NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – ORGANIZATION AND BUSINESS
BlueFire Renewables, Inc. (“BlueFire”
or the “Company”) was incorporated in the State of Nevada on March 28, 2006 (“Inception”). BlueFire was
established to deploy the commercially ready and patented process for the conversion of cellulosic waste materials to ethanol
(“Arkenol Technology”) under a technology license agreement with Arkenol, Inc. (“Arkenol”). BlueFire’s
use of the Arkenol Technology positions it as a cellulose-to-ethanol company with demonstrated production of ethanol from urban
trash (post-sorted “MSW”), rice and wheat straws, wood waste and other agricultural residues. The Company’s
goal is to develop and operate high-value carbohydrate-based transportation fuel production facilities in North America, and to
provide professional services to such facilities worldwide. These “biorefineries” will convert widely available, inexpensive,
organic materials such as agricultural residues, high-content biomass crops, wood residues, and cellulose from MSW into ethanol.
On July 15, 2010, the board of directors of
BlueFire, by unanimous written consent, approved the filing of a Certificate of Amendment to the Company’s Articles of Incorporation
with the Secretary of State of Nevada, changing the Company’s name from BlueFire Ethanol Fuels, Inc. to BlueFire Renewables,
Inc. On July 20, 2010, the Certificate of Amendment was accepted by the Secretary of State of Nevada.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Management’s Plans
Going Concern
The Company is a development-stage company
which has incurred losses since Inception. Management has funded operations primarily through proceeds received in connection
with a reverse merger, loans from its majority shareholder, the private placement of the Company’s common stock in December
2007 for net proceeds of approximately $14,500,000, the issuance of convertible notes with warrants in July and in August 2007,
and Department of Energy reimbursements from 2009 through the present. The Company may encounter difficulties in establishing
operations due to the time frame of developing, constructing and ultimately operating the planned bio-refinery projects.
As of June 30, 2013, the Company has negative
working capital of approximately $2,205,000. Management has estimated that operating expenses for the next 12 months will be approximately
$1,700,000, excluding engineering costs related to the development of bio-refinery projects. These matters raise substantial doubt
about the Company’s ability to continue as a going concern. Throughout the remainder of 2013, the Company intends to fund
its operations with reimbursements under the Department of Energy contract, as well as seek additional funding in the form of
equity or debt. However, the Company’s ability to get reimbursed under the DOE contract is dependent on the availability
of cash to pay for the related costs. As of August 19, 2013, the Company expects the current resources available to them will
only be sufficient for a period of approximately one month unless significant additional financing is received. Management has
determined that the general expenditures must be reduced and additional capital will be required in the form of equity or debt
securities. In addition, if we cannot raise additional short term capital we may consume all of our cash reserved for operations.
There are no assurances that management will be able to raise capital on terms acceptable to the Company. If we are unable to
obtain sufficient amounts of additional capital, we may be required to reduce the scope of our planned development, which could
harm our business, financial condition and operating results. The financial statements do not include any adjustments that might
result from these uncertainties.
Additionally, the Company’s Lancaster
plant is currently shovel ready, except for the air permit which the Company will need to renew as stated below, and only requires
minimal capital to maintain until funding is obtained for the construction. The preparation for the construction of this plant
was the primary capital use in prior years. In December 2011, BlueFire requested an extension to pay the project’s permits
for an additional year while we awaited potential financing. The Company has let the air permits expire as there were no more
extensions available and management deemed the project not likely to start construction in the short-term. BlueFire will need
to resubmit for air permits once it is able to raise the necessary financing. The Company sees this project on hold until we receive
the funding to construct the facility.
As of December 31, 2010, the Company completed
the detailed engineering on our proposed Fulton Project, procured all necessary permits for construction of the plant, and began
site clearing and preparation work, signaling the beginning of construction. As of December 31, 2012, 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. However, as additional capital
and/or cost share funds become available, additional work may be completed, such as retaining wall construction, utility infrastructure
placement, and the preparation of construction staging areas.
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. The Company is currently in discussions
with potential sources of financing for these facilities but no definitive agreements are in place. The Company cannot continue
significant development or furtherance of the Fulton project until financing for the construction of the Fulton plant is obtained,
however the Company has continued to improve and modify plans to for construction in contemplation of different configurations
that would be advantageous for potential investors.
Basis of Presentation
The accompanying unaudited interim financial
statements have been prepared by the Company pursuant to the rules and regulations of the United States Securities Exchange Commission.
Certain information and disclosures normally included in the annual financial statements prepared in accordance with the accounting
principles generally accepted in the Unites States of America have been condensed or omitted pursuant to such rules and regulations.
In the opinion of management, all adjustments and disclosures necessary for a fair presentation of these financial statements
have been included. Such adjustments consist of normal recurring adjustments. These interim financial statements should be read
in conjunction with the audited financial statements of the Company for the year ended December 31, 2012. The results of operations
for the three and six-months ended June 30, 2013 are not necessarily indicative of the results that may be expected for the full
year.
During the three months ended March 31, 2013,
the Company included $41,425 related to the amortization of debt discount in interest expense rather than amortization of debt
discount in the statement of operations. The classification has been corrected for the presentation of the three and six months
ended June 30, 2013 in the accompanying statement of operations. There was no effect on net income or earnings per share for the
three months ended March 31, 2013 due to the reclassification.
Principles of Consolidation
The consolidated financial statements include
the accounts of BlueFire Renewables, Inc., and its wholly-owned subsidiaries, BlueFire Ethanol, Inc., and Sucre Source LLC. BlueFire
Ethanol Lancaster, LLC, and BlueFire Fulton Renewable Energy LLC (excluding 1% interest sold) are wholly-owned subsidiaries of
BlueFire Ethanol, Inc. All intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in
conformity with accounting principles generally accepted in the United States of America requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements, and the reported amounts of revenues and expenses during the reported periods. Actual
results could materially differ from those estimates.
Project Development
Project development costs are either expensed
or capitalized. The costs of materials and equipment that will be acquired or constructed for project development activities,
and that have alternative future uses, both in project development, marketing or sales, will be classified as property and equipment
and depreciated over their estimated useful lives. To date, project development costs include the research and development expenses
related to the Company’s future cellulose-to-ethanol production facilities. During three and six-months ended June 30, 2013
and 2012, and for the period from March 28, 2006 (Inception) to June 30, 2013, research and development costs included in Project
Development were approximately $128,000, $153,000, $247,000, $291,000, and $15,185,000, respectively.
Convertible Debt
Convertible debt is accounted for under the
guidelines established by Accounting Standards Codification (“ASC”) 470 “Debt with Conversion and Other Options”.
The Company records a beneficial conversion feature (“BCF”) related to the issuance of convertible debt that have
conversion features at fixed or adjustable rates that are in-the-money when issued and records the fair value of warrants issued
with those instruments. The BCF for the convertible instruments is recognized and measured by allocating a portion of the proceeds
to warrants and as a reduction to the carrying amount of the convertible instrument equal to the intrinsic value of the conversion
features, both of which are credited to paid-in-capital.
The Company calculates the fair value of warrants
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 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. For a conversion price change of a convertible debt issue, the additional intrinsic value of the debt
conversion feature, calculated as the number of additional shares issuable due to a conversion price change multiplied by the
previous conversion price, is recorded as additional debt discount and amortized over the remaining life of the debt.
The Company accounts for modifications of
its BCF’s in accordance with ASC 470-50 “Modifications and Extinguishments”. ASC 470 requires the modification
of a convertible debt instrument that changes the fair value of an embedded conversion feature and the subsequent recognition
of interest expense or the associated debt instrument when the modification does not result in a debt extinguishment.
Equity Instruments Issued with Registration
Rights Agreement
The Company accounts for these penalties as
contingent liabilities, applying the accounting guidance of ASC 450 “Contingencies”. This accounting is consistent
with views established in ASC 825 “Financial Instruments”. Accordingly, the Company recognizes damages when it becomes
probable that they will be incurred and amounts are reasonably estimable.
In connection with the Company signing
the $10,000,000 Purchase Agreement with LPC, the Company was required to file a registration statement related to the transaction
with the SEC covering the shares that may be issued to LPC under the Purchase Agreement within ten days of the agreement, and
the registration statement was to be declared effective by March 31, 2011. The registration statement was declared effective on
May 10, 2011, without any penalty, and LPC did not terminate the Purchase Agreement.
In connection with the Company signing the
$2,000,000 Equity Facility with TCA on March 28, 2012, the Company agreed to file a registration statement related to the transaction
with the Securities and Exchange Commission (“SEC“) covering the shares that may be issued to TCA under the Equity
Facility within 45 days of closing. Although under the Registration Rights Agreement the registration statement was to be declared
effective within 90 days following closing, it has yet to be declared effective. The Company is working with TCA to resolve this
issue. There has been no accrual for any penalties as it relates to the Equity Facility Registration Rights Agreement. The penalty
for filing to get the registration statement effective is capped at $20,000, and the Company believes that any penalty is remote
as the terms of the TCA Agreement, when combined with the debt portion of financing from TCA, both of which were provided by TCA,
prevent us from having it declared effective.
Fair Value of Financial Instruments
The Company follows the guidance of ASC 820
– “Fair Value Measurement and Disclosure”. Fair value is defined as the exit price, or the amount that would
be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement
date. The guidance also establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs
and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs
are inputs market participants would use in valuing the asset or liability and are developed based on market data obtained from
sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the factors
market participants would use in valuing the asset or liability. The guidance establishes three levels of inputs that may be used
to measure fair value:
Level 1. Observable inputs
such as quoted prices in active markets;
Level 2. Inputs, other
than the quoted prices in active markets, that are observable either directly or indirectly; and
Level 3. Unobservable
inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
The Company did not have any level 1 financial
instruments at June 30, 2013 or December 31, 2012.
As of June 30, 2013, the Company’s warrant
liability and derivative liability are considered level 2 items, see Notes 4 and 5.
As of June 30, 2013 and December 31, 2012
the Company’s redeemable non-controlling interest is considered a level 3 item and changed during the six months ended June
30, 2013 as follows.
Balance
at December 31, 2012
|
|
$
|
849,945
|
|
Net
loss attributable to non-controlling interest
|
|
|
(2,742
|
)
|
Balance at
June 30, 2013
|
|
$
|
847,203
|
|
Risks and Uncertainties
The Company’s operations are subject
to new innovations in product design and function. Significant technical changes can have an adverse effect on product lives.
Design and development of new products are important elements to achieve and maintain profitability in the Company’s industry
segment. The Company may be subject to federal, state and local environmental laws and regulations. The Company does not anticipate
expenditures to comply with such laws and does not believe that regulations will have a material impact on the Company’s
financial position, results of operations, or liquidity. The Company believes that its operations comply, in all material respects,
with applicable federal, state, and local environmental laws and regulations.
Income (loss) per Common Share
The Company presents basic loss per share
(“EPS”) and diluted EPS on the face of the consolidated statement of operations. Basic income (loss) per share is
computed as net income (loss) divided by the weighted average number of common shares outstanding for the period. Diluted EPS
reflects the potential dilution that could occur from common shares issuable through stock options, warrants, and other convertible
securities. As of June 30, 2013 and 2012, the Company had 0 and 1,229,659 options and 928,571 and 7,115,265
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 quarter and thus no shares are considered dilutive under the treasury stock method of accounting
and their effects would have been antidilutive due to the loss in certain of the periods presented.
Derivative Financial Instruments
We do not use derivative financial instruments
to hedge exposures to cash-flow risks or market-risks that may affect the fair values of our financial instruments. However, under
the provisions ASC 815 – “Derivatives and Hedging” certain financial instruments that have characteristics of
a derivative, as defined by ASC 815, such as embedded conversion features on our Convertible Notes, that are potentially settled
in the Company’s own common stock, are classified as liabilities when either (a) the holder possesses rights to net-cash
settlement or (b) physical or net-share settlement is not within our control. In such instances, net-cash settlement is assumed
for financial accounting and reporting purposes, even when the terms of the underlying contracts do not provide for net-cash settlement.
Derivative financial instruments are initially recorded, and continuously carried, at fair value each reporting period.
The value of the embedded conversion feature
is determined using the Black-Scholes option pricing model. All future changes in the fair value of the embedded conversion feature
will be recognized currently in earnings until the note is converted or redeemed. Determining the fair value of derivative financial
instruments involves judgment and the use of certain relevant assumptions including, but not limited to, interest rate risk, credit
risk, volatility and other factors. The use of different assumptions could have a material effect on the estimated fair value
amounts.
Redeemable - Non-controlling Interest
Redeemable interest held by third parties
in subsidiaries owned or controlled by the Company is reported on the consolidated balance sheets outside permanent equity. As
these redeemable non-controlling interests provide for redemption features not solely within the control of the issuer, we classify
such interests outside of permanent equity in accordance with ASC 480, “Distinguishing Liabilities from Equity”. All
redeemable non-controlling interest reported in the consolidated statements of operations reflects the respective interests in
the income or loss after income taxes of the subsidiaries attributable to the other parties, the effect of which is removed from
the net loss available to the Company. The Company accreted the redemption value of the redeemable non-controlling interest over
the redemption period using the straight-line method.
New Accounting Pronouncements
Management does not believe that any other
recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the accompanying
financial statements.
NOTE 3 – DEVELOPMENT CONTRACTS
Department of Energy Awards 1 and 2
In February 2007, the Company was awarded
a grant for up to $40 million from the U.S. Department of Energy’s (“DOE”) cellulosic ethanol grant program
to develop a solid waste biorefinery project at a landfill in Southern California. During October 2007, the Company finalized
Award 1 for a total approved budget of just under $10,000,000 with the DOE. This award is 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 brings the DOE’s total award to the Fulton project to approximately $88 million. The Company
is currently drawing down on funds for Phase II of its Fulton Project.
As of August 19, 2013, the Company has received
reimbursements of approximately $11,220,000 under these awards.
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. Awards 1 and 2
consist of a total reimbursable amount of approximately $87,560,000, and through August 19, 2013, we have an unreimbursed amount
of approximately $76,069,000 available to us under the awards. We cannot guarantee that we will continue to receive grants, loan
guarantees, or other funding for our projects from the DOE.
In June 2011, it was determined that the Company
had received an over payment of approximately $354,000 from the cumulative reimbursements of the DOE grants under Award 1 for
the period from inception of the award through December 31, 2010. The over payment was a result of estimates made on the indirect
rate during the reimbursement process over the course of the award. As of September 12, 2012 Award 1 was officially closed and
the over payment was deobligated. The Company was notified of the deobligation in the fourth quarter of 2012.
NOTE 4 – CONVERTIBLE NOTES PAYABLE
On March 28, 2012 the Company entered into
a $300,000 promissory note with a third party. See Note 9 for additional information.
On July 31, 2012,
the Company issued a convertible note of $63,500 to Asher Enterprises, Inc. Under the terms of the notes, the Company was to repay
any principal balance and interest, at 8% per annum at maturity date of May 2, 2013. The Company had the option to prepay the
convertible promissory note prior to maturity at varying prepayment penalty rates specified under the agreement. The convertible
promissory note was convertible into shares of the Company’s common stock after six months. The conversion price was calculated
by multiplying 58% (42% discount to market) by the average of the lowest three closing bid prices during the 10 days prior to
the conversion date. The Company determined that since the conversion price was variable and did not contain a floor, the conversion
feature represented a derivative liability upon the ability to convert the loan, which commenced on approximately January 27,
2013.
The Company calculated
the derivative liability using the Black-Scholes pricing model for the note upon the initial date the note became convertible
and recorded the fair market value of the derivative liability of approximately $47,000, resulting in a discount to the note.
The discount was amortized over the term of the note and accelerated as the note was converted. During the six months ended June
30, 2013, all of the discount was amortized to interest expense, with no remaining unamortized discount. See below for assumptions
used in valuing the derivative liability. As of June 30, 2013, all amounts outstanding in relation to this note have been converted
to equity.
On October 11, 2012,
the Company issued a convertible note of $37,500 to Asher Enterprises, Inc. Under the terms of the notes, the Company was to repay
any principal balance and interest, at 8% per annum at maturity date of July 15, 2013. The Company had the option to prepay the
convertible promissory note prior to maturity at varying prepayment penalty rates specified under the agreement. The convertible
promissory note was convertible into shares of the Company’s common stock after six months. The conversion price was calculated
by multiplying 58% (42% discount to market) by the average of the lowest three closing bid prices during the 10 days prior to
the conversion date. The Company determined that since the conversion price was variable and does not contain a floor, the conversion
feature represented a derivative liability upon the ability to convert the loan, which commenced on approximately April 9, 2013.
The Company calculated
the derivative liability using the Black-Scholes pricing model for the note upon the initial date the note became convertible
and recorded the fair market value of the derivative liability of approximately $66,000, resulting in a discount to the note and
an additional day one charge of $28,507 for the excess value of the derivative liability over the face value of the note. The
excess value was recognized as an expense in the accompanying statement of operations. The discount was being amortized over the
term of the note. During the six months ended June 30, 2013, all $37,500 of the discount was amortized to interest expense as
the note was fully converted, with no remaining unamortized discount. See below for assumptions used in valuing the derivative
liability.
On December 21, 2012,
the Company agreed to a convertible note of $32,500 to Asher Enterprises, Inc, which was funded and effective in January 2013.
Under the terms of the notes, the Company is to repay any principal balance and interest, at 8% per annum at maturity date of
September 26, 2013. The Company may prepay the convertible promissory note prior to maturity at varying prepayment penalty rates
specified under the agreement. The convertible promissory note is convertible into shares of the Company’s common stock
after six months. The conversion price is calculated by multiplying 58% (42% discount to market) by the average of the lowest
three closing bid prices during the 10 days prior to the conversion date. The Company determined that since the conversion price
was variable and does not contain a floor, the conversion feature represented a derivative liability upon the ability to convert
the loan, which commenced on approximately June 19, 2013. See below for assumptions used in valuing the derivative liability.
Subsequent to June 30, 2013, $27,000 in principal has been converted, and $5,500 plus accrued interest remain outstanding.
On February 11, 2013,
the Company agreed to a convertible note of $53,000 to Asher Enterprises, Inc. Under the terms of the notes, the Company is to
repay any principal balance and interest, at 8% per annum at maturity date of November 13, 2013. The Company may prepay the convertible
promissory note prior to maturity at varying prepayment penalty rates specified under the agreement. The convertible promissory
note is convertible into shares of the Company’s common stock after six months. The conversion price is 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. Since the conversion feature is only convertible after six months, there is no derivative liability. However, the Company
will account for the derivative liability upon the passage of time and the note becoming convertible if not extinguished, as defined
above. Derivative accounting applies upon the conversion feature being available to the holder, as it is variable and does not
have a floor as to the number of common shares in which could be converted.
On June 13, 2013,
the Company agreed to a convertible note of $32,500 to Asher Enterprises, Inc. Under the terms of the notes, the Company is to
repay any principal balance and interest, at 8% per annum at maturity date of March 17, 2014. The Company may prepay the convertible
promissory note prior to maturity at varying prepayment penalty rates specified under the agreement. The convertible promissory
note is convertible into shares of the Company’s common stock after six months. The conversion price is 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. Since the conversion feature is only convertible after six months, there is no derivative liability. However, the Company
will account for the derivative liability upon the passage of time and the note becoming convertible if not extinguished, as defined
above. Derivative accounting applies upon the conversion feature being available to the holder, as it is variable and does not
have a floor as to the number of common shares in which could be converted.
Upon conversion of
all or a portion of the convertible notes, the derivative liability associated with the principal converted is valued immediately
before conversion using the Black-Scholes model. The change in fair value of the derivative liability associated with the principal
converted is recorded as a gain/loss on fair value of derivative liability in the accompanying statement of operation, with the
derivative liability associated with the principal converted credited to additional paid-in capital. During the six months ended
June 30, 2013, the holder of the convertible notes converted $101,000 of principal plus accrued interest thereon, into 3,186,119
shares of common stock. Derivative liability of approximately $86,000 associated with the converted principal was credited to
additional paid-in capital at the time of conversion. As of June 30, 2013, the derivative liability associated with the remaining
associated notes was valued at approximately $42,000. The Company used the following inputs to the Black-Scholes pricing model
for each valuation.
Using the Black-Scholes pricing model, with
the range of inputs listed below, we calculated the fair market value of the conversion feature at inception of the conversion
feature and at each conversion event. The Company revalued the conversion feature at June 30, 2013 in the same manor with the
inputs listed below and recognized a gain on the change in fair value of the derivative liability on the accompanying statement
of operations of $90,236.
During the six months ending June 30, 2013,
the range of inputs used to calculate derivative liabilities noted above were as follows:
|
|
Six months ending
|
|
|
|
June 30, 2013
|
|
Annual
dividend yield
|
|
|
-
|
|
Expected
life (years)
|
|
|
0.01
- 0.27
|
|
Risk-free
interest rate
|
|
|
0.04
- 0.12
|
%
|
Expected
volatility
|
|
|
61.34
- 134.92
|
%
|
In addition, fees
paid to secure the convertible debt were accounted for as deferred financing costs and capitalized in the accompanying balance
sheet or considered and on-issuance discount to the notes. The deferred financing costs and discounts, as applicable, are being
amortized over the term of the notes. As of June 30, 2013, the Company amortized approximately $25,000 with $1,000 in
deferred financing costs remaining. As of June 30, 2013, the Company’s remaining convertible notes outstanding include on-issuance
discounts totaling $8,000 of which approximately $3,376 has been charged to amortization of debt discount. Unamortized debt discount
of $19,400 remains as of June 30, 2013.
NOTE 5 – OUTSTANDING WARRANT LIABILITY
As a result of adopting ASC 815 “Derivatives
and Hedging” effective January 1, 2009, 6,962,963 of our issued and outstanding common stock purchase warrants previously
treated as equity pursuant to the derivative treatment exemption were no longer afforded equity treatment. These warrants had
an exercise price of $2.90; 5,962,563 warrants were set to expire in December 2012 and 1,000,000 expired August 2010 (See Note
6). As such, effective January 1, 2009 we reclassified the fair value of these common stock purchase warrants, which have exercise
price reset features, from equity to liability status as if these warrants were treated as a derivative liability since their
date of issue in August 2007 and December 2007. On January 1, 2009, we reclassified from additional paid-in capital, as a cumulative
effect adjustment, $15.7 million to beginning retained earnings and $2.9 million to a long-term warrant liability to recognize
the fair value of such warrants on such date.
In connection with the 5,962,563 warrants
that expired in December 2012, the Company recognized gains of approximately $0, $19,000, $0, $1,000, and $2,516,000 from the
change in fair value of these warrants during the three and six-months ended June 30, 2013 and 2012 and the period from Inception
to June 30, 2013. As of December 31, 2012 none of these warrants remained outstanding.
On October 19, 2009, the Company cancelled
673,200 warrants for $220,000 in cash. These warrants were part of the 1,000,000 warrants issued in August 2007, and were set
to expire August 2010.
These common stock purchase warrants were
initially issued in connection with two private offerings, our August 2007 issuance of 689,655 shares of common stock and our
December 2007 issuance of 5,740,741 shares of common stock. The common stock purchase warrants were not issued with the intent
of effectively hedging any future cash flow, fair value of any asset, liability or any net investment in a foreign operation.
The warrants do not qualify for hedge accounting, and as such, changes in the fair value of these warrants are recognized in earnings
until such time as the warrants are exercised or expire. These warrants either expired or were exercised in 2012 and accordingly
no revaluation was necessary as of June 30, 2013 or December 31, 2012. See Note 9.
The Company issued 428,571 warrants to purchase
common stock in connection with the Stock Purchase Agreement entered into on January 19, 2011 with Lincoln Park Capital, LLC (See
Note 9). These warrants are accounted for as a liability under ASC 815. The Company assesses the fair value of the warrants
quarterly based on the Black-Scholes pricing model. See below for variables used in assessing the fair value.
|
|
June
30, 2013
|
|
|
December 31, 2012
|
|
Annual dividend yield
|
|
|
-
|
|
|
-
|
|
Expected life (years) of
|
|
|
2.55
|
|
|
3.05
|
|
Risk-free interest rate
|
|
|
0.51
|
%
|
|
0.72
|
%
|
Expected volatility
|
|
|
111.85
|
%
|
|
116.79
|
%
|
In connection with these warrants, the Company
recognized a gain/(loss) on the change in fair value of warrant liability of approximately $7,800, $80,000, $22,000, ($6,000),
and $125,000 from the change in fair value of these warrants during three and six-months ended June 30, 2013 and 2012, and for
the period from Inception to June 30, 2013.
Expected volatility is based primarily on
historical volatility. Historical volatility was computed using weekly pricing observations for recent periods that correspond
to the expected life of the warrants. The Company believes this method produces an estimate that is representative of our expectations
of future volatility over the expected term of these warrants. The Company currently has no reason to believe future volatility
over the expected remaining life of these warrants is likely to differ materially from historical volatility. The expected life
is based on the remaining term of the warrants. The risk-free interest rate is based on U.S. Treasury securities rates.
NOTE 6 – COMMITMENTS AND CONTINGENCIES
Fulton Project Lease
On July 20, 2010, the Company entered into
a thirty year lease agreement with Itawamba County, Mississippi for the purpose of the development, construction, and operation
of the Fulton Project. At the end of the primary 30 year lease term, the Company shall have the right for two additional thirty
year terms. The current lease rate is computed based on a per acre rate per month that is approximately $10,300 per month. The
lease stipulates the lease rate is to be reduced at the time of the construction start by a Property Cost Reduction Formula which
can substantially reduce the monthly lease costs. The lease rate shall be adjusted every five years to the Consumer Price Index.
Rent expense under non-cancellable leases
was approximately $30,900, $30,900, $61,800, $61,800, and $369,800 during the three and six-months ended June 30, 2013 and 2012
and the period from March 28, 2006 (Inception) to June 30, 2013, respectively.
The Company is not current on lease payments
due to Itawamba County, and as of June 30, 2013, we were in technical default of the lease due to non-payment. Accordingly, approximately
$267,600 has been accrued in accounts payable in the accompanying consolidated balance sheet. The Company is in constant
communication with Itawamba County officials, and we are working on alternative mechanisms for payment of the outstanding amounts
due. The Company does not believe there is a significant risk that Itawamba County will void the lease for non-payment. As of
August 19, 2013, we have not received a notice of default.
Legal Proceedings
On February 26, 2013, the Company received
notice that the Orange County Superior Court (the “Court”) issued a Minute Order (the “Order”) in connection
with certain shareholders’ claims of breach of contract and declaratory relief related to 5,740,741 warrants (the “Warrants”)
issued by the Company.
Pursuant to the Order, the Court ruled in
favor of the shareholders on the two claims, finding that the Warrants contain certain anti-dilution protective provisions which
provide for the re-adjustment of the exercise price of such Warrants upon certain events and that such exercise price per share
of the Warrants must be decreased to $0.00.
The Company has considered these warrants
exercised based on the notice of exercise received from the respective shareholders in December 2012. As of June 30, 2013, the
Company had not issued these shares, but was required to do so based on the information from the Court, the shareholders raising
the claim, and the shareholders’ exercise notice which is deemed correct based on the Order, and on August 2, 2013, the
Company issued the 5,740,741 shares underlying the Warrants.
On March 7, 2013, the shareholders making
claims provided their request for judgment based on the Order received, which has been initially refused by the Court via a second
minute order received by the Company on April 8, 2013. On April 15, 2013, the Company’s counsel submitted a proposed judgment
to the Court as per the Courts request, which followed the Order and provided for no monetary damages against the Company. On
May 14, 2013, this proposed judgment was approved by the Court (“Judgment”).
On June 20, 2013, the Company filed motions
to vacate the Judgment, a motion for a new trial, and a motion to stay enforcement of the Judgment, all of which were denied on
June 27, 2013.
On August 2, 2013, pursuant to the exercise
notice of the Warrants, and the Order, the Company issued 5,740,741 shares to certain shareholders. See Note 9 in the accompanying
notes to consolidated financial statements for additional information.
Other than the above, we are currently not
involved in litigation that we believe will have a materially adverse effect on our financial condition or results of operations, other
than as disclosed below. 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, other than as disclosed below.
NOTE 7 – RELATED PARTY TRANSACTIONS
On December 15, 2010, the Company entered
into a loan agreement (the “Loan Agreement”) by and between Arnold Klann, the Chief Executive Officer, Chairman of
the board of directors and majority shareholder of the Company, as lender (the “Lender”), and the Company, as borrower.
Pursuant to the Loan Agreement, the Lender agreed to advance to the Company a principal amount of Two Hundred Thousand United
States Dollars ($200,000) (the “Loan”). The Loan Agreement requires the Company to (i) pay to the Lender a one-time
amount equal to fifteen percent (15%) of the Loan (the “Fee Amount”) in cash or shares of the Company’s common
stock at a value of $0.50 per share, at the Lender’s option; and (ii) issue the Lender warrants allowing the Lender to buy
500,000 common shares of the Company at an exercise price of $0.50 per common share, such warrants to expire on December 15, 2013.
The Company has promised to pay in full the outstanding principal balance of any and all amounts due under the Loan Agreement
within thirty (30) days of the Company’s receipt of investment financing or a commitment from a third party to provide One
Million United States Dollars ($1,000,000) to the Company or one of its subsidiaries (the “Due Date”), to be paid
in cash.
The fair value of the warrants was $83,736
as determined by the Black-Scholes option pricing model using the following weighted-average assumptions: volatility of 112.6%,
risk-free interest rate of 1.1%, dividend yield of 0%, and a term of three (3) years.
The proceeds were allocated to the warrants
issued to the note holder based on their relative fair values which resulted in $83,736 allocated to the warrants. The amount
allocated to the warrants resulted in a discount to the note. The Company amortized the discount over the estimated term of the
Loan using the straight line method due to the short term nature of the Loan. The Company estimated the Loan would be paid back
during the quarter ended September 30, 2011. During the three and six-months ended June 30, 2013 and 2012, and for the period
from March 28, 2006 (Inception) to June 30, 2013, the Company amortized the discount to interest expense of approximately $0,
$0, $0, $0, and $83,736, respectively.
For the three and six-months ended June 30,
2013 and 2012, and for the period from March 28, 2006 (Inception) to June 30, 2013, the Company recognized interest expense of
approximately $0, $0, $0, $0, and $30,000, respectively.
NOTE 8 – REDEEMABLE NON-CONTROLLING INTEREST
On December 23, 2010, the Company sold a one
percent (1%) membership interest in its operating subsidiary, BlueFire Fulton Renewable Energy, LLC (“BlueFire Fulton”
or the “Fulton Project”), to an accredited investor for a purchase price of $750,000 (“Purchase Price”).
The Company maintains a 99% ownership interest in the Fulton Project. In addition, the investor received a right to require the
Company to redeem the 1% interest for $862,500, or any pro-rata amount thereon. The redemption is based upon future contingent
events based upon obtaining financing for the construction of the Fulton Project. The third party equity interests in the consolidated
joint ventures are reflected as redeemable non-controlling interests in the Company’s consolidated financial statements
outside of equity. The Company accreted the redeemable non-controlling interest for the total redemption price of $862,500 through
the estimated forecasted financial close, originally estimated to be the end of the third quarter of 2011.
Net income (loss) attributable to the redeemable
non-controlling interest during for the three and six-months ended June 30, 2013 and 2012 and for the period from Inception to
June 30, 2013 was $(685), $409, $(2,742), $(2,542), and $(15,297), respectively which netted against the value of the redeemable
non-controlling interest in temporary equity. The allocation of income (loss) was presented on the statement of operations.
NOTE 9 – STOCKHOLDERS’ DEFICIT
Stock-Based Compensation
During the three and six-months ended June
30, 2013 and 2012, and for the period from March 28, 2006 (Inception) to June 30, 2013, the Company recognized stock-based compensation,
including consultants, of approximately $0, $33,000, $9,100, $44,000, and $6,481,600, to general and administrative expenses
and $0, $0, $0, $0, and $4,468,000 to project development expenses, respectively. There is no additional future compensation expense
to record as of June 30, 2013 based on the previous awards.
Shares Issued for Services
During the six
months ended June 30, 2013, the Company issued 75,000 shares of common stock for legal services provided. In connection
with this issuance the Company recorded approximately $
9,100 in legal expense which is included in general and administrative
expense. The Company valued the shares using the closing market price on the date of issuance.
Stock Purchase Agreement
On January 19, 2011, the Company signed a
$10 million purchase agreement (the “Purchase Agreement”) with Lincoln Park Capital Fund, LLC (“LPC”),
an Illinois limited liability company. The Company also entered into a registration rights agreement with LPC whereby we
agreed to file a registration statement related to the transaction with the U.S. Securities & Exchange Commission (“SEC”)
covering the shares that may be issued to LPC under the Purchase Agreement within ten days of the agreement. Although under the
Purchase Agreement the registration statement was to be declared effective by March 31, 2011, LPC did not terminate the Purchase
Agreement. The registration statement was declared effective on May 10, 2011, without any penalty.
After the SEC had declared effective the registration
statement related to the transaction, the Company has the right, in their sole discretion, over a 30-month period to
sell the shares of common stock to LPC in amounts from $35,000 and up to $500,000 per sale, depending on the Company’s
stock price as set forth in the Purchase Agreement, up to the aggregate commitment of $10 million.
There are no upper limits to the price LPC
may pay to purchase our common stock and the purchase price of the shares related to the $10 million funding will be based on
the prevailing market prices of the Company’s shares immediately preceding the time of sales without any fixed discount,
and the Company controls the timing and amount of any future sales, if any, of shares to LPC. LPC shall not have the right
or the obligation to purchase any shares of our common stock on any business day that the price of our common stock is below $0.15.
The Purchase Agreement contains customary representations, warranties, covenants, closing conditions and indemnification and termination
provisions by, among and for the benefit of the parties. LPC has covenanted not to cause or engage in any manner whatsoever, any
direct or indirect short selling or hedging of the Company’s shares of common stock. The Purchase Agreement may be terminated
by us at any time at our discretion without any cost to us. Except for a limitation on variable priced financings, there
are no financial or business covenants, restrictions on future fundings, rights of first refusal, participation rights, penalties
or liquidated damages in the agreement.
Upon signing the Purchase Agreement, BlueFire
received $150,000 from LPC as an initial purchase under the $10 million commitment in exchange for 428,571 shares of our common
stock and warrants to purchase 428,571 shares of our common stock at an exercise price of $0.55 per share. The warrants contain
a ratchet provision in which the exercise price will be adjusted based on future issuances of common stock, excluding
certain issuances; if issuances are at prices lower than the current exercise price (see Note 6). The warrants have an expiration
date of January 2016.
Concurrently, in consideration for entering
into the $10 million agreement, we issued to LPC 600,000 shares of our common stock as a commitment fee and shall issue up to
600,000 shares pro rata as LPC purchases up to the remaining $9.85 million.
During the three and six-months ended June
30, 2013 and 2012 and the period from Inception to March 31, 2012 the Company drew $0, $0, $0, $35,000, and $385,000 on the Purchase
Agreement.
Equity Facility Agreement
On March 28, 2012, BlueFire finalized a committed
equity facility (the “Equity Facility”) with TCA Global Credit Master Fund, LP, a Cayman Islands limited partnership
(“TCA”), whereby the parties entered into (i) a committed equity facility agreement (the “Equity Agreement”)
and (ii) a registration rights agreement (the “Registration Rights Agreement”). Pursuant to the terms of the Equity
Agreement, for a period of twenty-four (24) months commencing on the date of effectiveness of the Registration Statement (as defined
below), TCA committed to purchase up to $2,000,000 of BlueFire’s common stock, par value $0.001 per share (the “Shares”),
pursuant to Advances (as defined below), covering the Registrable Securities (as defined below). The purchase price of the Shares
under the Equity Agreement is equal to ninety-five percent (95%) of the lowest daily volume weighted average price of BlueFire’s
common stock during the five (5) consecutive trading days after BlueFire delivers to TCA an Advance notice in writing requiring
TCA to advance funds (an “Advance”) to BlueFire, subject to the terms of the Equity Agreement. The “Registrable
Securities” include (i) the Shares; and (ii) any securities issued or issuable with respect to the Shares by way of exchange,
stock dividend or stock split or in connection with a combination of shares, recapitalization, merger, consolidation or other
reorganization or otherwise. As further consideration for TCA entering into and structuring the Equity Facility, BlueFire paid
to TCA a fee by issuing to TCA shares of BlueFire’s common stock that equal a dollar amount of $110,000 (the “Facility
Fee Shares”). It is the intention of BlueFire and TCA that the value of the Facility Fee Shares shall equal $110,000. In
the event the value of the Facility Fee Shares issued to TCA does not equal $110,000 after a nine month evaluation date, the Equity
Agreement provides for an adjustment provision allowing for necessary action (either the issuance of additional shares to TCA
or the return of shares previously issued to TCA to BlueFire’s treasury) to adjust the number of Facility Fee Shares issued.
BlueFire also entered into the Registration Rights Agreement with TCA. Pursuant to the terms of the Registration Rights Agreement,
BlueFire is obligated to file a registration statement (the “Registration Statement”) with the U.S. Securities and
Exchange Commission (the “SEC’) to cover the Registrable Securities within 45 days of closing. BlueFire must use its
commercially reasonable efforts to cause the Registration Statement to be declared effective by the SEC by a date that is no later
than 90 days following closing.
In connection with the issuance of approximately
280,000 shares for the $110,000 facility fee as described above, the Company capitalized said amount within deferred financings
costs, along with other costs incurred as part Equity Facility and the Convertible Note described below. Additional costs related
to the Equity Facility and paid from the funds of the Convertible Note described below, were approximately $60,000. Aggregate
costs of the Equity Facility were $170,000. Because these costs were to access the Equity Facility, earned by TCA regardless of
the Company drawing on the Equity Facility, and not part of a funding, they are treated akin to debt costs. The deferred financings
costs related to the Equity Facility were amortized over one (1) year on a straight-line basis. The Company believed this accelerated
amortization, which is less than the two year Equity Facility term, was appropriate based on substantial doubt about the Company’s
ability to continue as a going concern. As of December 31, 2012, the Company determined that it was not probable the Registration
Statement would become effective under the original structure of the agreement and accordingly, wrote off all remaining deferred
financing costs related to the Equity Agreement. Amortization of the deferred financing costs during the six months ended June
30, 2013 was $0.
On March 28, 2012, BlueFire entered into a
security agreement (the “Security Agreement”) with TCA, related to a $300,000 convertible promissory note issued by
BlueFire in favor of TCA (the “Convertible Note”). The Security Agreement grants to TCA a continuing, first priority
security interest in all of BlueFire’s assets, wheresoever located and whether now existing or hereafter arising or acquired.
On March 28, 2012, BlueFire issued the Convertible Note in favor of TCA. The maturity date of the Convertible Note is March 28,
2013, and the Convertible Note bears interest at a rate of twelve percent (12%) per annum with a default rate of eighteen percent
(18%) per annum. The Convertible Note is convertible into shares of BlueFire’s common stock at a price equal to ninety-five
percent (95%) of the lowest daily volume weighted average price of BlueFire’s common stock during the five (5) trading days
immediately prior to the date of conversion. The Convertible Note may be prepaid in whole or in part at BlueFire’s option
without penalty. The proceeds received by the Company under the purchase agreement are expected to be used for general working
capital purposes which include costs expected to be reimbursed under the DOE cost share program.
In connection with the Convertible Note, approximately
$93,000 was withheld and immediately disbursed to cover costs of the Convertible Note and Equity Facility described above. The
costs related to the Convertible Note were $24,800 which were capitalized as deferred financing costs; were amortized on a straight-line
basis over the term of the Convertible Note. In addition, $7,500 was dispersed to cover legal fees. After all costs, the Company
received approximately $207,000 in cash from the Convertible Note. Amortization of the deferred financing costs during the six
months ended June 30, 2013 and 2012 was approximately $38,617, $21,000, respectively. As of June 30, 2013, there were no
remaining deferred financing costs.
This note contains an embedded conversion
feature whereby the holder can convert the note at a discount to the fair value of the Company’s common stock price. Based
on applicable guidance the embedded conversion feature is considered a derivative instrument and bifurcated. This liability is
recorded on the face of the financial statements as “derivative liability”, and must be revalued each reporting period.
The Company discounted the note by the fair
market value of the derivative liability upon inception of the note. This discount was accreted back to the face value of the
note over the note term.
Using the Black-Scholes pricing model, with
the inputs listed below, we calculated the fair market value of the conversion feature to be $162,500 at the notes inception.
The Company revalued the conversion feature at June 30, 2013 in the same manor with the inputs listed below and recognized a gain
on the change in fair value of the derivative liability on the accompanying statement of operations of $137,000.
|
|
June
30, 2013
|
|
|
December 31, 2012
|
|
|
March
28, 2012
|
|
Annual dividend
yield
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Expected
life (years)
|
|
|
0.01
|
|
|
|
0.24
|
|
|
|
1.00
|
|
Risk-free interest
rate
|
|
|
0.02
|
%
|
|
|
0.16
|
%
|
|
|
0.19
|
%
|
Expected volatility
|
|
|
134.92
|
%
|
|
|
76.50
|
%
|
|
|
119.00
|
%
|
Warrants Exercised
Some of our previously outstanding warrants
contained a provision in which the exercise price is to be adjusted for future issuances of common stock at prices lower
than their current exercise price.
In 2012, certain shareholders’ owning
an aggregate of 5,740,741 warrants made claims of the Company that the exercise price of their warrants should have been adjusted
due to a certain issuance of common shares by the Company (see Note 6). The Company initially believed that said issuance would
not trigger adjustment based on the terms of the respective agreements.
On December 4, 2012, these shareholders presented
exercise forms to the Company to exercise all 5,740,741 warrants for a like amount of common shares. The warrants were exercised
at $0.00, which is the amount the shareholders’ believed the new exercise price should be based the ratchet provision and
their claims.
On February 26, 2013, the Company received
notice that the Court issued an Order in connection with these certain shareholders’ claims of breach of contract and declaratory
relief related to 5,740,741 warrants issued by the Company (see Note 6).
Pursuant to the Order, the Court ruled in
favor of the shareholders on the two claims, finding that the Warrants contain certain anti-dilution protective provisions which
provide for the re-adjustment of the exercise price of such Warrants upon certain events and that such exercise price per share
of the Warrants must be decreased to $0.00.
The Company has considered these warrants
exercised based on the notice of exercise received from the respective shareholders in December 2012. The Company determined,
that based on the Order by the Court a ratchet event had taken place based on the Order and claims made. The Company used December
4, 2012 as the date in which the new terms were considered to be in force based on the Shareholders’ notice to exercise
on that date and the Courts subsequent Order that allowed the Shareholders to do so.
As such, the modification of the exercise
price is treated as an extinguishment of the warrants under the previous terms, with a revaluation of the warrants with new terms.
As such, the warrant liability was valued immediately before extinguishment with the gain/loss recognized through earnings and
remaining value reclassified to equity. Because there was only approximately one week of remaining life under the unmodified terms
and because the previous exercise price was out of the money ($2.90) compared to the price of our common stock on the day of extinguishment
($0.14), the warrant value upon extinguishment was considered to be near zero based on a Black-Scholes calculation, which also
used volatility of 104.2% and risk-free rate of 0.07%. Because the warrant liability was also valued near zero as of September
30, 2012, there was no value transferred to equity.
In addition, the new warrant liability was
valued immediately after the modification but prior to the exercise by the Shareholders with the new value being recognized through
earnings. The “new” warrants have a fixed price, fixed number of shares, and effectively no ratchet provision based
on the Order. There are no circumstances at this time that would require or allow for net cash settlement. As such, the warrants
qualify for equity accounting under ASC 815. The Company valued the warrants with new terms at approximately $804,000 based on
the fair value of the Company’s common stock on December 4, 2012 ($0.14) as it was considered an immediate exercise and
therefore, the value of the shares was known on the date of exercise. As of June 30, 2013, the Company had not issued these shares,
but was required to do so based on the information from the Court, the shareholders raising the claim, and the shareholders’
exercise notice which is deemed correct based on the subsequent Order. On August 2, 2013, the Company issued these 5,740,741 shares.
Accordingly, the warrants are considered committed shares to be issued in the consolidated balance sheets as of June 30, 2013
and December 31, 2012.
NOTE 10 – SUBSEQUENT EVENTS
Subsequent to June 30, 2013, the holder of
various convertible notes, converted $27,000 in principal of a separate note into 2,987,296 shares of common stock. See Note 4 for
more information on the conversion features of the notes.
On August 2, 2013, pursuant to the exercise notice of the Warrants,
and the Order, the Company issued 5,740,741 shares to certain shareholders.