NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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.
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 a 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 August
of 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, 2017, the Company has negative working capital of approximately $3,691,000. Management has estimated that operating
expenses for the next 12 months will be approximately $750,000 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 15,
2017, 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.
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-refinery to be in the range of approximately $300 million for the Fulton
Project. 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 this facility 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
Company’s business, industry and operations are subject to new innovations in product design and function. Significant
technical changes can have an adverse effect on product lives. Design and development of new products are important elements to
achieving and maintaining 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 may be subject to federal, state and local environmental laws and regulations.
The Company does not anticipate non-compliance 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.
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 the 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 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.
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. 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, 2016. The results of operations for the three months ended March 31,
2017 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, 2017 and 2016, research and development costs included in Project Development were approximately
$31,000, and $100,000, respectively.
Income
Taxes
The
Company accounts for income taxes in accordance with ASC 740 “Income Taxes” requires the Company to provide a net
deferred tax asset/liability equal to the expected future tax benefit/expense of temporary reporting differences between book
and tax accounting methods and any available operating loss or tax credit carry forwards.
This
Interpretation sets forth a recognition threshold and valuation method to recognize and measure an income tax position taken,
or expected to be taken, in a tax return. The evaluation is based on a two-step approach. The first step requires an entity to
evaluate whether the tax position would “more likely than not,” based upon its technical merits, be sustained upon
examination by the appropriate taxing authority. The second step requires the tax position to be measured at the largest amount
of tax benefit that is greater than 50 percent likely of being realized upon ultimate settlement. The Company does not have any
uncertain positions which require such analysis.
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, 2017 or December 31, 2016.
As
of March 31, 2017 and December 31, 2016, the Company’s derivative liabilities are considered a Level 2 item (see Notes 4
and 5).
As
of March 31, 2017 and December 31, 2016 the Company’s redeemable noncontrolling interest is considered a Level 3 item and
changed during the three months ended March 31, 2017 as follows.
Balance
at December 31, 2016
|
|
$
|
860,980
|
|
Net
loss attributable to noncontrolling interest
|
|
|
(864
|
)
|
Balance
at March 31, 2017
|
|
$
|
860,116
|
|
See
Note 8 for details of valuation and changes during the years 2017 and 2016.
The
carrying amounts reported in the accompanying consolidated financial statements for current assets and current liabilities approximate
the fair value because of the immediate or short term maturities of the financial instruments.
Concentrations
of Credit Risk
The
Company maintains its cash accounts in a commercial bank and in an institutional money-market fund account. The total cash balances
held in a commercial bank are secured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000, per insured
bank. At times, the Company has cash deposits in excess of federally insured limits. In addition, the Institutional Funds Account
is insured through the Securities Investor Protection Corporation (“SIPC”) up to $500,000 per customer, including
up to $250,000 for cash. At times, the Company has cash deposits in excess of federally and institutional insured limits.
As
of March 31, 2017 and December 31, 2016, four vendors made up approximately 84% and 82% of accounts payable, respectively.
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, 2017 and 2016, the Company had 0 and 23,100,000 warrants, respectively, for which,
in 2016, 23,100,000 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 0 and 23,100,000 warrants, respectively, were excluded from dilutive EPS calculations
under the treasury stock method of accounting. In addition, due to the net loss in the periods presented, the warrants’
effects are antidilutive and therefore, excluded from diluted EPS calculations.
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.
On
February 25, 2016, the Financial Accounting Standards Board (FASB) issued authoritative guidance intended to improve financial
reporting about leasing transactions. The new guidance requires entities to recognize assets and liabilities for leases with lease
terms of more than 12 months. The new guidance also requires qualitative and quantitative disclosures regarding the amount, timing,
and uncertainty of cash flows arising from leases. The new guidance is effective for the Company beginning January 1, 2019. The
Company is evaluating the impact of the standard on its consolidated financial statements.
In
May 2014, FASB issued authoritative guidance that provides principles for recognizing revenue for the transfer of promised goods
or services to customers with the consideration to which the entity expects to be entitled in exchange for those goods or services.
This ASU also requires that reporting companies disclose the nature, amount, timing and uncertainty of revenue and cash flows
arising from contracts with customers. On July 9, 2015, FASB agreed to delay the effective date by one year and, accordingly,
the new standard is effective for the Company beginning in the first quarter of fiscal 2018. Early adoption is permitted, but
not before the original effective date of the standard. The new standard is required to be applied retrospectively to each prior
reporting period presented or retrospectively with the cumulative effect of initially applying it recognized at the date of initial
application. The Company has not yet selected a transition method nor has it determined the impact of the new standard on its
consolidated financial statements.
Management
does not believe that any recently issued, but not yet effective accounting pronouncements, if adopted, would have a material
effect on the accompanying consolidated 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. 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. In September 2012, Award 1 was officially closed.
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
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.
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 was 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 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 was 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.
|
|
Final
Conversion
April 5, 2016
(Excluding Inception)
|
|
|
March
31, 2016
|
|
Annual
dividend yield
|
|
|
-
|
|
|
|
-
|
|
Expected
life (years)
|
|
|
0.99
|
|
|
|
1.25
- 2.00
|
|
Risk-free
interest rate
|
|
|
0.56
|
%
|
|
|
0.61
– 1.06
|
%
|
Expected
volatility
|
|
|
188
|
%
|
|
|
282
– 304
|
%
|
During
the three months ended March 31, 2016, the Company issued 96,830,000 shares of common stock for the conversion of approximately
$53,000 of principal and $8,000 of accrued interest. The note was fully converted on April 5, 2016.
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; however, the Company has received multiple
extensions to the due date moving it to December 31, 2017. The AKR Note 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. The discount was fully amortized as of the original maturity date of April 8, 2015.
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; however, the Company has received multiple
extensions to the due date moving it to December 31, 2017. 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. Company may prepay the debt, prior to maturity
with no prepayment penalty. 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.
Tarpon
Bay Convertible Note
Pursuant
to a contemplated 3(a)10 transaction, which would be used to reduce aged liabilities of the Company, 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 was 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
above note was issued without funds being received. Accordingly, the note was issued with a full on-issuance discount that was
amortized over the term of the note. During the three months ended March 31, 2017, amortization of $3,889, was recognized related
to the discount on the note. As of March 31, 2017, a discount of $0 remained.
Because
the conversion price was variable and did not contain a floor, the conversion feature represented a derivative liability upon
issuance. Accordingly, the Company calculated the derivative liability using the Black-Sholes pricing model for the notes upon
inception, resulting in a day one loss of approximately $36,000. The derivative liability was marked to market each quarter and
as of March 31, 2017 which resulted in a loss of approximately $1,000. The Company used the following assumptions for the three
months ended March 31, 2017:
|
|
March
31, 2017
|
|
Annual
dividend yield
|
|
|
-
|
|
Expected
life (years) of
|
|
|
0.01
|
|
Risk-free
interest rate
|
|
|
0.74
|
%
|
Expected
volatility
|
|
|
174
|
%
|
Although
Tarpon Bay can convert the note at any time, as of March 31, 2017 no conversions have occurred. The Company is working with Tarpon
Bay in order to ascertain how to move forward with the proposed 3(a)10 transaction.
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. The Company is currently in default of the Kodiak Note.
As
of March 31, 2017, the balance outstanding on the Kodiak Note was $40,000.
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
|
|
Annual
dividend yield
|
|
|
-
|
|
Expected
life (years) of
|
|
|
0
|
|
Risk-free
interest rate
|
|
|
0.21
|
%
|
Expected
volatility
|
|
|
179
|
%
|
In
connection with these warrants, the Company recognized a gain on the change in fair value of warrant liability of approximately
$199 during the three months ended March 31, 2016.
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.
The
warrants expired on January 19, 2016.
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.
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, 2017 and 2016,
respectively.
As
of March 31, 2017 and 2016, $329,334 and $205,840 of the monthly lease payments were included in accounts payable on the accompanying
consolidated balance sheets, respectively.
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, 2017, the Company has accrued $42,521 of default interest due
to the nonpayment of the lease. Subsequent to March 31, 2017, the Company received a demand for payment of the outstanding amount
due to the County of Itawamba. The Company is working with the County of Itawamba to resolve this issue and hopefully ensure continued
access to the potential project site. See Note 10 for more information.
SEC
Notice and Settlement
On
May 2, 2016, the Company received a written notice from the Securities and Exchange Commission (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 consolidated financial statements for such
settlement. The Company has yet to make an additional payment and as of May 15, 2017, the Company has received no further
communication from the SEC.
Legal
Proceedings
We
are currently not involved in litigation that we believe will have a materially adverse effect on our financial condition or results
of operations. There is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government
agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of our Company or any of our
subsidiaries, threatened against or affecting our Company, our common stock, any of our subsidiaries or of our Company’s
or our Company’s subsidiaries’ officers or directors in their capacities as such, in which an adverse decision is
expected to have a material adverse effect.
NOTE
7 - RELATED PARTY TRANSACTIONS
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 Line 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,
at the time, the 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 incrementally increased to $250,000 on October 5, 2016. As of March
31, 2017, the outstanding balance on the line of credit was approximately $240,924 with $9,076 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.
As
of March 31, 2017, approximately $38,856 in accrued interest is owed under this line of credit and included with accrued liabilities.
Accrued
Salaries
As
of March 31, 2017 and December 31, 2016, accrued salary due to the Chief Executive Officer included within accrued liabilities
was $395,500 and $339,000, respectively.
Total
accrued and unpaid salary of all employees is $1,416,329 and $1,330,777 as of March 31, 2017, and December 31, 2016, respectively,
representing 21 months of accrual at March 31, 2017.
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, 2017 and 2016 was $864
and $1,479, 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.
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.
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.
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. The Purchase Agreement
is now terminated.
NOTE
10 - SUBSEQUENT EVENTS
On
May 1, 2017, the Company received a letter from the County of Itawamba stating that the lease for the Fulton Project would be
cancelled unless the current balance outstanding plus default interest were paid in full by May 10, 2017. The Company has appealed
for an extension or forgiveness of the past due liability but considers the site lease cancelled as of May 10, 2017. As of
the date of this filing, the Company has not received a response to its appeal. See Note 6 for more information.