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, 2018, the Company has negative working capital of approximately $4,919,847. Management has estimated that operating
expenses for the next 12 months will be approximately $120,000, excluding any salary costs, for full-time or part-time employees,
or engineering costs related to the development of bio-refinery projects. These matters raise substantial doubt about the Company’s
ability to continue as a going concern. Throughout 2018, the Company intends to fund its operations with any additional funding
that can be secured in the form of equity or debt the potential sale of Fulton Project equity ownership, and from a potential
merger or sale of the Company. As of May 21, 2018, the Company expects the current resources available to them will only
be sufficient for a period of less than one month unless significant additional financing is received. Management has determined
that the general expenditures must remain 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, operating results, and ability to continue operating. 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, 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.
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.
Due
to the Company’s struggles in securing sufficient financing necessary to enact its business plan, the Board is currently
evaluating strategic alternatives which include, among other things, seeking a strategic merger, selling the Company or potentially
selling equity in the Company’s proposed projects, if possible, in order to obtain additional capital sufficient to continue
operating and meet both our operating and financial obligations. This evaluation is still under way, there is no formal plan is
in place, and there can be no assurance that we will be successful in any of these efforts or that we will have sufficient funds
to cover our operational and financial obligations over the next twelve months. We have no definitive agreement with respect to
engaging in a merger with, joint venture with or acquisition of, a private or public entity. No assurances can be given that we
will successfully identify and evaluate suitable business opportunities. We cannot guarantee that we will be able to negotiate
a business combination or merger on favorable terms. Throughout 2018, the Company intends to fund its operations by seeking additional
funding in the form sales of equity or debt instruments, the potential sale of Fulton Project equity ownership, or other projects,
and/or from a potential merger. No assurances can be given that we will be able to fund our operations from the sales of equity
or debt instruments, the potential sale of the Fulton Project equity ownership, or other projects, and/or from a potential merger.
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, 2017. The results of operations for the three months ended March 31,
2018 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, 2018 and 2017, research and development costs included in Project Development were approximately
$0 and $31,000, respectively.
Convertible
Debt
Convertible
debt is accounted for under the guidelines established by Accounting Standards Codification (“ASC”) 470-20 “Debt
with Conversion and Other Options”. ASC 470-20 governs the calculation of an embedded beneficial conversion, which is treated
as an additional discount to the instruments where derivative accounting (explained below) does not apply. The amount of the value
of warrants and beneficial conversion feature may reduce the carrying value of the instrument to zero, but no further. The discounts
relating to the initial recording of the derivatives or beneficial conversion features are accreted over the term of the debt.
The
Company calculates the fair value of warrants and conversion features issued with the convertible instruments using the Black-Scholes
valuation method, using the same assumptions used for valuing employee options for purposes of ASC 718 “Compensation –
Stock Compensation”, except that the contractual life of the warrant or conversion feature is used. Under these guidelines,
the Company allocates the value of the proceeds received from a convertible debt transaction between the conversion feature and
any other detachable instruments (such as warrants) on a relative fair value basis. The allocated fair value is recorded as a
debt discount or premium and is amortized over the expected term of the convertible debt to interest expense.
The
Company accounts for modifications of its BCF’s in accordance with ASC 470-50 “Modifications and Extinguishments”.
ASC 470-50 requires the modification of a convertible debt instrument that changes the fair value of an embedded conversion feature
and the subsequent recognition of interest expense or the associated debt instrument when the modification does not result in
a debt extinguishment.
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, 2018 or December 31, 2017.
As
of March 31, 2018 and December 31, 2017, the Company’s derivative liabilities are considered a Level 2 item (see Notes 3
and 4).
As
of March 31, 2018 and December 31, 2017 the Company’s redeemable noncontrolling interest is considered a Level 3 item and
changed during the three months ended March 31, 2018 as follows.
Balance
at December 31, 2017
|
|
$
|
859,377
|
|
Net
loss attributable to noncontrolling interest
|
|
|
-
|
|
Balance at
March 31, 2018
|
|
$
|
859,377
|
|
See
Note 8 for details of valuation and changes during the years 2018 and 2017.
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 may have cash deposits in excess of federally and institutional insured limits.
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, 2018 and 2017, the Company had no warrants or other instruments outstanding. Pursuant
to the 3a10 transaction entered into with Tarpon Bay Partner’s, there is potentially up to our current authorized amount
of common shares issuable available to be issued to settle liabilities and the note payable to Tarpon Bay Partners.
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 adopted the selected transition method and has determined there is no 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 - 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.
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 originally due on April 8, 2015; however, the Company received an extension
through December 31, 2018. 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.
On
April 24, 2014, the Company issued a promissory note in favor of AKR in the principal aggregate amount of $30,000 (“2nd
AKR Note”). The 2
nd
AKR Note was due on July 24, 2014, however, the Company received an extension through December
31, 2018. 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.
There
was no financial impact of the note and warrants during the three months ended March 31, 2018 or the year
ended December 31, 2017.
Tarpon
Bay Convertible Notes
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, 2018, amortization of $0, was recognized related
to the discount on the note. As of March 31, 2018, 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 December 31, 2017 which resulted in a loss of approximately $3,763. The Company used the following range of assumptions
for the year ended December 31:
|
|
Year
Ended
|
|
|
|
December
31, 2017
|
|
Annual
dividend yield
|
|
|
-
|
|
Expected
life (years)
|
|
|
0.5-0.01
|
|
Risk-free
interest rate
|
|
|
0.74
– 1.00
|
%
|
Expected
volatility
|
|
|
143
- 174
|
%
|
During
the year ended December 31, 2017, the Company issued 54,444,445 shares of common stock to pay down $25,000 of principal and $3,200
in fees of the Tarpon Bay Convertible Note. $30,353 was reclassed to APIC during 2017. The note was fully converted as of September
30, 2017.
Pursuant
to the 3(a)10 transaction with Tarpon Bay Partners LLC (“Tarpon”), the Company owes a success fee convertible note
to Tarpon Bay Partners LLC “the “Tarpon Success Fee Note”). Under the terms of the Tarpon Success Fee Note,
the Company shall pay Tarpon $49,981. No formal note agreement has been signed but as of December 31, 2017 the Company has recorded
the derivative liability for this note in the accompanying financial statements. This note will be 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 pursuant to the agreements in place.
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, 2018, amortization of $24,991, was recognized to
interest expense related to the discount on the note. As of March 31, 2018, a discount of $2,499 remained which is being amortized
through the maturity date.
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 $66,672. The derivative liability was marked to market at March 31, 2018 being valued
at $67,627, which resulted in a loss of $8,141. The Company used the following assumptions for the three
months ended March 31, 2018:
|
|
March
31, 2018
|
|
Annual
dividend yield
|
|
|
-
|
|
Expected
life (years)
|
|
|
0.5
|
|
Risk-free
interest rate
|
|
|
1.63
|
%
|
Expected
volatility
|
|
|
198.18
|
%
|
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, 2018, the balance outstanding on the Kodiak Note was $40,000.
Revolving
Line of Credit
On
March 23, 2018 the Company entered into a Revolving Line of Credit with an accredited investor for up to $100,000 at the lenders
discretion with an initial draw of $25,000. The line of credit accrues interest at 5% per annum. The line of credit becomes payable
when the Company receives over $100,000 in investment. The Company can pay any time with no prepayment penalty. During the three
months ended March 31, 2018, the company accrued approximately $35 in interest on the initial draw of the line of credit.
NOTE
4 – LIABILITIES PURCHASE AGREEMENT
On
September 27, 2017, BlueFire Renewables, Inc., a Nevada Corporation (the “Company”) entered into a Settlement Agreement
and Stipulation (the “Settlement Agreement”) with Tarpon Bay Partners, LLC, a Florida limited liability company (“TBP”),
pursuant to which the Company agreed to issue common stock to TBP in exchange for the settlement of $999,630.45 (the “Settlement
Amount”) of past-due obligations and accounts payable of the Company. TBP purchased the obligations and accounts payable
from certain vendors of the Company as described below.
On
October 11, 2017, the Circuit Court of Leon County, Florida (the “Court”), entered an order (the “TBP Order”)
approving, among other things, the fairness of the terms and conditions of an exchange pursuant to Section 3(a)(10) of the Securities
Act of 1933, as amended (the “Securities Act”), in accordance with a stipulation of settlement, pursuant to the Settlement
Agreement between the Company and TBP, in the matter entitled
Tarpon Bay Partners, LLC v. BlueFire Renewables, Inc
. (the
“TBP Action”). TBP commenced the TBP Action against the Company to recover an aggregate of $999,630.45 of past-due
obligations and accounts payable of the Company (the “TBP Claim”), which TBP had purchased from certain vendors of
the Company pursuant to the terms of separate receivable purchase agreements between TBP and each of such vendors (the “TBP
Assigned Accounts”). The TBP Assigned Accounts relate to certain contractual obligations and legal services provided to
the Company. The TBP Order provides for the full and final settlement of the TBP Claim and the TBP Action. The Settlement Agreement
became effective and binding upon the Company and TBP upon execution of the TBP Order by the Court on October 11, 2017.
Pursuant
to the terms of the Settlement Agreement approved by the TBP Order, on October 11, 2017, the Company agreed to issue to TBP shares
(the “TBP Settlement Shares”) of the Company’s common stock, $0.001 par value (the “Common Stock”).
The Settlement Agreement provides that the TBP Settlement Shares will be issued in one or more tranches, as necessary, sufficient
to satisfy the TBP Settlement Amount through the issuance of common stock. Pursuant to the Settlement Agreement, TBP may deliver
a request to the Company for shares of Common Stock to be issued to TBP (the “TBP Share Request”). Pursuant to the
fairness hearing, the Order, and the Company’s agreement with Tarpon, on October 11, 2017, the Company booked the Tarpon
Success Fee Note in the principal amount of $50,000 in favor of Tarpon as a commitment fee although no signed note agreement exists.
The Tarpon Success Fee Note is considered due on April 11, 2018. The Tarpon Success Fee Note is convertible into shares of the
Company’s common stock.
In
connection with the settlement, during the three months ended March 31, 2018, the Company has issued 350,046,000 shares
of Common Stock to Tarpon in which gross proceeds of $59,565 were generated from the sale of the Common Stock. In connection
with the transaction, Tarpon received fees of $17,870 and providing payments of $41,695 to settle outstanding vendor payables.
The Company valued these shares at $122,279 and recorded the difference of $62,714 as a cost of the transaction. The Company
cannot reasonably estimate the amount of proceeds Tarpon expects to receive from the sale of these shares which will be used to
satisfy the liabilities. Any shares not used by Tarpon are subject to return to the Company. Accordingly, the Company accounts
for these shares as issued but not outstanding until the shares have been sold by Tarpon and the proceeds are known. Net proceeds
received by Tarpon are included as a reduction to accounts payable or other liability as applicable, as such funds are legally
required to be provided to the party Tarpon purchased the debt from.
The
parties reasonably estimate that the fair market value of the TBP Settlement Shares to be received by TBP is equal to approximately
$1,666,000.
Because
the conversion price is variable and does 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 $823,968. The derivative liability was marked to market at March 31, 2018
being valued at $738,221, which resulted in a gain of $16,549. The derivative is revalued each
payment date and at quarter end. The Company used the following range of assumptions for the quarter ended March 31,
2018:
|
|
March
31, 2018
|
|
Annual
dividend yield
|
|
|
-
|
|
Expected
life (years) of
|
|
|
1.78
– 1.53
|
|
Risk-free
interest rate
|
|
|
2.13%
- 2.33%
|
|
Expected
volatility
|
|
|
192%
- 198%
|
|
Approximately
$43,800 was reclassed to APIC in connection with this derivative.
Subsequent
to March 31, 2018, the Company issued 76,745,000 shares of common stock to settle additional liabilities purchased by Tarpon
Bay.
NOTE
5 - 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. The Board of Directors waived their cash and stock compensation
for fiscal year 2017.
On
January 28, 2018, Mr. Chris Nichols and Mr. Joseph Sparano (the “Directors”) voluntarily resigned as members of the
Board of Directors of BlueFire Renewables, Inc. (the “Company”), and all other positions with the Company to which
they have been assigned regardless of whether they served in such capacity, effective immediately. The Directors’ resignations
were not as a result of any disagreements with the Company.
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.
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 appealed
for an extension or forgiveness of the past due liability but was denied and told “The County is actively marketing the
real property through its economic developer. The real property is available on a first-come, first-served basis.” Due to
the uncertainty of access to the site, the Company stopped the accrual of lease payments on May 10, 2017 and considers the lease
cancelled. The site is still available and the Company will work to reinstate when financing is obtained.
Rent
expense under non-cancellable leases was approximately $0 and $30,900 during the three months ended March 31, 2018 and 2017, respectively.
As
of March 31, 2018 and December 31, 2017, $344,320 and $344,320 of the monthly lease payments were included in accounts
payable on the accompanying consolidated balance sheets, respectively.
As
of March 31, 2018, the Company has accrued $48,794 of default interest due to the nonpayment of the lease.
SEC
Notice and Settlement
On
May 2, 2016, the Company received a written notice from the SEC, as further described elsewhere in this annual 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
yet to make an additional payment due to capital constraints and has received no further communication from the SEC in regards
to the settlement or further payment to date. The Company has accrued the balance on the accompanying consolidated financial statements
for such settlement.
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
6 - 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 $275,000 on August 17, 2017. As of March
31, 2018, the outstanding balance on the line of credit was approximately $256,245 with $18,755 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, 2018 and December 31, 2017, $77,669 and $68,985 respectively, in accrued interest is owed under
this line of credit and included with accrued liabilities.
Accrued
Salaries
As
of March 31, 2018 and December 31, 2017, accrued salary due to the Chief Executive Officer included within accrued liabilities
was $368,474 and $379,950, respectively. In connection with the 3a10 transaction, the CEO assigned $125,145 to Tarpon Bay.
Total
accrued and unpaid salary of all employees is $1,625,816 and $1,663,695 as of March 31, 2018, and December 31, 2017,
respectively, representing 33 months of accrual at March 31, 2018. Of the total accrued salaries, $792,000 is included
in the 3a10 transaction with Tarpon Bay Partners with $48,968 total having been reduced by the 3a10 transaction as of March
31, 2018.
NOTE
7 - 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, 2018 and 2017 was $0 and
$864, 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
8 – STOCKHOLDERS’ DEFICIT
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.
Increase
in Authorized Shares
Effective
December 14, 2017, the Company filed an amendment to its articles of incorporation with the Secretary of State of the State of
Nevada, to increase the Company’s authorized common stock from five hundred million (500,000,000) shares of common stock,
par value $0.001 per share, to five billion (5,000,000,000) shares of common stock, par value $0.001 per share.
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.
NOTE
9 - SUBSEQUENT EVENTS
On
April 12, 2018 the Company issued 76,745,000 shares of common stock to Tarpon Bay pursuant to the 3a10 transaction entered into
in October 11, 2017.