulton” or the “Fulton Project”), to an accredited investor for a purchase price
of $750,000 (“Purchase Price”). The Company maintains a 99% ownership interest in the Fulton Project. In addition,
the investor received a right to require the Company to redeem the 1% interest for $862,500, or any pro-rata amount thereon. The
redemption is based upon future contingent events based upon obtaining financing for the construction of the Fulton Project. The
third party equity interests in the consolidated joint ventures are reflected as redeemable non-controlling interests in the Company’s
consolidated financial statements outside of equity. The Company accreted the redeemable non-controlling interest for the total
redemption price of $862,500 through the estimated forecasted financial close, originally estimated to be the end of the third
quarter of 2011.
Net
income (loss) attributable to the redeemable non-controlling interest for the three and nine-months ended September 30, 2016 and
2015 was $(1,044), $6,315, $(3,591) and $2,577, respectively, which netted against the value of the redeemable non-controlling
interest in temporary equity. The allocation of loss was presented on the statement 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 had a 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 nine months ended September 30, 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.
Return
of Shares and Settlement
On
May 6, 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 case was dismissed
with prejudice on May 12, 2016 and the matter closed.
Board
of Directors Common Stock Issuance
The
Company issued 18,000 shares of common stock to its Board Members, which the Company valued at $144. See Note 6 for additional
information.
NOTE
10 - SUBSEQUENT EVENTS
Subsequent
to September 30, 2016, and pursuant to a contemplated 3(a)10 transaction, the Company issued a convertible promissory note in
the principal amount of $3,750 to a Corinthian Partners LLC.