Attached files
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EX-5.1 - Bluefire Renewables, Inc. | v210674_ex5-1.htm |
EX-23.2 - Bluefire Renewables, Inc. | v210674_ex23-2.htm |
EX-23.1 - Bluefire Renewables, Inc. | v210674_ex23-1.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
S-1
REGISTRATION
STATEMENT
UNDER
THE SECURITIES ACT OF 1933
BLUEFIRE
RENEWABLES, INC.
(Name of
small business issuer in its charter)
Nevada
|
2860
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20-4590982
|
||
(State or jurisdiction of
incorporation or organization)
|
|
(Primary Standard Industrial
Classification Code Number)
|
|
(I.R.S. Employer
Identification number)
|
31
Musick
Irvine,
California 92618
Tel:
(949) 588-3767
(Address,
including zip code, and telephone number,
including
area code, of registrant’s principal executive offices)
The
Corporation Trust Company of Nevada
311
S Division St
Carson
City, NV 89703
Tel:
(608) 827-5300
(Name,
address, including zip code, and telephone number,
including
area code, of agent for service)
Copies
to:
Joseph
M. Lucosky, Esq.
Lucosky
Brookman LLP
33
Wood Avenue South, 6th Floor
Iselin,
New Jersey 08830
Tel:
(732) 395-4400
Fax:
(732) 395-4401
Approximate
date of proposed sale to public: From time to time after the effective date of
this Registration Statement.
If any
securities being registered on this Form are to be offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act of 1933. x
If this
Form is filed to register additional securities for an offering pursuant to Rule
462(b) under the Securities Act, please check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. ¨
If this
Form is a post-effective amendment filed pursuant to Rule 462(c) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. ¨
If this
Form is a post effective amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. ¨
If
delivery of the prospectus is expected to be made pursuant to Rule 434, please
check the following box. ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act.
Large accelerated filer
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¨
|
Accelerated filer
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¨
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Non-accelerated filer
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¨
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Smaller reporting company
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x
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CALCULATION
OF REGISTRATION FEE
Title of
Each Class Of Securities to be
Registered
|
Amount to be
Registered (1)
|
Proposed
Maximum
Aggregate
Offering Price
per share
|
Proposed
Maximum
Aggregate
Offering Price
|
Amount of
Registration fee
|
||||||||||||
Common
Stock, $0.001 par value per share, issuable pursuant to the Purchase
Agreement
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3,900,000
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$
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0.46
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(2) |
$
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1,794,000
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(2) |
$
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208.29
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(1) The shares of
our common stock being registered hereunder are being registered for sale by the
selling stockholder named in the prospectus.
(2) Estimated
solely for the purpose of computing the amount of the registration fee in
accordance with Rule 457(c) of the Securities Act on the basis of the closing
lowest sale price of common stock of the registrant as reported on the
Over-the-Counter Bulletin Board (the “OTCBB”) on February 10,
2011.
THE
REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS
MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A
FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
The
information in this prospectus is not complete and may be changed. We may not
sell these securities until the registration statement filed with the U.S.
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and we are not soliciting offers to buy these
securities in any state where the offer or sale is not permitted.
PROSPECTUS
BLUEFIRE
RENEWABLES, INC.
3,900,000
Shares of Common Stock
This
prospectus relates to the sale of up to 3,900,000 shares of our common stock
which may be offered by the selling stockholder, Lincoln Park Capital Fund, LLC,
or LPC. The shares of common stock being offered by the selling
stockholder are issuable pursuant to the LPC Purchase Agreement, which we refer
to in this prospectus as the Purchase Agreement. Please refer to the
section of this prospectus entitled “The LPC Transaction” for a description of
the Purchase Agreement and the section entitled “Selling Stockholder” for
additional information. The prices at which LPC may sell the shares
will be determined by the prevailing market price for the shares or in
negotiated transactions. We will not receive proceeds from the sale
of our shares by LPC, however, we may receive proceeds of up to $10,000,000
under the Purchase Agreement.
Our
common stock is registered under Section 12(g) of the Securities Exchange Act of
1934 and quoted on the Over-the-Counter Bulletin Board Market under the symbol
“BFRE.” On February 10, 2011, the last reported sale price for our common stock
as reported on the Over-the-counter Bulletin Board was $0.46 per
share.
Investing
in the common stock involves certain risks. See “Risk Factors” beginning on page
8 for a discussion of these risks.
The
selling stockholder is an “underwriter” within the meaning of the Securities Act
of 1933, as amended.
Neither
the U.S. Securities and Exchange Commission nor any state securities commission
has approved or disapproved of these securities or determined if this prospectus
is truthful or complete. Any representation to the contrary is a criminal
offense.
The date
of this Prospectus is ________, 2011.
TABLE
OF CONTENTS
PROSPECTUS
SUMMARY
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3
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SUMMARY
FINANCIAL DATA
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7
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RISK
FACTORS
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8
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FORWARD-LOOKING
STATEMENTS
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15
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USE
OF PROCEEDS
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15
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DETERMINATION
OF OFFERING PRICE
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15
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MARKET
FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
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16
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MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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18
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DESCRIPTION
OF BUSINESS
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25
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LEGAL
PROCEEDINGS
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34
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MANAGEMENT
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35
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EXECUTIVE
COMPENSATION
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37
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CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
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45
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SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
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46
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DESCRIPTION
OF SECURITIES
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48
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SELLING
STOCKHOLDERS
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53
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PLAN
OF DISTRIBUTION
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54
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CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS
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55
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LEGAL
MATTERS
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55
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EXPERTS
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55
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ADDITIONAL
INFORMATION
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56
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2
PROSPECTUS
SUMMARY
This
summary provides an overview of certain information contained elsewhere in this
Prospectus and does not contain all of the information that you should consider
or that may be important to you. Before making an investment decision, you
should read the entire Prospectus carefully, including the “Risk Factors”
section, the financial statements and the notes to the financial statements. In
this Prospectus, the terms “BlueFire,” “Company,” “we,” “us” and “our” refer to
BlueFire Renewables, Inc. and our operating subsidiary.
Our
Company
We are
BlueFire Renewables, Inc., a Nevada corporation. Our goal is to develop, own and
operate high-value carbohydrate-based transportation fuel plants, or
biorefineries, to produce ethanol, a viable alternative to fossil fuels, and to
provide professional services to biorefineries worldwide. Our biorefineries will
convert widely available, inexpensive, organic materials such as agricultural
residues, high-content biomass crops, wood residues and cellulose from municipal
solid wastes into ethanol. This versatility enables us to consider a wide
variety of feedstocks and locations in which to develop facilities to become a
low cost producer of ethanol. We have licensed for use a patented process from
Arkenol, Inc., a Nevada corporation (“Arkenol”), to produce ethanol from
cellulose (the “Arkenol Technology”). We are the exclusive North America
licensee of the Arkenol Technology. We may also utilize certain biorefinery
related rights, assets, work-product, intellectual property and other know-how
related to 19 ethanol project opportunities originally developed by ARK Energy,
Inc, a Nevada corporation, to accelerate our deployment of the Arkenol
Technology.
Company
History
We are a
Nevada corporation that was initially organized as Atlanta Technology Group,
Inc., a Delaware corporation, on October 12, 1993. The Company was re-named
Docplus.net Corporation on December 31, 1998, and further re-named Sucre
Agricultural Corp. (“Sucre”) and re-domiciled as a Nevada corporation on March
6, 2006. Finally, on May 24, 2006, in anticipation of the reverse merger
by which it would acquire BlueFire Ethanol, Inc. (“BlueFire”), a privately held
Nevada corporation organized on March 28, 2006, as described below, the Company
was re-named to BlueFire Ethanol Fuels, Inc.
On June
27, 2006, the Company completed a reverse merger (the “Reverse Merger”) with
BlueFire Ethanol, Inc. (“BlueFire Ethanol”). At the time of Reverse
Merger, the Company was a blank-check company and had no operations, revenues or
liabilities. The only asset possessed by the Company was $690,000 in cash which
continued to be owned by the Company at the time of the Reverse Merger. In
connection with the Reverse Merger, the Company issued BlueFire Ethanol
17,000,000 shares of common stock, approximately 85% of all of the outstanding
common stock of the Company, for all the issued and outstanding BlueFire Ethanol
common stock. The Company stockholders retained 4,028,264 shares of Company
common stock. As a result of the Reverse Merger, BlueFire Ethanol became
our wholly-owned subsidiary. On June 21, 2006, prior to and in
anticipation of the Reverse Merger, Sucre sold 3,000,000 shares of common stock
to two related investors in a private offering of shares pursuant to Rule 504
for proceeds of $1,000,000.
On July
20, 2010, the Company changed its name to BlueFire Renewables, Inc. to more
accurately reflect our primary business plan expanding the focus from just
building cellulosic ethanol projects to include other advanced biofuels,
biodiesel, and other drop-in biofuels as well as synthetic
lubricants.
The
Company’s shares of common stock began trading under the symbol “BFRE.PK” on the
Pink Sheets of the National Quotation Bureau on July 11, 2006 and later began
trading on the OTCBB under the symbol “BFRE.OB” on June 19, 2007. On February
10, 2011, the closing price of our Common Stock was $0.46 per
share.
Our
executive offices are located at 31 Musick, Irvine, California 92618 and
our telephone number at such office is (949) 588-3767.
3
Recent
Developments
In 2009,
BlueFire completed the engineering package for the Lancaster
Biorefinery, and finalized the Front-End Loading (FEL) 3 stage of
engineering for the Lancaster Biorefinery. FEL is the process for conceptual
development of processing industry projects. This process is used in the
petrochemical, refining, and pharmaceutical industries. Front-End Loading is
also referred to as Front-End Engineering Design (FEED). There are three stages
in the FEL process:
FEL-1
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FEL-2
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FEL-3
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||
*
Material Balance
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*
Preliminary Equipment Design
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*
Purchase Ready Major Equipment Specifications
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||
*
Energy Balance
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*
Preliminary Layout
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*
Definitive Estimate
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*
Project Charter
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*
Preliminary Schedule
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*
Project Execution Plan
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*
Preliminary Estimate
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*
Preliminary 3D Model
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*
Electrical Equipment List
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*
Line List
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||||
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*
Instrument Index
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In July
2008, BlueFire signed a teaming agreement with Amalgamated Research, Inc.
(“ARI”) for the exclusive right to use its Simulated Moving Bed Chromatographic
Separation (“SMB”) technology for the separation of concentrated sulfuric acid
and simple sugars. By using ARI’s SMB, BlueFire recovers approximately 99% of
the entrained sugars in the acid/sugar stream.
In July
2008, BlueFire was granted a conditional-use permit from the County of Los
Angeles, Department of Regional Planning, to permit the construction of the
Lancaster Biorefinery. However, a subsequent appeal of the county
decision pushed the effective date of the now non-appealable permit approval to
December 12, 2008.
On
February 12, 2009, we were issued our Authority to Construct permit by the
Antelope Valley Air Quality Management District.
On
October 15, 2009, BlueFire announced the strategic relocation of its second
planned biorefinery (DOE Facility) to Fulton, Mississippi.
The
Offering
On
January 19, 2011, we executed a Purchase Agreement and a Registration Rights
Agreement with Lincoln Park Capital Fund, LLC, pursuant to which LPC has
purchased 428,571 shares of our common stock together with warrants to purchase
428,571 shares of our common stock at an exercise price of $0.55 per share, for
total consideration of $150,000. The warrants have a term of five years. Under
the Purchase Agreement, we also have the right to sell to LPC up to an
additional $9,850,000 of our common stock at our option as described
below.
Pursuant
to the Registration Rights Agreement, we are filing this registration statement
and prospectus with the Securities and Exchange Commission (the “SEC”) covering
shares that have been issued or may be issued to LPC under the Purchase
Agreement. We do not have the right to commence any additional sales
of our shares to LPC until the SEC has declared effective the registration
statement of which this Prospectus is a part. After the registration
statement is declared effective, over approximately 30 months, generally we have
the right to direct LPC to purchase up to an additional $9,850,000 of our common
stock in amounts up to $35,000 as often as every two business days under certain
conditions. We can also accelerate the amount of our stock to be purchased under
certain circumstances. No sales of shares may occur below $0.15 per
share. There are no trading volume requirements or restrictions under
the Purchase Agreement, and we will control the timing and amount of any sales
of our common stock to Lincoln Park. The purchase price of the shares
will be based on the market prices of our shares immediately preceding the time
of sale as computed under the Purchase Agreement without any fixed
discount. We may at any time in our sole discretion terminate the
Purchase Agreement without fee, penalty or cost upon one business day
notice. LPC may not assign or transfer its rights and obligations
under the Purchase Agreement. We issued 600,000 shares of our stock
to LPC as a commitment fee for entering into the agreement, and we may issue up
to 600,000 shares pro rata as LPC purchases the up to the additional $9,850,000
of our stock as directed by us.
4
As of
February 10, 2011, there were 28,555,400 shares outstanding (11,873,017 shares
held by non-affiliates) excluding the 1,028,571 shares which we have already
issued and are offered by LPC pursuant to this Prospectus. 3,900,000
shares are offered hereby consisting of 428,571 shares together with 428,571
shares underlying a warrant, which are not included in this offering, that we
have sold to LPC for $150,000, 600,000 shares that we issued as a commitment fee
and 2,871,429 shares, of which 600,000 shares that we may issue pro rata as up
to the additional $9,850,000 of our stock is purchased by LPC, the remainder
representing shares we may sell to LPC under the Purchase
Agreement. If all of the 3,900,000 shares offered by LPC hereby were
issued and outstanding as of the date hereof, such shares would represent
approximately 12.02% of the total common stock outstanding or approximately
24.73% of the non-affiliates shares outstanding, as adjusted, as of the date
hereof. The number of shares ultimately offered for sale by LPC is
dependent upon the number of shares that we sell to LPC under the Purchase
Agreement. If we elect to issue more than the 3,900,000 shares offered under
this prospectus, which we have the right but not the obligation to do, we must
first register under the Securities Act any additional shares we may elect to
sell to Lincoln Park before we can sell such additional shares.
Securities
Offered
Common
Stock to be offered by the Selling Stockholder:
|
3,900,000
shares consisting of:
· 428,571 purchase shares
issued;
· 600,000 initial commitment
shares issued to LPC;
· 600,000 shares that we are
required to issue proportionally in the future, as a commitment fee, if
and when we sell additional shares to LPC under the Purchase Agreement;
and
· The remainder represents
shares we may sell to LPC under the Purchase Agreement.
|
|
Common
stock outstanding prior to this offering:
|
28,555,400
shares as of February 10, 2011
|
|
Common
stock to be outstanding after giving effect to the issuance of 3,900,000
shares under the Purchase Agreement:
|
32,455,400
shares
|
|
Use
of Proceeds:
|
We
will receive no proceeds from the sale of shares of common stock by LPC in
this offering. However, we may receive up to an additional $9,850,000
under the Purchase Agreement with LPC. Any proceeds that we receive from
sales to LPC under the Purchase Agreement will be used for general working
capital purposes. See “Use of Proceeds.”
|
|
Risk
Factors:
|
This
investment involves a high degree of risk. See “Risk Factors” for a
discussion of factors you should consider carefully before making an
investment decision.
|
|
Symbol
on the Over-the-Counter Bulletin Board:
|
BFRE.OB
|
5
You
should read the summary financial data set forth below in conjunction with
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” and our financial statements and the related notes included
elsewhere in this prospectus. We derived the financial data as of the nine
months ended September 30, 2010 and 2009, the fiscal year ending December 31,
2009 and 2008, and for the period from March 28, 2006 (Inception) to September
30, 2010, from our financial statements included in this report. The historical
results are not necessarily indicative of the results to be expected for any
future period.
6
Summary
Financial Data
STATEMENT OF OPERATIONS:
|
For the years ended
December 31,
|
For the Nine Months
Ended September 30,
|
Period from
March 28,
2006
(Inception)
to
September,
30
|
|||||||||||||||||
2009
|
2008
|
2010
|
2009
|
2010
|
||||||||||||||||
Revenues
|
$ | 4,318,213 | $ | 1,075,508 | $ | 538,405 | $ | 4,105,833 | $ | 5,981,126 | ||||||||||
Total
operating expenses
|
3,527,258 | 15,671,513 | 2,240,891 | 2,746,690 | 33,514,723 | |||||||||||||||
Operating
income (loss)
|
790,955 | (14,596,005 | ) | (1,702,486 | ) | 1,359,143 | (27,533,597 | ) | ||||||||||||
Net
Income (loss)
|
$ | 1,136,092 | $ | (14,370,594 | ) | $ | (351,996 | ) | $ | (450,227 | ) | $ | (29,418,413 | ) | ||||||
Basic
and diluted earnings (loss) per common share
|
$ | 0.04 | $ | (0.51 | ) | (0.01 | ) | $ | (0.02 | ) | ||||||||||
Weighted
average common shares outstanding basic and diluted
|
28,159,629 | 28,064,572 | 28,381,276 | 28,116,271 |
BALANCE SHEETS:
|
At September
30,
2010
|
At December
31,
2009
|
At December
31,
2008
|
|||||||||
Cash
and cash equivalents
|
$ | 517,716 | $ | 2,844,711 | $ | 2,999,599 | ||||||
Current
assets
|
$ | 966,442 | $ | 3,102,881 | $ | 3,781,484 | ||||||
Total
assets
|
$ | 2,347,344 | $ | 3,420,876 | $ | 3,967,596 | ||||||
Current
liabilities
|
$ | 1,168,342 | $ | 580,941 | $ | 1,855,502 | ||||||
Total
liabilities
|
$ | 2,093,349 | $ | 2,855,334 | $ | 1,855,502 | ||||||
Total
stockholders’ equity
|
$ | 253,995 | $ | 565,542 | $ | 2,112,094 |
7
RISK
FACTORS
This
registration statement contains forward-looking statements that involve risks
and uncertainties. These statements can be identified by the use of
forward-looking terminology such as “believes,” “expects,” “intends,” “plans,”
“may,” “will,” “should,” or “anticipation” or the negative thereof or other
variations thereon or comparable terminology. Actual results could differ
materially from those discussed in the forward-looking statements as a result of
certain factors, including those set forth below and elsewhere in this
Registration Statement. The following risk factors should be considered
carefully in addition to the other information in this Registration Statement,
before purchasing any of the Company’s securities.
RISKS
RELATED TO OUR BUSINESS AND INDUSTRY
SINCE
INCEPTION, WE HAVE HAD LIMITED OPERATIONS AND HAVE INCURRED NET LOSSES OF
$29,418,413 AND WE NEED ADDITIONAL CAPITAL TO EXECUTE OUR BUSINESS
PLAN.
We have
had limited operations and have incurred net losses of approximately $29,400,000
for the period from March 28, 2006 (Inception) through September 30, 2010, of
which approximately $23,000,000 was cash used in our operating activities.
We have generated revenues from consulting of approximately $116,000 and
approximately $5,866,000 in grant revenue from the DOE for total revenues of
approximately $5,982,000, and no revenues from operations. We have yet to begin
ethanol production or construction of ethanol producing plants. Since the
Reverse Merger, we have been engaged in developmental activities, including
developing a strategic operating plan, plant engineering and development
activities, entering into contracts, hiring personnel, developing processing
technology, and raising private capital. Our continued existence is dependent
upon our ability to obtain additional debt and/or equity financing. We are
uncertain given the economic landscape when to anticipate the beginning
construction of a plant given the availability of capital. We estimate the total
cost including contingencies to be in the range of approximately $100 million to
$125 million for our first plant. We plan to raise additional funds through
project financings, grants and/or loan guarantees, or through future sales of
our common stock, until such time as our revenues are sufficient to meet our
cost structure, and ultimately achieve profitable operations. There is no
assurance we will be successful in raising additional capital or achieving
profitable operations. Wherever possible, our Board of Directors will attempt to
use non-cash consideration to satisfy obligations. In many instances, we believe
that the non-cash consideration will consist of restricted shares of our common
stock. These actions will result in dilution of the ownership interests of
existing shareholders may further dilute common stock book value, and that
dilution may be material.
OUR
CELLULOSE-TO-ETHANOL TECHNOLOGIES ARE UNPROVEN ON A LARGE-SCALE COMMERCIAL BASIS
AND PERFORMANCE COULD FAIL TO MEET PROJECTIONS, WHICH COULD HAVE A DETRIMENTAL
EFFECT ON THE LONG-TERM CAPITAL APPRECIATION OF OUR STOCK.
While
production of ethanol from corn, sugars and starches is a mature technology,
newer technologies for production of ethanol from cellulose biomass have not
been built at large commercial scales. The technologies being utilized by us for
ethanol production from biomass have not been demonstrated on a commercial
scale. All of the tests conducted to date by us with respect to the Arkenol
Technology have been performed on limited quantities of feedstocks, and we
cannot assure you that the same or similar results could be obtained at
competitive costs on a large-scale commercial basis. We have never utilized
these technologies under the conditions or in the volumes that will be required
to be profitable and cannot predict all of the difficulties that may arise. It
is possible that the technologies, when used, may require further research,
development, design and testing prior to larger-scale commercialization.
Accordingly, we cannot assure you that these technologies will perform
successfully on a large-scale commercial basis or at all.
8
OUR
BUSINESS EMPLOYS LICENSED ARKENOL TECHNOLOGY WHICH MAY BE DIFFICULT TO PROTECT
AND MAY INFRINGE ON THE INTELLECTUAL PROPERTY RIGHTS OF THIRD
PARTIES.
We
currently license our technology from Arkenol. Arkenol owns 11 U.S.
patents, 21 foreign patents, and has one foreign patent pending and may file
more patent applications in the future. Our success depends, in part, on our
ability to use the Arkenol Technology, and for Arkenol to obtain patents,
maintain trade secrecy and not infringe the proprietary rights of third parties.
We cannot assure you that the patents of others will not have an adverse effect
on our ability to conduct our business, that we will develop additional
proprietary technology that is patentable or that any patents issued to us or
Arkenol will provide us with competitive advantages or will not be challenged by
third parties. Further, we cannot assure you that others will not independently
develop similar or superior technologies, duplicate elements of the Arkenol
Technology or design around it.
It is
possible that we may need to acquire other licenses to, or to contest the
validity of, issued or pending patents or claims of third parties. We cannot
assure you that any license would be made available to us on acceptable terms,
if at all, or that we would prevail in any such contest. In addition, we could
incur substantial costs in defending ourselves in suits brought against us for
alleged infringement of another party’s patents in bringing patent infringement
suits against other parties based on our licensed patents.
In
addition to licensed patent protection, we also rely on trade secrets,
proprietary know-how and technology that we seek to protect, in part, by
confidentiality agreements with our prospective joint venture partners,
employees and consultants. We cannot assure you that these agreements will not
be breached, that we will have adequate remedies for any breach, or that our
trade secrets and proprietary know-how will not otherwise become known or be
independently discovered by others.
OUR
SUCCESS DEPENDS UPON ARNOLD KLANN, OUR CHAIRMAN AND CHIEF EXECUTIVE OFFICER, AND
JOHN CUZENS, OUR CHIEF TECHNOLOGY OFFICER AND SENIOR VICE
PRESIDENT.
We
believe that our success will depend to a significant extent upon the efforts
and abilities of (i) Arnold Klann, our Chairman and Chief Executive Officer, due
to his contacts in the ethanol and cellulose industries and his overall insight
into our business, and (ii) John Cuzens, our Chief Technology Officer and Senior
Vice President for his technical and engineering expertise, including his
familiarity with the Arkenol Technology. Our failure to retain Mr. Klann or Mr.
Cuzens, or to attract and retain additional qualified personnel, could adversely
affect our operations. We do not currently carry key-man life insurance on any
of our officers.
COMPETITION
FROM LARGE PRODUCERS OF PETROLEUM-BASED GASOLINE ADDITIVES AND OTHER COMPETITIVE
PRODUCTS MAY IMPACT OUR PROFITABILITY.
Our
proposed ethanol plants will also compete with producers of other gasoline
additives made from other raw materials having similar octane and oxygenate
values as ethanol. The major oil companies have significantly greater resources
than we have to develop alternative products and to influence legislation and
public perception of ethanol. These other companies also have significant
resources to begin production of ethanol should they choose to do
so.
We will
also compete with producers of other gasoline additives having similar octane
and oxygenate values as ethanol. An example of such other additives is MTBE, a
petrochemical derived from methanol. MTBE costs less to produce than ethanol.
Many major oil companies produce MTBE and because it is petroleum-based, its use
is strongly supported by major oil companies. Alternative fuels, gasoline
oxygenates and alternative ethanol production methods are also continually under
development. The major oil companies have significantly greater resources than
we have to market MTBE, to develop alternative products, and to influence
legislation and public perception of MTBE and ethanol.
OUR
BUSINESS PROSPECTS WILL BE IMPACTED BY CORN SUPPLY.
Our
ethanol will be produced from cellulose, however currently most ethanol is
produced from corn, which is affected by weather, governmental policy, disease
and other conditions. A significant increase in the availability of corn and
resulting reduction in the price of corn may decrease the price of ethanol and
harm our business.
9
IF
ETHANOL AND GASOLINE PRICES DROP SIGNIFICANTLY, WE WILL ALSO BE FORCED TO REDUCE
OUR PRICES, WHICH POTENTIALLY MAY LEAD TO FURTHER LOSSES.
Prices
for ethanol products can vary significantly over time and decreases in price
levels could adversely affect our profitability and viability. The price of
ethanol has some relation to the price of gasoline. The price of ethanol tends
to increase as the price of gasoline increases, and the price of ethanol tends
to decrease as the price of gasoline decreases. Any lowering of gasoline prices
will likely also lead to lower prices for ethanol and adversely affect our
operating results. We cannot assure you that we will be able to sell our ethanol
profitably, or at all.
INCREASED
ETHANOL PRODUCTION FROM CELLULOSE IN THE UNITED STATES COULD INCREASE THE DEMAND
AND PRICE OF FEEDSTOCKS, REDUCING OUR PROFITABILITY.
New
ethanol plants that utilize cellulose as their feedstock may be under
construction or in the planning stages throughout the United States. This
increased ethanol production could increase cellulose demand and prices,
resulting in higher production costs and lower profits.
PRICE
INCREASES OR INTERRUPTIONS IN NEEDED ENERGY SUPPLIES COULD CAUSE LOSS OF
CUSTOMERS AND IMPAIR OUR PROFITABILITY.
Ethanol
production requires a constant and consistent supply of energy. If there is any
interruption in our supply of energy for whatever reason, such as availability,
delivery or mechanical problems, we may be required to halt production. If we
halt production for any extended period of time, it will have a material adverse
effect on our business. Natural gas and electricity prices have historically
fluctuated significantly. We purchase significant amounts of these resources as
part of our ethanol production. Increases in the price of natural gas or
electricity would harm our business and financial results by increasing our
energy costs.
OUR
BUSINESS PLAN CALLS FOR EXTENSIVE AMOUNTS OF FUNDING TO CONSTRUCT AND OPERATE
OUR BIOREFINERY PROJECTS AND WE MAY NOT BE ABLE TO OBTAIN SUCH FUNDING WHICH
COULD ADVERSELY AFFECT OUR BUSINESS, OPERATIONS AND FINANCIAL
CONDITION.
Our
business plan depends on the completion of up to 19 numerous biorefinery
projects. Although each facility will have specific funding requirements, our
proposed facility in Lancaster, CA will require approximately $100-$125 million
to fund, and our proposed DOE facility in Fulton, MS will require an additional
$260 million in addition to the approximate $88 million in grant funding
currently allocated to the project. We will be relying on additional financing,
and funding from such sources as Federal and State grants and loan guarantee
programs. We are currently in discussions with potential sources of
financing but no definitive agreements are in place. If we cannot achieve the
requisite financing or complete the projects as anticipated, this could
adversely affect our business, the results of our operations, prospects and
financial condition.
WE
RELY ON ACCESS TO FUNDING FROM THE UNITED STATES DEPARTMENT OF ENERGY. IF WE
CANNOT ACCESS GOVERNMENT FUNDING WE MAY BE UNABLE TO FINANCE OUR PROJECTS AND/OR
OUR OPERATIONS.
Our
operations have been financed to a large degree through funding provided by the
U.S. Department of Energy. 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. In 2008, the Company began to draw down on the Award 1
monies that were finalized with the U.S. Department of Energy. As our Fulton
Project developed further, the Company was able to begin drawing down on the
second phase of U.S. Department of Energy monies (“Award 2”). Although we
finalized Award 1 with a total reimbursable amount of $6,425,564, and Award 2
with a total reimbursable amount of $81,134,686 and through February 10, 2011,
we have an unreimbursed amount of approximately $365,628 available to us under
Award 1, and approximately $78,875,127 under Award 2, only $3,382,375 of which
has been made available as of the date above, we cannot guarantee that we will
continue to receive grants, loan guarantees, or other funding for our projects
from the U.S. Department of Energy.
10
RISKS
RELATED TO GOVERNMENT REGULATION AND SUBSIDIZATION
FEDERAL
REGULATIONS CONCERNING TAX INCENTIVES COULD EXPIRE OR CHANGE, WHICH COULD CAUSE
AN EROSION OF THE CURRENT COMPETITIVE STRENGTH OF THE ETHANOL
INDUSTRY.
Congress
currently provides certain federal tax credits for ethanol producers and
marketers. The current ethanol industry and our business initially depend on the
continuation of these credits. The credits have supported a market for ethanol
that might disappear without the credits. These credits may not continue beyond
their scheduled expiration date or, if they continue, the incentives may not be
at the same level. The revocation or amendment of any one or more of these tax
incentives could adversely affect the future use of ethanol in a material way,
and we cannot assure investors that any of these tax incentives will be
continued. The elimination or reduction of federal tax incentives to the ethanol
industry could have a material adverse impact on the industry as a
whole.
LAX
ENFORCEMENT OF ENVIRONMENTAL AND ENERGY POLICY REGULATIONS MAY ADVERSELY AFFECT
DEMAND FOR ETHANOL.
Our
success will depend in part on effective enforcement of existing environmental
and energy policy regulations. Many of our potential customers are unlikely to
switch from the use of conventional fuels unless compliance with applicable
regulatory requirements leads, directly or indirectly, to the use of ethanol.
Both additional regulation and enforcement of such regulatory provisions are
likely to be vigorously opposed by the entities affected by such requirements.
If existing emissions-reducing standards are weakened, or if governments are not
active and effective in enforcing such standards, our business and results of
operations could be adversely affected. Even if the current trend toward more
stringent emission standards continues, we will depend on the ability of ethanol
to satisfy these emissions standards more efficiently than other alternative
technologies. Certain standards imposed by regulatory programs may limit or
preclude the use of our products to comply with environmental or energy
requirements. Any decrease in the emission standards or the failure to enforce
existing emission standards and other regulations could result in a reduced
demand for ethanol. A significant decrease in the demand for ethanol will reduce
the price of ethanol, adversely affect our profitability and decrease the value
of your stock.
COSTS
OF COMPLIANCE WITH BURDENSOME OR CHANGING ENVIRONMENTAL AND OPERATIONAL SAFETY
REGULATIONS COULD CAUSE OUR FOCUS TO BE DIVERTED AWAY FROM OUR BUSINESS AND OUR
RESULTS OF OPERATIONS TO SUFFER.
Ethanol
production involves the emission of various airborne pollutants, including
particulate matter, carbon monoxide, carbon dioxide, nitrous oxide, volatile
organic compounds and sulfur dioxide. The production facilities that we will
build will discharge water into the environment. As a result, we are subject to
complicated environmental regulations of the U.S. Environmental Protection
Agency and regulations and permitting requirements of the states where our
plants are to be located. These regulations are subject to change and such
changes may require additional capital expenditures or increased operating
costs. Consequently, considerable resources may be required to comply with
future environmental regulations. In addition, our ethanol plants could be
subject to environmental nuisance or related claims by employees, property
owners or residents near the ethanol plants arising from air or water
discharges. Ethanol production has been known to produce an odor to which
surrounding residents could object. Environmental and public nuisance claims, or
tort claims based on emissions, or increased environmental compliance costs
could significantly increase our operating costs.
OUR
PROPOSED NEW ETHANOL PLANTS WILL ALSO BE SUBJECT TO FEDERAL AND STATE LAWS
REGARDING OCCUPATIONAL SAFETY.
Risks of
substantial compliance costs and liabilities are inherent in ethanol production.
We may be subject to costs and liabilities related to worker safety and job
related injuries, some of which may be significant. Possible future
developments, including stricter safety laws for workers and other individuals,
regulations and enforcement policies and claims for personal or property damages
resulting from operation of the ethanol plants could reduce the amount of cash
that would otherwise be available to further enhance our business.
RISKS
RELATED TO OUR COMMON STOCK AND THIS OFFERING.
THERE
IS NO LIQUID MARKET FOR OUR COMMON STOCK.
Our
shares are traded on the OTCBB and the trading volume has historically been very
low. An active trading market for our shares may not develop or be sustained. We
cannot predict at this time how actively our shares will trade in the public
market or whether the price of our shares in the public market will reflect our
actual financial performance.
11
OUR
COMMON STOCK PRICE HAS FLUCTUATED CONSIDERABLY AND STOCKHOLDERS MAY NOT BE ABLE
TO RESELL THEIR SHARES AT OR ABOVE THE PRICE AT WHICH SUCH SHARES WERE
PURCHASED.
The
market price of our common stock may fluctuate significantly. From July
11, 2006, the day we began trading publicly as BFRE.PK, and February 10, 2011,
traded as BFRE.OB, the high and low price for our common stock has been $7.90
and $0.23 per share, respectively. Our share price has fluctuated in
response to various factors, including not yet beginning construction of our
first plant, needing additional time to organize engineering resources, issues
relating to feedstock sources, trying to locate suitable plant locations,
locating distributors and finding funding sources.
OUR
COMMON STOCK MAY BE CONSIDERED “A PENNY STOCK” AND MAY BE DIFFICULT FOR YOU TO
SELL.
The SEC
has adopted regulations which generally define “penny stock” to be an equity
security that has a market price of less than $5.00 per share or an exercise
price of less than $5.00 per share, subject to specific exemptions. The market
price of our common stock has been for much of its trading history since July
11, 2006, and may continue to be less than $5.00 per share, and therefore may be
designated as a “penny stock” according to SEC rules. This designation requires
any broker or dealer selling these securities to disclose certain information
concerning the transaction, obtain a written agreement from the purchaser and
determine that the purchaser is reasonably suitable to purchase the securities.
These rules may restrict the ability of brokers or dealers to sell our common
stock and may affect the ability of investors to sell their shares.
COMPLIANCE
AND CONTINUED MONITORING IN CONNECTION WITH CHANGING REGULATION OF CORPORATE
GOVERNANCE AND PUBLIC DISCLOSURE MAY RESULT IN ADDITIONAL EXPENSES.
Changing
laws, regulations and standards relating to corporate governance and public
disclosure may create uncertainty regarding compliance matters. New or changed
laws, regulations and standards are subject to varying interpretations in many
cases. As a result, their application in practice may evolve over time. We are
committed to maintaining high standards of corporate governance and public
disclosure. Complying with evolving interpretations of new or changed legal
requirements may cause us to incur higher costs as we revise current practices,
policies and procedures, and may divert management time and attention from the
achievement of revenue generating activities to compliance activities. If our
efforts to comply with new or changed laws, regulations and standards differ
from the activities intended by regulatory or governing bodies due to
uncertainties related to practice, our reputation might be harmed which would
could have a significant impact on our stock price and our business. In
addition, the ongoing maintenance of these procedures to be in compliance with
these laws, regulations and standards could result in significant increase in
costs.
OUR
PRINCIPAL STOCKHOLDER HAS SIGNIFICANT VOTING POWER AND MAY TAKE ACTIONS THAT MAY
NOT BE IN THE BEST INTEREST OF ALL OTHER STOCKHOLDERS.
The
Company’s Chairman and President controls approximately 46.67% of its current
outstanding shares of voting common stock. He may be able to exert significant
control over our management and affairs requiring stockholder approval,
including approval of significant corporate transactions. This concentration of
ownership may expedite approvals of company decisions, or have the effect of
delaying or preventing a change in control, adversely affect the market price of
our common stock, or be in the best interests of all our
stockholders.
12
YOU
COULD BE DILUTED FROM THE ISSUANCE OF ADDITIONAL COMMON STOCK.
As of
February 10, 2011, we had 29,583,971 shares of common stock outstanding,
including the 1,028,571 shares which we have already issued and are offered by
LPC pursuant to this Prospectus, and no shares of preferred stock
outstanding. We are authorized to issue up to 100,000,000 shares of common
stock and 1,000,000 shares of preferred stock. To the extent of such
authorization, our Board of Directors will have the ability, without seeking
stockholder approval, to issue additional shares of common stock or preferred
stock in the future for such consideration as the Board of Directors may
consider sufficient. The issuance of additional common stock or preferred stock
in the future may reduce your proportionate ownership and voting
power.
WE
HAVE NOT AND DO NOT INTEND TO PAY ANY DIVIDENDS. AS A RESULT, YOU MAY ONLY BE
ABLE TO OBTAIN A RETURN ON INVESTMENT IN OUR COMMON STOCK IF ITS VALUE
INCREASES.
We have
not paid dividends in the past and do not plan to pay dividends in the near
future. We expect to retain earnings to finance and develop our business. In
addition, the payment of future dividends will be directly dependent upon our
earnings, our financial needs and other similarly unpredictable factors. As a
result, the success of an investment in our common stock will depend upon future
appreciation in its value. The price of our common stock may not appreciate in
value or even maintain the price at which you purchased our shares.
WE
HAVE A LIMITED OPERATING HISTORY WITH SIGNIFICANT LOSSES AND EXPECT LOSSES TO
CONTINUE FOR THE FORESEEABLE FUTURE.
We have
yet to establish any history of profitable operations. In two of the
last three years we have incurred annual operating losses. Operating
income/(losses) were $790,955, $(14,596,005) and $(10,476,864) for fiscal years
ended 2009, 2008, and 2007, respectively. As a result, at September
30, 2010 we had an accumulated deficit of approximately $13,747,000. In 2009 we
have net income from continuing operations of $1,136,092. However, we incurred
net losses from continuing operations in 2008 of $(14,370,594). Excluding 2009,
our revenues have not been sufficient to sustain our operations. We
expect that our revenues will not be sufficient to sustain our operations for
the foreseeable future. Our profitability will require the successful
commercialization of at least one commercial scale cellulose to ethanol
facility. No assurances can be given when this will occur or that we will ever
be profitable.
WE
MAY REQUIRE ADDITIONAL FINANCING TO SUSTAIN OUR OPERATIONS AND WITHOUT IT WE MAY
NOT BE ABLE TO CONTINUE OPERATIONS.
At
September 30, 2010 we had a working capital deficit of approximately $202,000.
We have an operating loss of $709,669 for the three months ended September 30,
2010, an operating loss of $1,702,486 for the nine months ended September 30,
2010, and for the year ended 2009, operating income of $790,955. We do not
currently have sufficient financial resources to fund our operations or those of
our subsidiaries. Therefore, we need additional funds to continue these
operations.
We may
direct LPC to purchase up to an additional $9,850,000 worth of shares of our
common stock under our agreement over a 30 month period generally in amounts of
up to $35,000 every 2 business days. However, LPC shall not have the
right nor the obligation to purchase any shares of our common stock on any
business day that the market price of our common stock is less than $0.15. We
are registering 3,900,000 shares pursuant to this prospectus. In the
event we elect to issue more than the 3,900,000 shares offered hereby, we would
be required to file a new registration statement and have it declared effective
by the SEC. Assuming a purchase price of $0.46 per share (the closing
sale price of the common stock on February 10, 2011) and the purchase by LPC of
the full 2,793,164 purchase shares and along with issuance of 78,265 additional
pro rata commitment shares registered under this offering, proceeds to us would
only be $1,284,855.
The
extent we rely on LPC as a source of funding will depend on a number of factors
including, the prevailing market price of our common stock and the extent to
which we are able to secure working capital from other
sources. Specifically, LPC shall not have the right nor the
obligation to purchase any shares of our common stock on any business days that
the market price of our common stock is less than $0.15. If obtaining
sufficient funding from LPC were to prove unavailable or prohibitively dilutive
and if we are unable to sell enough of our products, we will need to secure
another source of funding in order to satisfy our working capital
needs. Even if we sell all $10,000,000 under the Purchase Agreement
to LPC, we may still need additional capital to fully implement our business,
operating and development plans. Should the financing we require to
sustain our working capital needs be unavailable or prohibitively expensive when
we require it, the consequences could be a material adverse effect on our
business, operating results, financial condition and prospects.
13
THE
SALE OF OUR COMMON STOCK TO LPC MAY CAUSE DILUTION AND THE SALE OF THE SHARES OF
COMMON STOCK ACQUIRED BY LPC COULD CAUSE THE PRICE OF OUR COMMON STOCK TO
DECLINE.
In
connection with entering into the agreement, we authorized the issuance to LPC
of up to 21,200,000 shares of our common stock. The number of shares
ultimately offered for sale by LPC under this prospectus is dependent upon the
number of shares purchased by LPC under the agreement. The purchase price for
the common stock to be sold to LPC pursuant to the Purchase Agreement will
fluctuate based on the price of our common stock. All 3,900,000
shares registered in this offering are expected to be freely
tradable. It is anticipated that shares registered in this offering
will be sold over a period of up to 30 months from the date of this
prospectus. Depending upon market liquidity at the time, a sale of
shares under this offering at any given time could cause the trading price of
our common stock to decline. We can elect to direct purchases in our
sole discretion but no sales may occur if the price of our common stock is below
$0.15 and therefore, LPC may ultimately purchase all, some or none of the
2,871,429 shares of common stock not yet issued but registered in this
offering. After it has acquired such shares, it may sell all, some or
none of such shares. Therefore, sales to LPC by us under the agreement may
result in substantial dilution to the interests of other holders of our common
stock. The sale of a substantial number of shares of our common stock under this
offering, or anticipation of such sales, could make it more difficult for us to
sell equity or equity-related securities in the future at a time and at a price
that we might otherwise wish to effect sales. However, we have the
right to control the timing and amount of any sales of our shares to LPC and the
agreement may be terminated by us at any time at our discretion without any cost
to us.
THE
MARKET PRICE OF OUR COMMON STOCK IS HIGHLY VOLATILE.
The
market price of our common stock has been and is expected to continue to be
highly volatile. Factors, including announcements of technological innovations
by us or other companies, regulatory matters, new or existing products or
procedures, concerns about our financial position, operating results,
litigation, government regulation, developments or disputes relating to
agreements, patents or proprietary rights, may have a significant impact on the
market price of our stock. In addition, potential dilutive effects of future
sales of shares of common stock by shareholders and by the Company,
including LPC pursuant to this prospectus and subsequent sale of common stock by
the holders of warrants and options could have an adverse effect on the market
price of our shares.
14
FORWARD-LOOKING
STATEMENTS
Included
in this prospectus are “forward-looking” statements, as well as historical
information. Although we believe that the expectations reflected in these
forward-looking statements are reasonable, we cannot assure you that the
expectations reflected in these forward-looking statements will prove to be
correct. Our actual results could differ materially from those anticipated in
forward-looking statements as a result of certain factors, including matters
described in the section titled “Risk Factors.” Forward-looking statements
include those that use forward-looking terminology, such as the words
“anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “project,”
“plan,” “will,” “shall,” “should,” and similar expressions, including when used
in the negative. Although we believe that the expectations reflected in these
forward-looking statements are reasonable and achievable, these statements
involve risks and uncertainties and we cannot assure you that actual results
will be consistent with these forward-looking statements. Important factors that
could cause our actual results, performance or achievements to differ from these
forward-looking statements include the following:
|
·
|
the
availability and adequacy of our cash flow to meet our
requirements,
|
|
·
|
economic,
competitive, demographic, business and other conditions in our local and
regional markets,
|
|
·
|
changes
or developments in laws, regulations or taxes in the ethanol or energy
industries,
|
|
·
|
actions
taken or not taken by third-parties, including our suppliers and
competitors, as well as legislative, regulatory, judicial and other
governmental authorities,
|
|
·
|
competition
in the ethanol industry,
|
|
·
|
the
failure to obtain or loss of any license or
permit,
|
|
·
|
success
of the Arkenol Technology,
|
|
·
|
changes
in our business and growth strategy (including our plant building strategy
and co-location strategy), capital improvements or development
plans,
|
|
·
|
the
availability of additional capital to support capital improvements and
development, and
|
|
·
|
other
factors discussed under the section entitled “Risk Factors” or elsewhere
in this registration statement.
|
All
forward-looking statements attributable to us are expressly qualified in their
entirety by these and other factors. We undertake no obligation to update or
revise these forward-looking statements, whether to reflect events or
circumstances after the date initially filed or published, to reflect the
occurrence of unanticipated events or otherwise.
USE
OF PROCEEDS
This
prospectus relates to shares of our common stock that may be offered and sold
from time to time by the selling stockholder. We will receive no
proceeds from the sale of shares of common stock in this
offering. However, we may receive proceeds up to $10,000,000 under
the Purchase Agreement. Any proceeds from LPC we receive under the
Purchase Agreement will be used for working capital and general corporate
purposes.
DETERMINATION
OF OFFERING PRICE
The
prices at which the shares of Common Stock covered by this prospectus may
actually be sold will be determined by the prevailing public market price for
shares of Common Stock, by negotiations between the Selling Shareholders and
buyers of our Common Stock in private transactions or as otherwise described in
“Plan of Distribution.”
15
MARKET
FOR COMMON EQUITY AND
RELATED
STOCKHOLDER MATTERS
Market
Information
Our
shares of common stock began trading under the symbol “BFRE.PK” on the Pink
Sheets of the National Quotation Bureau on July 11, 2006 and later began trading
on the OTCBB under the symbol “BFRE.OB” on June 19, 2007.
The
following table sets forth the high and low bid information for our common stock
for each quarter since we completed the Reverse Merger and began trading on July
11, 2006. The prices reflect inter-dealer quotations, do not include retail
mark-ups, markdowns or commissions and do not necessarily reflect actual
transactions.
QUARTERLY
COMMON STOCK PRICE RANGES
Quarter ended
|
Low Price
|
High Price
|
||||||
September
30, 2006
|
$
|
1.35
|
$
|
6.80
|
||||
December
31, 2006
|
$
|
1.47
|
$
|
4.00
|
||||
March
31, 2007
|
$
|
3.99
|
$
|
7.70
|
||||
June
30, 2007
|
$
|
5.40
|
$
|
7.15
|
||||
September
30, 2007
|
$
|
3.30
|
$
|
6.40
|
||||
December
31, 2007
|
$
|
3.15
|
$
|
5.01
|
||||
March
31, 2008
|
$
|
3.00
|
$
|
4.15
|
||||
June
30, 2008
|
$
|
3.05
|
$
|
4.40
|
||||
September
30, 2008
|
$
|
2.05
|
$
|
4.15
|
||||
December
31, 2008
|
$
|
0.55
|
$
|
2.15
|
||||
March
31, 2009
|
$
|
0.51
|
$
|
1.00
|
||||
June
30, 2009
|
$
|
0.55
|
$
|
1.60
|
||||
September
30, 2009
|
$
|
0.80
|
$
|
1.20
|
||||
December
31, 2009
|
$
|
0.85
|
$
|
1.25
|
||||
March
31, 2010
|
$ |
0.34
|
$
|
1.00
|
||||
June
30, 2010
|
$
|
0.17
|
$
|
0.37
|
||||
September
30, 2010
|
$
|
0.09
|
$
|
0.50
|
||||
December
31, 2010
|
$
|
0.43
|
$
|
0.66
|
Holders
As of
February 10, 2011, a total of 29,583,971 shares of the Company’s common stock
are currently outstanding held by approximately 2,750 shareholders of
record.
Transfer
Agent and Registrar
The
transfer agent and registrar for our common stock is First American Stock
Transfer with its business address at 4747 N 7th Street, Suite 170, Phoenix, AZ
85014.
Dividends
We have
not declared or paid any dividends on our common stock and intend to retain any
future earnings to fund the development and growth of our business.
Therefore, we do not anticipate paying dividends on our common stock for the
foreseeable future. There are no restrictions on our present ability to
pay dividends to stockholders of our common stock, other than those prescribed
by Nevada law.
16
Securities
Authorized for Issuance under Equity Compensation Plans
2006
INCENTIVE AND NONSTATUTORY STOCK OPTION PLAN, AS AMENDED
In order
to compensate our officers, directors, employees and/or consultants, on December
14, 2006 our Board of Directors approved and stockholders ratified by consent
the 2006 Incentive and Non-Statutory Stock Option Plan (the “Plan”). The
Plan has a total of 10,000,000 shares reserved for issuance.
On
October 16, 2007, the Board of Directors reviewed the Plan. As such, it
determined that the Plan was to be used as a comprehensive equity incentive
program for which the Board of Directors serves as the plan administrator and,
therefore, amended the Plan (the “Amended and Restated Plan”) to add the ability
to grant restricted stock awards.
Under the
Amended and Restated Plan, an eligible person in the Company’s service may
acquire a proprietary interest in the Company in the form of shares or an option
to purchase shares of the Company’s common stock. The amendment includes certain
previously granted restricted stock awards as having been issued under the
Amended and Restated Plan.
As of
February 10, 2011, we have issued the following stock options and grants under
the Amended and Restated Plan:
Equity
Compensation Plan Information
Plan category
|
Number of securities to be
issued upon exercise of
outstanding options,
warrants and rights and
number of shares of
restricted stock
|
Weighted average
exercise price
of outstanding
options, warrants
and rights (2)
|
Number of securities
remaining available for
future issuance
|
|||||||||
Equity
compensation plans approved by security holders under the Amended and
Restated Plan
|
3,667,006
|
(1)
|
$
|
2.48
|
6,312,994
|
|||||||
Equity
compensation not pursuant to a plan
|
739,203
|
(3)
|
$
|
3.98
|
||||||||
Total
|
4,406,209
|
(1)
|
Excluding
20,000 options that have been
exercised.
|
(2)
|
Excludes
shares of restricted stock issued under the
Plan.
|
(3)
|
Includes
a warrant to purchase 200,000 shares of its common stock at an exercise
price of $5.00 per share to a certain consultant issued by the Company on
November 9, 2006, for consulting
services.
|
RULE
10B-18 TRANSACTIONS
The
following table provides information about purchases by BlueFire of shares of
BlueFire’s common stock as of February 10, 2011. All repurchases were made
in compliance with the safe harbor provisions of Rule 10b-18 under the
Securities Exchange Act of 1934, subject to market conditions, applicable legal
requirements and other factors.
A monthly
summary of the repurchase activity as of February 10, 2011, is as
follows:
17
Issuer
Purchases of Equity Securities 1
Period
|
Total
number of
shares
purchased
|
Average
price paid
per share
|
Total number of
shares
purchased as
part of publicly
announced
plans or
programs
|
Maximum
number (or
approximate
dollar value)
of shares that
may yet be
purchased
under the plans
or programs
|
||||||||||||
4/1/08
– 4/30/08
|
9,901
|
$
|
3.48
|
0
|
0
|
|||||||||||
5/1/08
– 5/31/08
|
0
|
0
|
0
|
|||||||||||||
6/1/08
– 6/30/08
|
0
|
0
|
0
|
|||||||||||||
7/1/08
– 7/31/08
|
7,525
|
$
|
3.60
|
0
|
0
|
|||||||||||
8/1/08
– 8/31/08
|
3,000
|
$
|
2.64
|
0
|
0
|
|||||||||||
9/1/08
– 9/30/08
|
11,746
|
$
|
2.73
|
0
|
0
|
|||||||||||
Total
|
32,172
|
$
|
3.16
|
0
|
0
|
(1)
|
The
Company implemented a stock repurchase program effective April 1, 2008
with the intent to repurchase BlueFire shares in accordance with SEC Rule
10b-18. As of February 10, 2011, the Company repurchased a total of
32,172 shares at a cost of approximately $101,581. Under the stock
repurchase program, the Company is not obligated to repurchase any
additional shares of common stock.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATION
THE
FOLLOWING DISCUSSION OF OUR PLAN OF OPERATION SHOULD BE READ IN CONJUNCTION WITH
THE FINANCIAL STATEMENTS AND RELATED NOTES TO THE FINANCIAL STATEMENTS INCLUDED
ELSEWHERE IN THIS REGISTRATION STATEMENT. THIS DISCUSSION CONTAINS
FORWARD-LOOKING STATEMENTS THAT RELATE TO FUTURE EVENTS OR OUR FUTURE FINANCIAL
PERFORMANCE. THESE STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND
OTHER FACTORS THAT MAY CAUSE OUR ACTUAL RESULTS, LEVELS OF ACTIVITY, PERFORMANCE
OR ACHIEVEMENTS TO BE MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS, LEVELS OF
ACTIVITY, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY THESE
FORWARD-LOOKING STATEMENTS. THESE RISKS AND OTHER FACTORS INCLUDE, AMONG OTHERS,
THOSE LISTED UNDER “FORWARD-LOOKING STATEMENTS” AND “RISK FACTORS” AND THOSE
INCLUDED ELSEWHERE IN THIS REGISTRATION STATEMENT.
BUSINESS
OVERVIEW
We are a
Nevada corporation with a goal to develop, own and operate high-value
carbohydrate-based transportation fuel plants, or biorefineries, to produce
ethanol, a viable alternative to fossil fuels, and to provide professional
services to biorefineries worldwide. Our biorefineries will convert widely
available, inexpensive, organic materials such as agricultural residues,
high-content biomass crops, wood residues and cellulose from municipal solid
wastes into ethanol. This versatility enables us to consider a wide variety of
feedstocks and locations in which to develop facilities to become a low cost
producer of ethanol. We have licensed for use a patented process from Arkenol,
Inc., a Nevada corporation (“Arkenol”), to produce ethanol from cellulose (the
“Arkenol Technology”). We are the exclusive North America licensee of the
Arkenol Technology. We may also utilize certain biorefinery related rights,
assets, work-product, intellectual property and other know-how related to 19
ethanol project opportunities originally developed by ARK Energy, Inc, a Nevada
corporation, to accelerate our deployment of the Arkenol
Technology.
PLAN
OF OPERATION
Our
primary business encompasses development activities culminating in the design,
construction, ownership and long-term operation of cellulosic ethanol production
biorefineries utilizing the licensed Arkenol Technology in North America. Our
secondary business is providing support and operational services to Arkenol
Technology based biorefineries worldwide. As such, we are currently in the
development-stage of finding suitable locations and deploying project
opportunities for converting cellulose fractions of municipal solid waste and
other opportunistic feedstock into ethanol fuels.
18
Our
initial planned biorefineries in North America are projected as
follows:
|
·
|
A
biorefinery that will process approximately 190 tons of green waste
material annually to produce roughly 3.9 million gallons of ethanol
annually. On November 9, 2007, we purchased the facility site which is
located in Lancaster, California for the BlueFire Ethanol Lancaster
project (“Lancaster Biorefinery”). Permit applications were filed on
June 24, 2007, to allow for construction of the Lancaster Biorefinery. On
or around July 23, 2008, the Los Angeles Planning Commission approved the
use permit for construction of the plant. However, a subsequent appeal of
the county decision, which BlueFire overcame, combined with the waiting
period under the California Environmental Quality Act, pushed the
effective date of the now non-appealable permit approval to December 12,
2008. On February 12, 2009, we were issued our Authority to
Construct permit by the Antelope Valley Air Quality Management District.
We have completed the detailed engineering and design on the project and
are seeking funding in order to build the facility. We estimate the total
construction cost to be in the range of approximately $100 million to $125
million for this first plant. This amount is significantly greater than
our previous estimations communicated to the public. This is due in part
to a combination of significant increases in materials costs on the world
market from the last estimate till now, and the complexity of our first
commercial deployment. At the end of 2008 and early 2009, prices for
materials have declined, and we expect, that items like structural and
specialty steel may continue to decline in price in 2010 with other
materials of construction following suit. The cost approximations above do
not reflect any decrease in raw materials or any savings in construction
cost. We are currently in discussions with potential sources of financing
for this facility but no definitive agreements are in
place.
|
|
·
|
A
biorefinery proposed for development and construction in conjunction with
the U.S. Department of Energy (“DOE”), previously located in Southern
California, and now located in Fulton, Mississippi, which will process
approximately 700 metric dry tons of woody biomass, mill residue, and
other cellulosic waste annually to produce approximately 19 million
gallons of ethanol annually (“DOE Biorefinery”). We have received an Award
from the DOE of up to $40 million for the Facility. On or around October
4, 2007, we 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 approve costs may be reimbursed by the DOE pursuant to the total $40
million award announced in February 2007. On December 4, 2009,
the DOE announced that the award for this project has been increased to a
maximum of $88 million under the American Recovery and Reinvestment Act of
2009 (“ARRA”) and the Energy Policy Act of 2005. As of September 30, 2010,
BlueFire has been reimbursed approximately $7,201,000 from the DOE under
this award. On or around February 23, 2010, we announced that we
submitted an application for a $250 million dollar loan guarantee for this
planned biorefinery. The application, filed under the DOE Program
DE-FOA-0000140, which provides federal loan guarantees for projects that
employ innovative energy efficiency, renewable energy, and advanced
transmission and distribution technologies, was submitted on February 15,
2010, and serves as a phase one application in a two phase approval
process. If approved, the loan guarantee will secure a substantial portion
of the total costs to construct the facility, although there is no
assurance that the loan guarantee will be approved. On September 10, 2010,
we submitted the phase two application, which is only allowed after the
initial phase one application is deemed to have met the initial threshold
requirements fo the loan guarantee program. We are in the detailed
engineering phase for this project and expect to have all necessary
permits for this facility by the end of 2010, putting the Company on a
path to commence construction shortly after the remainder of financing is
secured. We estimate the total construction cost to be in the range of
approximately $300 million which includes an approximately $100 million
biomass power plant as part of the
facility.
|
|
·
|
Several
other opportunities are being evaluated by us in North America, although
no definitive agreements have been
reached.
|
19
BlueFire’s
capital requirement strategy for its planned biorefineries are as
follows:
|
·
|
Obtain
additional operating capital from joint venture partnerships, Federal or
State grants or loan guarantees, debt financing or equity financing to
fund our ongoing operations and the development of initial biorefineries
in North America. Although the Company is in discussions with potential
financial and strategic sources of financing for their planned
biorefineries no definitive agreements are in
place.
|
|
·
|
The
Energy Policy Act of 2005 provides for grants and loan guarantee programs
to incentivize the growth of the cellulosic ethanol market. These programs
include a Cellulosic Biomass Ethanol and Municipal Solid Waste Guarantee
Program under which the DOE could provide loan guarantees up to $250
million per qualified project. BlueFire plans to pursue all available
opportunities within the Energy Policy Act of
2005.
|
|
·
|
The
2008 Farm Bill, Title IX (Energy Title) provides grants for demonstration
scale Biorefineries, and loan guarantees for commercial
scale Biorefineries that produce advanced Biofuels (i.e.,
any fuel that is not corn-based). Section 9003 includes a Loan
Guarantee Program under which the USDA could provide loan guarantees up to
$250 million to fund development, construction, and retrofitting of
commercial-scale refineries. Section 9003 also includes a grant program to
assist in paying the costs of the development and construction of
demonstration-scale biorefineries to demonstrate the commercial
viability which can potentially fund up to 50% of project
costs. BlueFire plans to pursue all available opportunities within
the Farm Bill.
|
|
·
|
Utilize
proceeds from reimbursements under the DOE
contract.
|
|
·
|
As
available and as applicable to our business plans, applications for public
funding will be submitted to leverage private capital raised by
us.
|
RECENT
DEVELOPMENTS IN BLUEFIRE’S BIOREFINERY ENGINEERING AND DEVELOPMENT
In 2010,
BlueFire continued to develop the engineering package for the DOE Facility, and
completed the Front-End Loading (FEL) 2 stage of engineering for the DOE
Facility. FEL is the process for conceptual development of processing industry
projects. This process is used in the petrochemical, refining, and
pharmaceutical industries. Front-End Loading is also referred to as Front-End
Engineering Design (FEED). BlueFire is currently working on completing the FEL-3
engineering for the DOE facility that will ready the facility for
construction.
There are
three stages in the FEL process:
FEL-1
|
FEL-2
|
FEL-3
|
||
*
Material Balance
|
*
Preliminary Equipment Design
|
*
Purchase Ready Major Equipment Specifications
|
||
*
Energy Balance
|
*
Preliminary Layout
|
*
Definitive Estimate
|
||
*
Project Charter
|
*
Preliminary Schedule
|
*
Project Execution Plan
|
||
*
Preliminary Estimate
|
*
Preliminary 3D Model
|
|||
*
Electrical Equipment List
|
||||
*
Line List
|
||||
|
|
*
Instrument Index
|
20
On July
15, 2010, BlueFire announced the appointment of Roger L. Petersen to its Board
of Directors. Mr. Petersen, age 59, currently serves as the President of
Montana Horizons, LLC, a Montana limited liability company, which he founded in
2006, that provides support for utility mergers and acquisitions and energy
development projects. From 1995 to 2006, Mr. Petersen served as the President of
PPL Development Company, a wholly-owned subsidiary of PPL Corporation (NYSE:
PPL) (“PPL”), which focused on corporate growth through asset acquisition and
corporate mergers. From 2001 to 2003, Mr. Petersen served as the President of
PPL Global, Inc, a wholly-owned subsidiary of PPL, which managed all
international acquisitions and operations for PPL. From 1999 to 2001, Mr.
Petersen served as President and Chief Executive Officer of PPL Montana, LLC, a
wholly-owned subsidiary of PPL, which operates coal-fired and hydroelectric
generating facilities at 13 sites in the State of Montana. Mr. Petersen also
served as the Vice President and Chief Executive Officer of PPL Global, Inc, a
wholly-owned subsidiary of PPL, from 1995 to 1998, which developed and acquired
assets in the United Kingdom, Chile, El Salvadore, Peru, Bolivia, and the United
States. He served on several corporate boards in the United Kingdom,
Chile and El Salvador. Prior to joining PPL, he was Vice President of Operations
for Edison Mission Energy, a subsidiary of Edison International, and held
various engineering and project management positions at Fluor Engineers and
Constructors. Mr. Petersen earned his B.S. in Mechanical engineering
from South Dakota State University and his Masters of Engineering from
California Polytechnic Institute. BlueFire believes that Mr. Petersen’s experience in
the energy business as well as his experience in mergers and acquisitions will
be a valuable asset to the Company.
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. Our Board of
Directors and management believe that changing our name to BlueFire Renewables,
Inc. more accurately reflects our primary business plan expanding the focus from
just building cellulosic ethanol projects to include other advanced biofuels,
biodiesel, and other drop-in biofuels as well as synthetic lubricants. On July
20, 2010, the Certificate of Amendment was accepted by the Secretary of State of
Nevada.
On August
4, 2010, the Company submitted a loan guarantee request to the USDA for $250
million for the DOE Biorefinery. The application is under review to
determine if it meets the requirements set forth in the Section 9003 Loan
Guarantee program. No time line is available for response on the
application.
On
September 10, 2010, the Company submitted the phase two application under the
DOE Loan Guarantee Program. This phase requires more detail on contracts and
engineering as well as environmental and general program requirements. This
application was submitted pursuant to a letter the Company received during the
third quarter inviting the Company to submit a phase two application. A phase
two submittal is allowed only after the initial phase one application is deemed
to have met the initial threshold requirements for the loan guarantee
program.
On
September 20, 2010, the Company announced an off-take agreement with Tenaska
BioFuels, LLC (“TBF”) for the purchase and sale of all ethanol produced at the
Company’s planned DOE Biorefinery. Pricing of the 15-year contract follows
a market-based formula structured to capture the premium allowed for cellulosic
ethanol compared to corn-based ethanol giving the Company a credit worthy
contract to support financing of the project. Despite the long-term
nature of the contract, the Company is not precluded from the upside in the
coming years as fuel prices rise. TBF, a marketing affiliate of Tenaska,
provides procurement and marketing, supply chain management, physical delivery,
and financial services to customers in the agriculture and energy markets,
including the ethanol and biodiesel industries. In business since
1987, Tenaska is one of the largest independent power producers.
On
September 20, 2010, the Company announced a contract with Cooper Marine
& Timberlands to provide feedstock for the Company’s planned DOE
Biorefinery for a period of up to 15 years. Under the agreement, Cooper Marine
& Timberlands ("CMT") will supply the project with all of the feedstock
required to produce approximately 19-million gallons of ethanol per year from
locally sourced cellulosic materials such as wood chips, forest residual chips,
pre-commercial thinnings and urban wood waste such as construction waste, storm
debris, land clearing; or manufactured wood waste from furniture
manufacturing. Under the Agreement, CMT will pursue a least-cost strategy
for feedstock supply made possible by the project site's proximity to feedstock
sources and the flexibility of BlueFire's process to use a wide spectrum of
cellulosic waste materials in pure or mixed forms. CMT, with several chip mills
in operation in Mississippi and Alabama, is a member company of Cooper/T. Smith
one of America's oldest and largest stevedoring and maritime related firms with
operations on all three U.S. coasts and foreign operations in Central and South
America.
21
RESULTS
OF OPERATIONS
Nine
months Ended September 30, 2010 Compared to the nine months Ended September 30,
2009
Revenue
Revenue for
the nine months ended September 30, 2010 and 2009, was approximately $538,000
and $4,106,000, respectively, and was primarily related to a federal grant from
the DOE. The decrease in revenue for this time period is primarily
attributable to a September 2009 one-time $3.8 million DOE receivable
representing reimbursements for expenditures from 2007 through the nine months
of 2009. The grant generally provides for reimbursement in connection with
related development and construction costs involving commercialization of our
technologies. In addition, reimbursements from the DOE that relate to
construction-in-progress are netted against construction-in-progress
(contra-asset) instead of being recorded as revenue. The Company was
not capitalizing construction-in-progress during the 2009 year.
Project
Development
For the
nine months ended September 30, 2010, our project development costs were
approximately $957,000, compared to project development costs of $947,000 for
the same period during 2009. The increase in project development
costs is due to the increased activity in the design and engineering development
of the Fulton Plant in the first quarter prior to commencement of
capitalization.
22
General
and Administrative Expenses
General
and Administrative Expenses were approximately $1,284,000 for the nine months
ended September 30, 2010, compared to $1,799,000 for the same period in 2009.
The decrease in general and administrative costs is mainly due to the increased
activity at the project level, mostly related to the Fulton
facility.
Interest
Income
Interest
income for the nine months ended September 30, 2010, was approximately $1,100,
compared to $7,400 for the same period in 2009, in each case, related to funds
invested. The decrease in interest income from the same period in 2009 is mainly
due to the fact that our investment account balance was depleted as we used the
funds in operations, and that our rate of return on the account decreased
dramatically as it was tied to short-term interest rates.
Year
Ended December 31, 2009 Compared to the Year Ended December 31,
2008
Revenue
from Department of Energy Grant
Revenue
in 2009 was approximately $4,318,000 and was primarily related to a federal
grant from the United States Department of Energy, (“U.S. DOE”or “DOE”). The
grant generally provides for reimbursement in connection with related
development and construction costs involving commercialization of our
technologies.
Project
Development
In 2009,
our project development costs were approximately $1,307,000 compared to project
development costs of $10,535,000 for the same period during
2008. Included in project development costs in 2009 and 2008, was
approximately $522,000 and $4,901,000, respectively of expense incurred from
various engineering firms for the design and development of the
biorefineries. Included in project development costs in 2009 and
2008, was approximately $0 and $2,078,000, respectively of non-cash share-based
compensation expense, incurred in connection with our 2007 and 2006 Stock Option
awards. The decrease in project development costs is due to the
decreased activity in the design and engineering development of the
biorefineries with the plant design on Lancaster being substantially
completed.
General
and Administrative Expenses
General
and Administrative Expenses were approximately $2,220,000 in 2009, compared to
$4,136,000 for the same period in 2008. Included in general and
administrative expenses in 2009 and 2008, was approximately $233,000 and
$1,691,000, respectively of non-cash share-based compensation expense, incurred
in connection with our 2007 and 2006 Stock Option award. The decrease
in general and administrative costs is mainly due to a decrease in share based
compensation.
Interest
Income
Interest
income was approximately $8,000 in 2009, compared to approximately $225,000 in
2008, related to funds invested. The decrease in interest income from
the same period in 2008 is mainly due to the fact that our investment account
balance was depleted as we used the funds in operations, and that our rate of
return on the account decreased dramatically as it was tied to short-term
interest rates.
Related
Party License Fee
In 2008
the Company incurred the remaining cost of the Arkenol technology license fee of
$970,000. This is a one time fee, which was paid in full on March 11,
2009.
23
LIQUIDITY
AND CAPITAL RESOURCES
Our
principal sources of liquidity consist of cash and cash equivalents.
Historically, we have funded our operations through financing activities
consisting primarily of private placements of debt and equity securities with
existing shareholders and outside investors. Our principal use of funds has been
for the further development of our Biorefinery projects, for capital
expenditures and general corporate expenses. As of September 30, 2010, we had
cash and cash equivalents of approximately $518,000. However, as of February 10,
2011, the Company has approximately $623,667 in cash, due to
a $200,000 loan made to the Company by the Company’s CEO on December 15, 2010,
the sale of a 1% membership interest in the Company’s subsidiary, BlueFire
Fulton Renewable Energy LLC on December 23, 2010, and a $150,000 initial
purchase of the Company’s common stock under a $10 million purchase agreement
signed on January 19, 2011. After the SEC has declared effective the
registration statement related to the transaction, we have the right, in our
sole discretion, over a 30-month period to sell our shares of common stock to
LPC in amounts up to $500,000 per sale, depending on certain conditions as set
forth in the Purchase Agreement, up to the aggregate commitment of $10
million.
Management has estimated that operating expenses for the next
twelve months will be approximately $1,800,000, excluding engineering costs
related to the development of bio-refinery projects, and assuming no further
cost cutting measures are taken. These matters raise substantial doubt about the
Company’s ability to continue as a going concern. In 2011, 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,
including further investment at the project level. The Company expects the
current resources available to them will only be sufficient for a period of a
few months month unless significant additional cost cutting measures are taken.
Management is currently implementing cost cutting measures including a reduction
of headcount, reducing employee benefits and/or salary deferral, as needed.
Management has determined that these 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.
We
require the raising of additional funds from future equity and/or debt
offerings, current and future grant opportunities to meet our liquidity needs
going forward. Management believes that without raising additional
financing and taking significant cost cutting measures that the Company’s
cash will not be sufficient to meet our working capital requirements for the
next twelve month period. 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 such financing will be available to us on favorable terms, or at
all. If, after utilizing the existing sources of capital available to the
Company, further capital needs are identified and we are not successful in
obtaining the financing, the Company may not continue to function as a going
concern.
In
addition to the above, as our biorefinery projects develop to the point of
construction, we anticipate significant purchases of long lead time item
equipment for construction.
The
Company is currently in discussions with potential financial and strategic
sources of financing for both the Lancaster and DOE Biorefineries but no
definitive agreements are in place.
CRITICAL
ACCOUNTING POLICIES
We
prepare our consolidated financial statements in accordance with accounting
principles generally accepted in the United States of America. The preparation
of these financial statements require the use of estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amount of revenues and expenses during the reporting period. Our
management periodically evaluates the estimates and judgments made. Management
bases its estimates and judgments on historical experience and on various
factors that are believed to be reasonable under the circumstances. Actual
results may differ from these estimates as a result of different assumptions or
conditions.
The
methods, estimates, and judgment we use in applying our most critical accounting
policies have a significant impact on the results we report in our financial
statements. The SEC has defined “critical accounting policies” as those
accounting policies that are most important to the portrayal of our financial
condition and results, and require us to make our most difficult and subjective
judgments, often as a result of the need to make estimates of matters that are
inherently uncertain. Based upon this definition, our most critical estimates
relate to the fair value of warrant liabilities. We also have other key
accounting estimates and policies, but we believe that these other policies
either do not generally require us to make estimates and judgments that are as
difficult or as subjective, or it is less likely that they would have a material
impact on our reported results of operations for a given period. For additional
information see Note 2, “Summary of Significant Accounting Policies” in the
notes to our reviewed financial statements appearing elsewhere in this quarterly
report and our annual audited financial statements appearing on Form 10-K.
Although we believe that our estimates and assumptions are reasonable, they are
based upon information presently available, and actual results may differ
significantly from these estimates.
24
Recent
Accounting Pronouncements
In
January 2010, the Financial Accounting Standards Board (“FASB”) amended
authoritative guidance for improving disclosures about fair-value measurements.
The updated guidance requires new disclosures about recurring or nonrecurring
fair-value measurements including significant transfers into and out of Level 1
and Level 2 fair-value measurements and information on purchases, sales,
issuances, and settlements on a gross basis in the reconciliation of Level 3
fair-value measurements. The guidance also clarified existing fair-value
measurement disclosure guidance about the level of disaggregation, inputs, and
valuation techniques. The guidance became effective for interim and annual
reporting periods beginning on or after December 15, 2009, with an exception for
the disclosures of purchases, sales, issuances and settlements on the
roll-forward of activity in Level 3 fair-value measurements. Those disclosures
will be effective for fiscal years beginning after December 15, 2010 and for
interim periods within those fiscal years. The Company does not expect that the
adoption of this guidance will have a material impact on the consolidated
financial statements.
In June
2009, the FASB issued ASC 105 “Generally Accepted Accounting Principles”
(formerly SFAS No. 168 The FASB Accounting Standards Codification and the
Hierarchy of Generally Accepted Accounting Principles – a replacement of FASB
Statement No. 162). ASC 105 establishes the FASB Accounting Standards
Codification as the source of authoritative U.S. GAAP recognized by the FASB to
be applied by nongovernmental entities. ASC 105, which changes the referencing
of financial standards, is effective for interim or annual financial periods
ending after September 15, 2009. The Company adopted ASC 105 during the three
months ended September 30, 2009 with no impact to its financial statements,
except for the changes related to the referencing of financial
standards.
OFF-BALANCE
SHEET ARRANGEMENTS
The
Company does not have any off-balance sheet arrangements.
DESCRIPTION
OF BUSINESS
COMPANY
HISTORY
Our
Company
We are
BlueFire Renewables, Inc., a Nevada corporation. Our goal is to develop, own and
operate high-value carbohydrate-based transportation fuel plants, or
biorefineries, to produce ethanol, a viable alternative to fossil fuels, and to
provide professional services to biorefineries worldwide. Our biorefineries will
convert widely available, inexpensive, organic materials such as agricultural
residues, high-content biomass crops, wood residues and cellulose from municipal
solid wastes into ethanol. This versatility enables us to consider a wide
variety of feedstocks and locations in which to develop facilities to become a
low cost producer of ethanol. We have licensed for use a patented process from
Arkenol, Inc., a Nevada corporation (“Arkenol”), to produce ethanol from
cellulose (the “Arkenol Technology”). We are the exclusive North America
licensee of the Arkenol Technology. We may also utilize certain biorefinery
related rights, assets, work-product, intellectual property and other know-how
related to 19 ethanol project opportunities originally developed by ARK Energy,
Inc, a Nevada corporation, to accelerate our deployment of the Arkenol
Technology.
Company
History
We are a
Nevada corporation that was initially organized as Atlanta Technology Group,
Inc., a Delaware corporation, on October 12, 1993. The Company was re-named
Docplus.net Corporation on December 31, 1998, and further re-named Sucre
Agricultural Corp. (“Sucre”) and re-domiciled as a Nevada corporation on March
6, 2006. Finally, on May 24, 2006, in anticipation of the reverse merger
by which it would acquire BlueFire Ethanol, Inc. (“BlueFire”), a privately held
Nevada corporation organized on March 28, 2006, as described below, the Company
was re-named to BlueFire Ethanol Fuels, Inc.
25
On June
27, 2006, the Company completed a reverse merger (the “Reverse Merger”) with
BlueFire Ethanol, Inc. (“BlueFire Ethanol”). At the time of Reverse
Merger, the Company was a blank-check company and had no operations, revenues or
liabilities. The only asset possessed by the Company was $690,000 in cash which
continued to be owned by the Company at the time of the Reverse Merger. In
connection with the Reverse Merger, the Company issued BlueFire Ethanol
17,000,000 shares of common stock, approximately 85% of all of the outstanding
common stock of the Company, for all the issued and outstanding BlueFire Ethanol
common stock. The Company stockholders retained 4,028,264 shares of Company
common stock. As a result of the Reverse Merger, BlueFire Ethanol became
our wholly-owned subsidiary. On June 21, 2006, prior to and in
anticipation of the Reverse Merger, Sucre sold 3,000,000 shares of common stock
to two related investors in a private offering of shares pursuant to Rule 504
for proceeds of $1,000,000.
On July
20, 2010, the Company changed its name to BlueFire Renewables, Inc. to more
accurately reflect our primary business plan expanding the focus from just
building cellulosic ethanol projects to include other advanced biofuels,
biodiesel, and other drop-in biofuels as well as synthetic
lubricants.
The
Company’s shares of common stock began trading under the symbol “BFRE.PK” on the
Pink Sheets of the National Quotation Bureau on July 11, 2006 and later began
trading on the OTCBB under the symbol “BFRE.OB” on June 19, 2007. On February
10, 2011, the closing price of our Common Stock was $0.46 per
share.
Our
executive offices are located at 31 Musick, Irvine, California 92618 and
our telephone number at such office is (949) 588-3767.
BUSINESS
OF ISSUER
PRINCIPAL
PRODUCTS OR SERVICES AND THEIR MARKETS
Our goal
is to develop, own and operate high-value carbohydrate-based transportation fuel
plants, or biorefineries, to produce ethanol, a viable alternative to fossil
fuels, and to provide professional services to biorefineries worldwide. Our
biorefineries will convert widely available, inexpensive, organic materials such
as agricultural residues, high-content biomass crops, wood residues and
cellulose from municipal solid wastes into ethanol. This versatility enables us
to consider a wide variety of feedstocks and locations in which to develop
facilities to become a low cost producer of ethanol.
We have
licensed for use the Arkenol Technology, a patented process from Arkenol to
produce ethanol from cellulose for sale into the transportation fuel market. We
are the exclusive North America licensee of the Arkenol Technology.
ARKENOL
TECHNOLOGY
The
production of chemicals by fermenting various sugars is a well-accepted science.
Its use ranges from producing beverage alcohol and fuel-ethanol to making citric
acid and xantham gum for food uses. However, the high price of sugar and the
relatively low cost of competing petroleum based fuel has kept the production of
chemicals mainly confined to producing ethanol from corn sugar.
In the
Arkenol Technology process, incoming biomass feedstocks are cleaned and ground
to reduce the particle size for the process equipment. The pretreated material
is then dried to a moisture content consistent with the acid concentration
requirements for breaking down the biomass, then hydrolyzed (degrading the
chemical bonds of the cellulose) to produce hexose and pentose (C5 and C6)
sugars at the high concentrations necessary for commercial fermentation. The
insoluble materials left are separated by filtering and pressing into a cake and
further processed into fuel for other beneficial uses. The remaining acid-sugar
solution is separated into its acid and sugar components. The separated sulfuric
acid is recirculated and reconcentrated to the level required to breakdown the
incoming biomass. The small quantity of acid left in the sugar solution is
neutralized with lime to make hydrated gypsum which can be used as an
agricultural soil conditioner. At this point the process has produced a clean
stream of mixed sugars (both C6 and C5) for fermentation. In an ethanol
production plant, naturally-occurring yeast, which Arkenol has specifically
cultured by a proprietary method to ferment the mixed sugar stream, is mixed
with nutrients and added to the sugar solution where it efficiently converts
both the C6 and C5 sugars to fermentation beer (an ethanol, yeast and water
mixture) and carbon dioxide. The yeast culture is separated from the
fermentation beer by a centrifuge and returned to the fermentation tanks for
reuse. Ethanol is separated from the now clear fermentation beer by conventional
distillation technology, dehydrated to 200 proof and denatured with unleaded
gasoline to produce the final fuel-grade ethanol product. The still bottoms,
containing principally water and unfermented sugar, is returned to the process
for economic water use and for further conversion of the
sugars.
26
Simply
put, the process separates the biomass into two main constituents: cellulose and
hemicellulose (the main building blocks of plant life) and lignin (the “glue”
that holds the building blocks together), converts the cellulose and
hemicellulose to sugars, ferments them and purifies the fermentation liquids
into ethanol and other end-products.
ARK
ENERGY
BlueFire
may also utilize certain biorefinery related rights, assets, work-product,
intellectual property and other know-how related to nineteen (19) ethanol
project opportunities originally developed by ARK Energy, Inc., a Nevada
corporation to accelerate BlueFire’s deployment of the Arkenol Technology. The
opportunities consist of ARK Energy’s previous relationships, analysis, site
development, permitting experience and market research on various potential
project locations within North America. ARK Energy has transferred these assets
to us and we valued these business assets based on management’s best estimates
as to its actual costs of development. In the event we successfully finance the
construction of a project that utilizes any of the transferred assets from ARK
Energy, we are required to pay ARK Energy for the costs ARK Energy incurred in
the development of the assets pertaining to that particular project or location.
We did not incur the costs of a third party valuation but based our valuation of
the assets acquired by (i) an arms length review of the value assigned by ARK
Energy to the opportunities are based on the actual costs it incurred in
developing the project opportunities, and (ii) anticipated financial benefits to
us.
PILOT
PLANTS
From
1994-2000, a test pilot biorefinery plant was built and operated by Arkenol in
Orange, California to test the effectiveness of the Arkenol Technology using
several different types of raw materials containing cellulose. The types of
materials tested included: rice straw, wheat straw, green waste, wood wastes,
and municipal solid wastes. Various equipment for use in the process was also
tested and process conditions were verified leading to the issuance of the
certain patents in support of the Arkenol Technology.In 2002, using the results
obtained from the Arkenol California test pilot plant, JGC Corporation, based in
Japan, built and operated a bench scale facility followed by another test pilot
biorefinery plant in Izumi, Japan. At the Izumi plant, Arkenol retained the
rights to the Arkenol Technology while the operations of the facility were
controlled by JGC Corporation.
BIOREFINERY
PROJECTS
WE
ARE CURRENTLY IN THE DEVELOPMENT STAGE OF BUILDING BIOREFINERIES IN NORTH
AMERICA.
We plan
to use the Arkenol Technology and utilize JGC’s operations knowledge from the
Izumi test pilot plant to assist in the design and engineering of our facilities
in North America. MECS and Briderson Engineering, Inc. (“Brinderson”) provided
the preliminary design package for our first facility and Brinderson has
completed the detailed engineering design of the plant. We feel this completed
design should provide the blueprint for subsequent plant
constructions.
We intend
to build a facility that will process approximately 190 tons of green waste
material per day to produce roughly 3.9 million gallons of ethanol annually. In
connection therewith, on November 9, 2007, we purchased the facility site which
is located in Lancaster, California. Permit applications were filed on
June 24, 2007, to allow for construction of the Lancaster facility. The Los
Angeles County Planning Commission issued a Conditional Use Permit for the
Lancaster Project in July of 2008. However, a subsequent appeal of the county
decision, which BlueFire overcame, combined with the waiting period under the
California Environmental Quality Act, pushed the effective date of the now
non-appealable permit approval to December 12, 2008. On February 12, 2009
we were issued our Authority to Construct permit by the Antelope Valley Air
Quality Management District.
In 2009,
BlueFire completed the engineering package for the Lancaster
Biorefinery, and finalized the Front-End Loading (FEL) 3 stage of
engineering for the Lancaster Biorefinery. FEL is the process for
conceptual development of processing industry projects. This process is
used in the petrochemical,
refining, and pharmaceutical industries. Front-End Loading is
also referred to as Front-End Engineering Design (FEED). There are three
stages in the FEL process:
27
FEL-1
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FEL-2
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FEL-3
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Material Balance
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Preliminary Equipment Design
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Purchase Ready Major Equipment Specifications
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Energy Balance
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Preliminary Layout
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Definitive Estimate
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Project Charter
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Preliminary Schedule
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Project Execution Plan
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Preliminary Estimate
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Preliminary 3D Model
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Electrical Equipment List
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Line List
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Instrument Index
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We
estimate the total cost including contingencies to be in the range of
approximately $100 million to $125 million for this first plant. This amount is
significantly greater than our previous estimations communicated to the public.
This is due in part to a combination of significant increases in materials costs
on the world market from the last estimate till now, and the complexity of our
first commercial deployment. At the end of 2008 and early 2009, prices for
materials have declined, and we expect, that items like structural and specialty
steel may continue to decline in price in 2010 with other materials of
construction following suit. The cost approximations above do not reflect any
decrease in raw materials or any savings in construction cost.
The
uncertainties of the world credit markets have also caused a delay in the
financing we needed to enable placement of equipment orders for the construction
of our Lancaster Project and which would allow us to achieve a sustainable
construction schedule after breaking ground. Hence, to insure a timely and
continuous construction of the project, BlueFire’s board of directors determined
it is prudent to delay Lancaster’s groundbreaking until all the necessary funds
are in place. Project activities have advanced to a point that once credit is
available, orders can be immediately placed and construction started. We remain
optimistic in being able to raise the additional capital necessary once the new
federal administration’s policies take hold and the capital markets
normalize. We are currently in discussions with potential sources of financing
for this facility, including opportunities for grants and loan guarantees, but
no definitive agreements are in place.
We are
also developing a facility for construction in a joint effort with the U.S.
Department of Energy (“DOE”). This facility will be located in Fulton,
Mississippi and will use approximately 700 metric dry tons of woody biomass,
mill residue, and other cellulosic waste to produce approximately 19 million
gallons of ethanol annually. Detailed engineering is in progress and we expect
to have all necessary permits for this facility by the summer of 2010. We
have received an Award from the DOE of up to $40 million for the Facility. On or
around October 4, 2007, we 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 approve costs may be reimbursed by the DOE pursuant to the total $40 million
award announced in February 2007. December 4, 2009, the DOE announced that the
award for this project has been increased to a maximum of $88 million under the
American Recovery and Reinvestment Act of 2009 (“ARRA”) and the Energy Policy
Act of 2005. As of March 31, 2010, BlueFire has been reimbursed approximately
$5,374,000 from the DOE under this award. On or around February 23, 2010,
we announced that we submitted an application for a $250 million dollar loan
guarantee for this planned biorefinery. The application, filed under the DOE
Program DE-FOA-0000140, which provides federal loan guarantees for projects that
employ innovative energy efficiency, renewable energy, and advanced transmission
and distribution technologies, was submitted on February 15th, 2010 and serves
as a phase one application in a two phase approval process. If approved, the
loan guarantee will secure a substantial portion of the total costs to
construct the facility, although there is no assurance that the loan guarantee
will be approved. We are in the detailed engineering phase for this project and
expect to have all necessary permits for this facility by this summer, putting
the Company on a path to commence construction by the end of 2010.
Between
the two proposed facilities (Lancaster, CA and Fulton, MS) we expect them to
create more than 1,000 construction/manufacturing jobs and, once in operation,
more than 100 new operations and maintenance jobs.
The
Company is simultaneously researching and considering other suitable locations
for other similar bio-refineries.
28
STATUS
OF PUBLICLY ANNOUNCED NEW PRODUCTS AND SERVICES
On
December 11, 2008, BlueFire announced a Professional Services Agreement (“PSA”)
with Ubiex, Inc. a South Korean development company. Under the PSA,
BlueFire will provide the preliminary engineering design package and technical
support for Ubiex, Inc.
DISTRIBUTION
METHODS OF THE PRODUCTS OR SERVICES
We will
utilize existing ethanol distribution channels to sell the ethanol that is
produced from our plants. For example, we will enter into an agreement with an
existing refiner or blender to purchase the ethanol and sell it into the
Southern California, and Mississippi transportation fuels market. Ethanol is
currently mandated at a blend level of 10% in California which represents
a 1+ billion gallon per year market. We are also exploring the potential of
onsite blending of E85 (85% Ethanol, 15% gasoline) and direct marketing to
fueling stations. There are approximately 1,900 E85 fueling stations in the
United States.
COMPETITIVE
BUSINESS CONDITIONS AND THE SMALL BUSINESS ISSUER’S COMPETITIVE POSITION IN THE
INDUSTRY AND METHODS OF COMPETITION
COMPETITION
Most of
the ethanol supply in the United States is derived from corn according to the
Renewable Fuels Association (“RFA”) website (HTTP://WWW.ETHANOLRFA.ORG/) and as
of February 28, 2009 is produced at approximately 201 facilities, ranging in
size from 300,000 to 130 million gallons per year, located predominately in the
corn belt in the Midwest.
Traditional
corn-based production techniques are mature and well entrenched in the
marketplace, and the entire industry’s infrastructure is geared toward corn as
the principal feedstock.
With the
Arkenol Technology, the principle difference from traditional processes apart
from production technique is the acquisition and choice of feedstock. The use of
a non-commodity based non-food related biomass feedstock enables us to use
feedstock typically destined for disposal, i.e. wood waste, yard trimmings and
general green waste. All ethanol producers regardless of production technique
will fall subject to market fluctuation in the end product,
ethanol.
Due to
the feedstock variety we are able to process, we are able to locate production
facilities in and around the markets where the ethanol will be consumed thereby
giving us a competitive advantage against much larger traditional producers who
must locate plants near their feedstock, i.e. the corn belt in the Midwest and
ship the ethanol to the end market.
However,
in the area of biomass-to-ethanol production, there are few companies, and no
commercial production infrastructure is built. As we continue to advance our
biomass technology platform, we are likely to encounter competition for the same
technologies from other companies that are also attempting to manufacture
ethanol from cellulosic biomass feedstocks.
Ethanol
production is also expanding internationally. Ethanol produced or processed in
certain countries in Central American and the Caribbean region is eligible for
tariff reduction or elimination upon importation to the United States under a
program known as the Caribbean Basin Initiative. Large ethanol producers, such
as Cargill, have expressed interest in building dehydration plants in
participating Caribbean Basin countries, such as El Salvador, which would
convert ethanol into fuel-grade ethanol for shipment to the United States.
Ethanol imported from Caribbean Basin countries may be a less expensive
alternative to domestically produced ethanol and may affect our ability to sell
our ethanol profitably.
There are
approximately 21 next-generation biofuel companies that have received grants
from the DOE for development purposes.
29
INDUSTRY
OVERVIEW
On
December 19, 2007 President Bush signed into law the Energy Independence and
Security Act of 2007 (Energy Act of 2007). The Energy Act of 2007 provides
for an increase in the supply of alternative fuel sources by setting a mandatory
Renewable Fuel Standard (RFS) requiring fuel producers to use at least 36
billion gallons of biofuel by 2022, 16 billion gallon of which must come from
cellulosic derived fuel. Additionally, the Energy Act of 2007 called for
reducing U.S. demand for oil by setting a national fuel economy standard of 35
miles per gallon by 2020 – which will increase fuel economy standards by 40
percent and save billions of gallons of fuel.
In June
2008 the Food, Conservation and Energy Act of 2008 (Farm Bill) was signed into
law. The 2008 Farm Bill also modified existing incentives, including
ethanol tax credits and import duties and established a new integrated tax
credit of $1.01/gallon for cellulosic biofuels. The Farm Bill also
authorized new biofuels loan and grant programs, which will be subject to
appropriations, likely starting with the FY2010 budget request.
On
February 13, 2009, Congress passed the American Recovery and Reinvestment Act of
2009 at the urging of President Obama, who signed it into law four days later
(“ARRA”). A direct response to the economic crisis, the Recovery Act has three
immediate goals:
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Create
new jobs and save existing ones;
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Spur
economic activity and invest in long-term growth;
and
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Foster
unprecedented levels of accountability and transparency in government
spending.
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The
Recovery Act intends to achieve those goals by:
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Providing
$288 billion in tax cuts and benefits for millions of working families and
businesses;
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Increasing
federal funds for education and health care as well as entitlement
programs (such as extending unemployment benefits) by $224
billion;
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Making
$275 billion available for federal contracts, grants and loans;
and
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Requiring
recipients of Recovery funds to report quarterly on how they are using the
money. All the data is posted on Recovery.gov so the public can
track the Recovery funds.
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In
addition to offering financial aid directly to local school districts, expanding
the Child Tax Credit, and underwriting a process to computerize health records
to reduce medical errors and save on health care costs, the Recovery Act is
targeted at infrastructure development and enhancement. For instance, the Act
plans investment in the domestic renewable energy industry and the weatherizing
of 75 percent of federal buildings as well as more than one million private
homes around the country.
Historically,
producers and blenders had a choice of fuel additives to increase the oxygen
content of fuels. MTBE (methyl tertiary butyl ether), a petroleum-based
additive, was the most popular additive, accounting for up to 75% of the fuel
oxygenate market. However, in the United States, ethanol is replacing MTBE as a
common fuel additive. While both increase octane and reduce air pollution, MTBE
is a presumed carcinogen which contaminates ground water. It has already been
banned in California, New York, Illinois and 16 other states. Major oil
companies have voluntarily abandoned MTBE and it is scheduled to be phased out
under the Energy Policy Act. As MTBE is phased out, we expect demand for ethanol
as a fuel additive and fuel extender to rise. A blend of 5.5% or more of
ethanol, which does not contaminate ground water like MTBE, effectively complies
with U.S. Environmental Protection Agency requirements for reformulated
gasoline, which is mandated in most urban areas.
Ethanol
is a clean, high-octane, high-performance automotive fuel commonly blended in
gasoline to extend supplies and reduce emissions. In 2004, according to the
American Coalition for Ethanol, 3% of all United States gasoline was blended
with some percentage of ethanol. The most common blend is E10, which contains
10% ethanol and 90% gasoline. There is also growing federal government support
for E85, which is a blend of 85% ethanol and 15% gasoline.
30
Ethanol
is a renewable fuel produced by the fermentation of starches and sugars such as
those found in grains and other crops. Ethanol contains 35% oxygen by weight
and, when combined with gasoline, it acts as an oxygenate, artificially
introducing oxygen into gasoline and raising oxygen concentration in the
combustion mixture with air. As a result, the gasoline burns more completely and
releases less unburnt hydrocarbons, carbon monoxide and other harmful exhaust
emissions into the atmosphere. The use of ethanol as an automotive fuel is
commonly viewed as a way to reduce harmful automobile exhaust emissions. Ethanol
can also be blended with regular unleaded gasoline as an octane booster to
provide a mid-grade octane product which is commonly distributed as a premium
unleaded gasoline.
Studies
published by the Renewable Fuel Association indicate that approximately 8.1
billion gallons of ethanol was consumed in 2008 in the United States and every
automobile manufacturer approves and warrants the use of E10. Because the
ethanol molecule contains oxygen, it allows an automobile engine to more
completely combust fuel, resulting in fewer emissions and improved performance.
Fuel ethanol has an octane value of 113 compared to 87 for regular unleaded
gasoline. Domestic ethanol consumption has tripled in the last eight years, and
consumption increases in some foreign countries, such as Brazil, are even
greater in recent years. For instance, 40% of the automobiles in Brazil operate
on 100% ethanol, and others use a mixture of 22% ethanol and 78% gasoline. The
European Union and Japan also encourage and mandate the increased use of
ethanol.
For every
barrel of ethanol produced, the American Coalition for Ethanol estimates that
1.2 barrels of petroleum are displaced at the refinery level, and that since
1978, U.S. ethanol production has replaced over 14.0 billion gallons of imported
gasoline or crude oil. According to a Mississippi State University Department of
Agricultural Economics Staff Report in August 2003, a 10% ethanol blend results
in a 25% to 30% reduction in carbon monoxide emissions by making combustion more
complete. The same 10% blend lowers carbon dioxide emissions by 6% to
10%.
During
the last 20 years, ethanol production capacity in the United States has grown
from almost nothing to an estimated 7.6 billion gallons per year in 2008. In the
United States, ethanol is primarily made from starch crops, principally from the
starch fraction of corn. Consequently, the production plants are concentrated in
the grain belt of the Midwest, principally in Illinois, Iowa, Minnesota,
Nebraska and South Dakota.
In the
United States, there are two principal commercial applications for ethanol. The
first is as an oxygenate additive to gasoline to comply with clean air
regulations. The second is as a voluntary substitute for gasoline - this is a
purely economic choice by gasoline retailers who may make higher margins on
selling ethanol-blended gasoline, provided ethanol is available in the local
market. The U.S. gasoline market is currently approximately 170 billion gallons
annually, so the potential market for ethanol (assuming only a 10% blend) is 17
billion gallons per year. Increasingly, motor manufacturers are producing
flexible fuel vehicles (particularly sports utility vehicle models) which can
run off ethanol blends of up to 85% (known as E85) in order to obtain exemptions
from fleet fuel economy quotas. There are now in excess of 5 million flexible
fuel vehicles on the road in the United States and automakers will produce
several millions per year, offering further potential for significant growth in
ethanol demand.
CELLULOSE
TO ETHANOL PRODUCTION
In a 2002
report, “Outlook For Biomass Ethanol Production Demand,” the U.S. Energy
Information Administration found that advancements in production technology of
ethanol from cellulose could reduce costs and result in production increases of
40% to 160% by 2010. Biomass (cellulosic feedstocks) includes agricultural
waste, woody fibrous materials, forestry residues, waste paper, municipal solid
waste and most plant material. Like waste starches and sugars, they are often
available for relatively low cost, or are even free. However, cellulosic
feedstocks are more abundant, global and renewable in nature. These waste
streams, which would otherwise be abandoned, land-filled or incinerated, exist
in populated metropolitan areas where ethanol prices are
higher.
31
SOURCES
AND AVAILABILITY OF RAW MATERIALS
The U.S.
DOE and USDA in its April 2005 report “BIOMASS AS FEEDSTOCK FOR A BIOENERGY AND
BIOPRODUCTS INDUSTRY: THE TECHNICAL FEASIBILITY OF A BILLION-TON ANNUAL SUPPLY”
found that about one billion tons of cellulosic materials from agricultural and
forest residues are available to produce more than one-third of the current U.S.
demand for transportation fuels.
DEPENDENCE
ON ONE OR A FEW MAJOR CUSTOMERS
Currently,
we have no dependence on one or a few major customers. We are negotiating
definitive agreements but no definitive agreements have been signed as of yet.
See “DISTRIBUTION METHODS OF THE PRODUCTS OR SERVICES.”
PATENTS,
TRADEMARKS, LICENSES, FRANCHISES, CONCESSIONS, ROYALTY AGREEMENTS OR LABOR
CONTRACTS
On March
1, 2006, we entered into a Technology License Agreement with Arkenol, for use of
the Arkenol Technology. Arkenol holds the following patents in relation to the
Arkenol Technology: 11 U.S. patents, 21 foreign patents, and one pending foreign
patent. According to the terms of the agreement, we were granted an
exclusive, non-transferable, North American license to use and to sub-license
the Arkenol technology. The Arkenol Technology, converts cellulose and waste
materials into ethanol and other high value chemicals. As consideration for the
grant of the license, we are required to make a onetime payment of $1,000,000 at
first project funding and for each plant make the following payments: (1)
royalty payment of 3% of the gross sales price for sales by us or our
sub-licensees of all products produced from the use of the Arkenol Technology
(2) and a onetime license fee of $40.00 per 1,000 gallons of production capacity
per plant. According to the terms of the agreement, we made a onetime
exclusivity fee prepayment of $30,000 during the period ended December 31, 2006.
As of March 31, 2010, we have paid Arkenol in full for the license. All
sub-licenses issued by us will provide for payments to Arkenol of any other
license fees and royalties due.
NEED
FOR ANY GOVERNMENT APPROVAL OF PRINCIPAL PRODUCTS OR SERVICES
We are
not subject to any government oversight for our current operations other than
for corporate governance and taxes. However, the production facilities that we
will be constructing will be subject to various federal, state and local
environmental laws and regulations, including those relating to the discharge of
materials into the air, water and ground, the generation, storage, handling,
use, transportation and disposal of hazardous materials, and the health and
safety of our employees. In addition, some of these laws and regulations will
require our facilities to operate under permits that are subject to renewal or
modification. These laws, regulations and permits can often require expensive
pollution control equipment or operational changes to limit actual or potential
impacts to the environment. A violation of these laws and regulations or permit
conditions can result in substantial fines, natural resource damages, criminal
sanctions, permit revocations and/or facility shutdowns.
EFFECT
OF EXISTING OR PROBABLE GOVERNMENTAL REGULATIONS ON THE BUSINESS
Currently,
the federal government encourages the use of ethanol as a component in
oxygenated gasoline. This is a measure to both protect the environment, and, to
utilize biofuels as a viable renewable domestic fuel to reduce U.S. dependence
on foreign oil.
The
ethanol industry is heavily dependent on several economic incentives to produce
ethanol, including federal ethanol supports. Ethanol sales have been favorably
affected by the Clean Air Act amendments of 1990, particularly the Federal
Oxygen Program which became effective November 1, 1992. The Federal Oxygen
Program requires the sale of oxygenated motor fuels during the winter months in
certain major metropolitan areas to reduce carbon monoxide pollution. Ethanol
use has increased due to a second Clean Air Act program, the Reformulated
Gasoline Program. This program became effective January 1, 1995, and requires
the sale of reformulated gasoline in nine major urban areas to reduce
pollutants, including those that contribute to ground level ozone, better known
as smog. Increasingly stricter EPA regulations are expected to increase the
number of metropolitan areas deemed in non-compliance with Clean Air Standards,
which could increase the demand for ethanol.
32
On
October 22, 2004, President Bush signed H.R. 4520, which contained the
Volumetric Ethanol Excise Tax Credit (“VEETC”) and amended the federal excise
tax structure effective as of January 1, 2005. Before this, ethanol-blended fuel
was taxed at a lower rate than regular gasoline (13.2 cents on a 10% blend).
Under VEETC, the existing ethanol excise tax exemption is eliminated, thereby
allowing the full federal excise tax of 18.4 cents per gallon of gasoline to be
collected on all gasoline and allocated to the highway trust fund. The bill
created a new volumetric ethanol excise tax credit of 51 cents per gallon of
ethanol blended. Refiners and gasoline blenders would apply for this credit on
the same tax form as before only it would be a credit from general revenue, not
the highway trust fund. Based on volume, the VEETC is expected to allow much
greater refinery flexibility in blending ethanol. VEETC is scheduled to expire
in 2013. The 2008 Farm Bill amended this credit: Starting the year after
7.5 billion gallons of ethanol are produced and/or imported in the United
States, the value of the credit will be lowered to 45 cents per gallon—it is
expected that the United States passed this mark in 2008, leading to a reduction
in the credit starting in 2009.
The
Energy Policy Act of 2005 established a renewable fuel standard (RFS) to
increase in the supply of alternative sources for automotive fuels. The RFS was
expanded by the Energy Independence and Security Act of 2007. The RFS requires
the blending of renewable fuels (including ethanol and biodiesel) in
transportation fuel. In 2008, fuel suppliers must blend 9.0 billion gallons of
renewable fuel into gasoline; this requirement increases annually to 36 billion
gallons in 2022. The expanded RFS also specifically mandates the use of
“advanced biofuels”—fuels produced from non-corn feedstocks and with 50% lower
lifecycle greenhouse gas emissions than petroleum fuel—starting in 2009. Of the
36 billion gallons required in 2022, at least 21 billion gallons must be
advanced biofuel. There are also specific quotas for cellulosic biofuels and for
biomass-based diesel fuel. On May 1, 2007, EPA issued a final rule on the RFS
program detailing compliance standards for fuel suppliers, as well as a system
to trade renewable fuel credits between suppliers. EPA has not yet
initiated a rulemaking on the lifecycle analysis methods necessary to categorize
fuels as advanced biofuels. While this program is not a direct subsidy for the
construction of biofuels plants, the market created by the renewable fuel
standard is expected to stimulate growth of the biofuels industry.
The Food,
Conservation, and Energy Act of 2008 (2008 Farm Bill) provides for, among other
things, grants for demonstration scale Biorefineries, and loan guarantees for
commercial scale Biorefineries that produce advanced Biofuels (i.e., any fuel
that is not corn-based). Section 9003 includes a Loan Guarantee Program under
which the U.S.D.A. could provide loan guarantees up to $250 million to fund
development, construction, and retrofitting of commercial-scale refineries.
Section 9003 also includes a grant program to assist in paying the costs of the
development and construction of demonstration-scale biorefineries to demonstrate
the commercial viability which can potentially fund up to 50% of project
costs.
The ARRA,
passed into law in February 2009 makes $275 billion available for federal
contracts, grants, and loans, some of which is devoted to investment into the
domestic renewable energy industry.
Some other noteworthy governmental
actions regarding the production of biofuels are as follows:
|
·
|
Small
Ethanol Producer Credit:
|
A tax
credit valued at 10 cents per gallon of ethanol produced. The credit may be
claimed on the first 15 million gallons of ethanol produced by a small producer
in a given year. Qualified applicants are any ethanol producer with
production capacity below 60 million gallons per year. This credit was scheduled
to terminate on December 31, 2010, but was recently renewed through
2011.
|
·
|
Credit
for Production of Cellulosic
Biofuel:
|
An
integrated tax credit whereby Producers of cellulosic biofuel can claim up to
$1.01 per gallon tax credit. The credit for cellulosic ethanol varies with other
ethanol credits such that the total combined value of all credits is $1.01 per
gallon. As the VEETC and/or the Small Ethanol Producer Credits (outlined above)
decrease, the per-gallon credit for cellulosic ethanol production increases by
the same amount (ie the value of the credit is reduced by the amount of the
VEETC and the Small Ethanol Producer Credit—currently, the value would be 40
cents per gallon). The credit applies to fuel produced after December 31,
2008. This credit is scheduled to terminate on December 31,
2012.
33
|
·
|
Special
Depreciation Allowance for Cellulosic Biofuel Plant
Property:
|
A
taxpayer may take a depreciation deduction of 50% of the adjusted basis of a new
cellulosic biofuel plant in the year it is put in service. Any portion of the
cost financed through tax-exempt bonds is exempted from the depreciation
allowance. Before amendment by P.L. 110-343, the accelerated depreciation
applied only to cellulosic ethanol plants that break down cellulose through
enzymatic processes—the amended provision applies to all cellulosic biofuel
plants acquired after December 20, 2006, and placed in service before January 1,
2013. This accelerated depreciation allowance is scheduled to terminate on
December 31, 2012.
ESTIMATE
OF THE AMOUNT SPENT DURING EACH OF THE LAST TWO FISCAL YEARS ON RESEARCH AND
DEVELOPMENT ACTIVITIES
For the
fiscal years ending December 31, 2008 and 2009, we spent roughly
$10,535,278 and $1,307,185 on project development costs,
respectively.
To date,
project development costs include the research and development expenses related
to our future cellulose-to-ethanol production facilities including site
development, and engineering activities.
COSTS
AND EFFECTS OF COMPLIANCE WITH ENVIRONMENTAL LAWS (FEDERAL, STATE AND
LOCAL)
We will
be subject to extensive air, water and other environmental regulations and we
will have to obtain a number of environmental permits to construct and operate
our plants, including, air pollution construction permits, a pollutant discharge
elimination system general permit, storm water discharge permits, a water
withdrawal permit, and an alcohol fuel producer’s permit. In addition, we may
have to complete spill prevention control and countermeasures
plans.
The
production facilities that we will build are subject to oversight activities by
the federal, state, and local regulatory agencies. There is always a risk that
the federal agencies may enforce certain rules and regulations differently than
state environmental administrators. State or federal rules are subject to
change, and any such changes could result in greater regulatory burdens on plant
operations. We could also be subject to environmental or nuisance claims from
adjacent property owners or residents in the area arising from possible foul
smells or other air or water discharges from the plant.
NUMBER
OF TOTAL EMPLOYEES AND NUMBER OF FULL TIME EMPLOYEES
We have
six full time employees as of February 10, 2011, and three part time employees.
None of our employees are subject to a collective bargaining agreement, and we
believe that our relationship with our employees is good.
REPORTS
TO SECURITY HOLDERS
We are
subject to the reporting obligations of the Securities Exchange Act of 1934, as
amended (the “Exchange Act”). These obligations include filing an annual report
under cover of Form 10, with audited financial statements, unaudited quarterly
reports on Form 10-Q and the requisite proxy statements with regard to annual
stockholder meetings. The public may read and copy any materials the Company
files with the Securities and Exchange Commission (the “SEC”) at the SEC’s
Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may
obtain information on the operation of the Public Reference Room by calling the
SEC at 1-800-SEC-0030. The SEC maintains an Internet site (http://www.sec.gov)
that contains reports, proxy and information statements and other information
regarding issuers that file electronically with the SEC.
LEGAL
PROCEEDINGS
We are
currently not involved in any litigation that we believe could 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 could
have a material adverse effect.
34
MANAGEMENT
Directors
and Executive Officers
The
following table and biographical summaries set forth information, including
principal occupation and business experience, about our directors and executive
officers as of February 10, 2011. There is no familial relationship between or
among the nominees, directors or executive officers of the Company.
NAME
|
|
AGE
|
|
POSITION
|
|
OFFICER AND/OR DIRECTOR
SINCE
|
Arnold
Klann
|
59
|
President,
CEO and Director
|
June
2006
|
|||
Necitas
Sumait
|
50
|
Secretary,
SVP and Director
|
June
2006
|
|||
Christopher
Scott
|
35
|
Chief
Financial Officer
|
March
2007
|
|||
John
Cuzens
|
58
|
SVP,
Chief Technology Officer
|
June
2006
|
|||
Chris
Nichols
|
44
|
Director
|
June
2006
|
|||
Roger
L. Petersen
|
59
|
Director
|
July
2010
|
The
Company’s Directors serve in such capacity until the first annual meeting of the
Company’s shareholders and until their successors have been elected and
qualified. The Company’s officers serve at the discretion of the Company’s Board
of Directors, until their death, or until they resign or have been removed from
office.
There are
no agreements or understandings for any director or officer to resign at the
request of another person and none of the directors or officers is acting on
behalf of or will act at the direction of any other person. The activities of
each director and officer are material to the operation of the Company. No other
person’s activities are material to the operation of the Company.
Arnold
R. Klann – Chairman of the Board and Chief Executive Officer
Mr. Klann
has been our Chairman of the Board and Chief Executive Officer since our
inception in March 2006. Mr. Klann has been President of ARK Energy, Inc. and
Arkenol, Inc. from January 1989 to present. Mr. Klann has an AA from
Lakeland College in Electrical Engineering.
Necitas
Sumait – Senior Vice President and Director
Mrs.
Sumait has been our Director and Senior Vice President since our inception in
March 2006. Prior to this, Mrs. Sumait was Vice President of ARK Energy/Arkenol
from December 1992 to July 2006. Mrs. Sumait has a MBA in Technological
Management from Illinois Institute of Technology and a B.S. in Biology from
DePaul University.
Christopher
Scott - Chief Financial Officer
Mr. Scott
has been our Chief Financial Officer since March 2007. Prior to this, from 2002
to March 2007, Mr. Scott was most recently the CFO/CCO and FinOp of Westcap
Securities, Inc, an NASD Member Broker/Dealer and Investment Bank headquartered
in Irvine, CA. Mr. Scott currently holds the Series 7, 63, 24, and Series 27
FINRA licenses. From 1997 to 2002, Mr. Scott was a General Securities and
Registered Options Principal at First Allied Securities Inc. Mr. Scott earned
his Bachelor’s Degree in Business Administration, with a concentration in
Finance, from CSU, Fullerton.
35
John
Cuzens - Chief Technology Officer and Senior Vice President
Mr.
Cuzens has been our Chief Technology Officer and Senior Vice President since our
inception in March 2006. Mr. Cuzens was a Director from March 2006 until
his resignation from the Board of Directors in July 2007. Prior to this,
he was Director of Projects Wahlco Inc. from 2004 to June 2006. He was employed
by Applied Utility Systems Inc from 2001 to 2004 and Hydrogen Burner Technology
form 1997-2001. He was with ARK Energy and Arkenol from 1991 to 1997 and is the
co-inventor on seven of Arkenol’s eight U.S. foundation patents for the
conversion of cellulosic materials into fermentable sugar products using a
modified strong acid hydrolysis process. Mr. Cuzens has a B.S. Chemical
Engineering degree from the University of California at Berkeley.
Chris
Nichols – Director (Chairman, Compensation Committee)
Mr.
Nichols has been our Director since our inception in March 2006. Mr.
Nichols is currently the Chairman of the Board and Chief Executive Officer of
Advanced Growing Systems, Inc. Since 2003 Mr. Nichols was the Senior Vice
President of Westcap Securities’ Private Client Group. Prior to this, Mr.
Nichols was a Registered Representative at Fisher Investments from December 2002
to October 2003. He was a Registered Representative with Interfirst Capital
Corporation from 1997 to 2002. Mr. Nichols is a graduate of
California State University in Fullerton with a B.A. degree in
Marketing.
Roger
L. Petersen – Director
Mr.
Petersen currently serves as the President of Montana Horizons, LLC, a Montana
limited liability company which he founded in 2006, that provides support for
utility mergers and acquisitions and energy development projects. From 1995 to
2006, Mr. Petersen served as the President of PPL Development Company, a
wholly-owned subsidiary of PPL Corporation (NYSE: PPL) (“PPL”), which focused on
corporate growth through asset acquisition and corporate mergers. From 2001 to
2003, Mr. Petersen served as the President of PPL Global, Inc, a wholly-owned
subsidiary of PPL, which managed all international acquisitions and operations
for PPL. From 1999 to 2001, Mr. Petersen served as President and Chief Executive
Officer of PPL Montana, LLC, a wholly-owned subsidiary of PPL, which operates
coal-fired and hydroelectric generating facilities at 13 sites in the State of
Montana. Mr. Petersen also served as the Vice President and Chief Executive
Officer of PPL Global, Inc, a wholly-owned subsidiary of PPL, from 1995 to 1998,
which developed and acquired assets in the United Kingdom, Chile, El Salvadore,
Peru, Bolivia, and the United States. He served on several corporate
boards in the United Kingdom, Chile and El Salvador. Prior to joining PPL, he
was Vice President of Operations for Edison Mission Energy, a subsidiary of
Edison International, and held various engineering and project management
positions at Fluor Engineers and Constructors. Mr. Petersen earned
his B.S. in Mechanical engineering from South Dakota State University
and his Masters of Engineering from California Polytechnic Institute.
BlueFire believes that Mr. Petersen’s experience in the
energy business as well as his experience in mergers and acquisitions will be a
valuable asset to the Company.
FAMILY
RELATIONSHIPS
There are
no family relationships among our directors, executive officers, or persons
nominated or chosen by the Company to become directors or executive
officers.
SUBSEQUENT
EXECUTIVE RELATIONSHIPS
There are
no family relationships among our directors and executive officers. No director
or executive officer has been a director or executive officer of any business
which has filed a bankruptcy petition or had a bankruptcy petition filed against
it during the past five years. No director or executive officer has been
convicted of a criminal offense or is the subject of a pending criminal
proceeding during the past five years. No director or executive officer has been
the subject of any order, judgment or decree of any court permanently or
temporarily enjoining, barring, suspending or otherwise limiting his involvement
in any type of business, securities or banking activities during the past five
years. No director or officer has been found by a court to have violated a
federal or state securities or commodities law during the past five
years.
None of
our directors or executive officers or their respective immediate family members
or affiliates are indebted to us.
36
COMMITTEES
OF THE BOARD OF DIRECTORS
Each of
our Audit Committee, Compensation Committee and Nomination Committee are
composed of a majority of independent board members and are also chaired by an
independent board member.
Audit
Committee
Christopher
Nichols
Compensation
Committee
Christopher
Nichols, Chairman
Nomination
Committee
There are
currently no members in the Nomination Committee
COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT
Section
16(a) of the Exchange Act requires the Company’s directors, executive officers
and persons who beneficially own 10% or more of a class of securities registered
under Section 12 of the Exchange Act to file reports of beneficial ownership and
changes in beneficial ownership with the SEC. Directors, executive officers and
greater than 10% stockholders are required by the rules and regulations of the
SEC to furnish the Company with copies of all reports filed by them in
compliance with Section 16(a).
Based
solely on our review of certain reports filed with the Securities and Exchange
Commission pursuant to Section 16(a) of the Securities Exchange Act of 1934, as
amended, the following reports required to be filed with respect to transactions
in our Common Stock during the fiscal year ended December 31, 2009 were
untimely:
Arnold
Klann, the Chairman and CEO of the Company failed to timely file Form 4s for a
number of gifts to charity in an aggregate amount of 290,000 shares of our
Common Stock for the period ending December 31, 2009. The price on these
transactions was $1.00 per share, representing the closing price of our Common
Stock on December 31, 2009. Mr. Klann reported these transactions on a Form 4
filed on January 28, 2010.
With the
exception of the aforementioned filing, to the best of the Company’s knowledge,
any reports required to be filed were timely filed as of February 10,
2011.
CODE
OF ETHICS
The
Company has adopted a Code of Ethics that applies to the Registrant’s directors,
officers and key employees.
BOARD
NOMINATION PROCEDURE
There
have been no material changes to the procedures by which security holders may
recommend nominees to the Company’s board of directors since the Company
provided disclosure on such process on its proxy statement on Form DEF 14 A, as
amended, filed on May 19, 2010, with the SEC.
EXECUTIVE
COMPENSATION
The
following table sets forth information with respect to compensation paid by us
to our officers and directors during the two most recent fiscal years. This
information includes the dollar value of base salaries, bonus awards and number
of stock options granted, and certain other compensation, if
any.
37
2010/2009
SUMMARY COMPENSATION TABLE YEAR
NAME AND PRINCIPAL
POSITION
|
YEAR
|
SALARY
($)
|
BONUS
($)
|
STOCK
AWARDS
(2)
|
OPTIONS
AWARDS ($) (2)
|
NON-
EQUITY
INCENTIVE PLAN
COMPENSATION
($)
|
CHANGE
IN PENSION
VALUE AND
NONQUALIFIED
DEFERRED
COMPENSATION
EARNINGS ($)
|
ALL OTHER
COMPENSATION
($) (3)
|
TOTAL
($)
|
|||||||||||||||||||||||||
Arnold
Klann
|
2010
|
226,000 | - | 1,440 | (1) | - | 45,525 | 272,965 | ||||||||||||||||||||||||||
Director and
President
|
2009
|
226,000 | - | 5,250 | (1) | - | 231,250 | |||||||||||||||||||||||||||
Necitas
Sumait
|
2010
|
180,000 | - | 1,400 | (1) | 20,925 | 202,325 | |||||||||||||||||||||||||||
Director, Secretary
and VP
|
2009
|
180,000 | - | 5,250 | (1) | 185,250 | ||||||||||||||||||||||||||||
John
Cuzens
|
2010
|
180,000 | - | - | - | 8,654 | 188,654 | |||||||||||||||||||||||||||
Treasurer and VP
|
2009
|
180,000 | - | - | - | 180,000 | ||||||||||||||||||||||||||||
Christopher
Scott
|
2010
|
120,000 | - | - | - | 120,000 | ||||||||||||||||||||||||||||
Chief Financial
Officer
|
2009
|
155,833 | - | - | - | 155,833 | ||||||||||||||||||||||||||||
Chris
Nichols
|
2010
|
9,000 | 1,440 | (1) | 10,440 | |||||||||||||||||||||||||||||
Director
|
2009
|
5,000 | 5,250 | (1) | 10,250 | |||||||||||||||||||||||||||||
Roger
Petersen
|
2010
|
5,000 | 1,440 | (1) | 6,440 | |||||||||||||||||||||||||||||
Director
|
2009
|
N/A | N/A | N/A |
(1)
|
Reflects
value of shares of restricted common stock received as compensation as
Director. See notes to consolidated financial statements for
valuation.
|
(2)
|
Valued
based on the Black-Scholes valuation model at the date of grant, see note
to the consolidated financial
statements.
|
(3)
|
Reflects
the cash payments made to the executives for paid time
off.
|
38
2010
GRANTS OF PLAN-BASED AWARDS TABLE
ESTIMATED FUTURE PAYOUTS
UNDER NON-EQUITY
INCENTIVE PLAN AWARDS
|
ESTIMATED FUTURE
PAYOUTS
UNDER EQUITY INCENTIVE
PLAN AWARDS
|
|||||||||||||||||||||||||
Name
|
Grant
Date
|
Approval
Date
|
Number
of Non-Equity
Incentive
Plan
Units
Granted
(#)
|
Threshold
($)
|
Target
($)
|
Maximum
($)
|
Threshold
(#)
|
Target
(#)
|
Maximum
(#)
|
All
Other
Stock
Awards:
Number
of
Shares
of
Stock
or Units
(#)
|
All
Other
Option
Awards:
Number of
Securities
Underlying
Options
(#)
|
Exercise
or Base
Price of
Option
Awards
($ / SH)
|
Closing
Price
on
Grant
Date
($ / SH)
|
|||||||||||||
Arnold
Klann
|
None
|
|||||||||||||||||||||||||
Necitas
Sumait
|
None
|
|||||||||||||||||||||||||
Christopher
Scott
|
None
|
|||||||||||||||||||||||||
John
Cuzens
|
None
|
|||||||||||||||||||||||||
Chris
Nichols
|
None
|
|||||||||||||||||||||||||
Roger
Petersen
|
None
|
39
2010
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END TABLE
|
OPTION AWARDS
|
|
|
STOCK AWARDS
|
||||||||||||||||||||||||||
NAME
|
NUMBER OF
SECURITIES
UNDERLYING
UNEXERCISED
OPTIONS
(#)
EXERCISABLE
|
NUMBER OF
SECURITIES
UNDERLYING
UNEXERCISED
OPTIONS
(#)
UNEXERCISABLE
|
EQUITY
INCENTIVE
PLAN
AWARDS:
NUMBER OF
SECURITIES
UNDERLYING
UNEXERCISED
UNEARNED
OPTIONS
(#)
|
OPTION
EXERCISE
PRICE
($)
|
OPTION
EXPIRATION
DATE
|
NUMBER
OF
SHARES
OR
UNITS
OF
STOCK
THAT
HAVE
NOT
VESTED
(#)
|
MARKET
VALUE
OF
SHARES
OR
UNITS
OF
STOCK
THAT
HAVE
NOT
VESTED
($)
|
EQUITY
INCENTIVE
PLAN
AWARDS:
NUMBER
OF
UNEARNED
SHARES,
UNITS
OR OTHER
RIGHTS
THAT
HAVE NOT
VESTED
(#)
|
EQUITY
INCENTIVE
PLAN
AWARDS:
MARKET
OR
PAYOUT
VALUE
OF
UNEARNED
SHARES,
UNITS
OR OTHER
RIGHTS
THAT
HAVE NOT
VESTED
($)
|
|||||||||||||||||||||
Arnold
Klann
|
1,000,000 | - | 2.00 |
12/14/11
|
||||||||||||||||||||||||||
28,409 | - | 3.52 |
12/20/12
|
|||||||||||||||||||||||||||
125,000 | (1) | 125,000 | (1) | 3.20 |
12/20/12
|
|||||||||||||||||||||||||
500,000 | - | .50 |
12/15/13
|
|||||||||||||||||||||||||||
Necitas
Sumait
|
450,000 | - | 2.00 |
12/14/11
|
||||||||||||||||||||||||||
118,750 | (1) | 87,500 | (1) | 3.20 |
12/20/12
|
|||||||||||||||||||||||||
John
Cuzens
|
450,000 | - | 2.00 |
12/14/11
|
||||||||||||||||||||||||||
118,750 | (1) | 87,500 | (1) | 3.20 |
12/20/12
|
|||||||||||||||||||||||||
Christopher
Scott
|
118,750 | (1) | 87,500 | (1) | 3.20 |
12/20/12
|
||||||||||||||||||||||||
Chris
Nichols
|
||||||||||||||||||||||||||||||
Roger
Petersen
|
(1) 50%
vested immediately upon grant in 2007, 25% vests on closing remainder of
Lancaster Project Funding, 25% vests at the start of construction of Lancaster
Project
40
2010
OPTION EXERCISES AND STOCK VESTED TABLE
OPTION AWARDS
|
STOCK AWARDS
|
|||||||
|
Number of Shares
Acquired on Exercise
(#)
|
Value Realized
on Exercise
($)
|
Number of Shares
Acquired on Vesting
(#)
|
Value Realized
on Vesting
($)
|
||||
Arnold
Klann
|
||||||||
Necitas
Sumait
|
||||||||
Christopher
Scott
|
||||||||
John
Cuzens
|
||||||||
Chris
Nichols
|
||||||||
Roger
Petersen
|
2010
PENSION BENEFITS TABLE
NAME
|
PLAN NAME
|
NUMBER OF YEARS
CREDITED SERVICE
(#)
|
PRESENT VALUE OF
ACCUMULATED BENEFIT
($)
|
PAYMENTS DURING
LAST FISCAL YEAR
($)
|
||||
Arnold
Klann
|
||||||||
Necitas
Sumait
|
||||||||
Christopher
Scott
|
||||||||
John
Cuzens
|
||||||||
Chris
Nichols
|
||||||||
Roger
Petersen
|
|
|
|
|
2010
NONQUALIFIED DEFERRED COMPENSATION TABLE
NAME
|
EXECUTIVE
CONTRIBUTION
IN
LAST FISCAL
YEAR
($)
|
REGISTRANT
CONTRIBUTIONS IN
LAST FISCAL YEARS
($)
|
AGGREGATE
EARNINGS IN LAST
FISCAL YEAR
($)
|
AGGREGATE
WITHDRAWALS /
DISTRIBUTIONS
($)
|
AGGREGATE
BALANCE AT LAST
FISCAL YEAR-END
($)
|
|||||
Arnold
Klann
|
||||||||||
Necitas
Sumait
|
||||||||||
Christopher
Scott
|
||||||||||
John
Cuzens
|
||||||||||
Chris
Nichols
|
||||||||||
Roger
Petersen
|
|
|
|
|
|
41
2010
DIRECTOR COMPENSATION TABLE
FEES
EARNED
OR
PAID
IN
CASH
|
STOCK
AWARDS
|
OPTION
AWARDS
|
NON-EQUITY
INCENTIVE
PLAN
COMPENSATION
|
CHANGE
IN
PENSION
VALUE
AND
NONQUALIFIED
DEFERRED
COMPENSATION
EARNINGS
|
ALL
OTHER
COMPENSATION
|
TOTAL
|
||||||||||||||||||||||||
NAME
|
Year
|
($)
|
($)
(1)
|
($)
|
($)
|
($)
|
($)
|
($)
|
||||||||||||||||||||||
Necitas
Sumait
|
2010
|
1,440 | 1,440 | |||||||||||||||||||||||||||
Chris
Nichols
|
2010
|
9,000 | 1,440 | 10,440 | ||||||||||||||||||||||||||
Arnold
Klann
|
2010
|
1,440 | 1,440 | |||||||||||||||||||||||||||
Roger
Petersen
|
2010
|
5,000 | 1,440 | 6,440 |
(1)
|
Reflects
value of shares of restricted common stock received as compensation as
Director. See notes to consolidated financial statements for
valuation.
|
2010 ALL
OTHER COMPENSATION TABLE
NAME
|
YEAR
|
PERQUISITES
AND OTHER
PERSONAL
BENEFITS
($)
|
TAX
REIMBURSEMENTS
($)
|
INSURANCE
PREMIUMS
($)
|
COMPANY
CONTRIBUTIONS
TO RETIREMENT
AND 401(K)
PLANS
($)
|
SEVERANCE
PAYMENTS/
ACCRUALS
($)
|
CHANGE IN
CONTROL
PAYMENTS/
ACCRUALS
($)
|
TOTAL
($)
|
||||||||
Arnold
Klann
|
||||||||||||||||
Necitas
Sumait
|
||||||||||||||||
Christopher
Scott
|
||||||||||||||||
John
Cuzens
|
||||||||||||||||
Chris
Nichols
|
||||||||||||||||
Roger
Petersen
|
|
|
|
|
|
|
|
|
42
2010
PERQUISITES TABLE
NAME
|
YEAR
|
PERSONAL USE OF
COMPANY
CAR/PARKING
|
FINANCIAL
PLANNING
LEGAL
FEES
|
CLUB DUES
|
EXECUTIVE
RELOCATION
|
TOTAL PERQUISITES
AND OTHER
PERSONAL BENEFITS
|
||||||
Arnold
Klann
|
||||||||||||
Necitas
Sumait
|
||||||||||||
Christopher
Scott
|
||||||||||||
John
Cuzens
|
||||||||||||
Chris
Nichols
|
||||||||||||
Roger
Petersen
|
|
|
|
|
|
|
2010
POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE IN CONTROL TABLE
NAME
|
BENEFIT
|
BEFORE
CHANGE
IN CONTROL
TERMINATION
W/O
CAUSE OR FOR
GOOD REASON
|
AFTER
CHANGE
IN CONTROL
TERMINATION
W/O
CAUSE OR
GOOD
REASON
|
VOLUNTARY
TERMINATION
|
DEATH
|
DISABILITY
|
CHANGE
IN
CONTROL
|
|||||||
Arnold
Klann
|
Full
comp. first 2 months, 50% of comp. next 4 months
|
|||||||||||||
Necitas
Sumait
|
Full
comp. first 2 months, 50% of comp. next 4 months
|
|||||||||||||
Christopher
Scott (1)
|
Full
comp. first 2 months, 50% of comp. next 4 months
|
|||||||||||||
John
Cuzens
|
Full
comp. first 2 months, 50% of comp. next 4 months
|
|||||||||||||
Chris
Nichols
|
N/A
|
|||||||||||||
Roger
Petersen
|
|
|
|
|
|
|
N/A
|
|
(1) The
disability benefit came into effect with the signing of Mr. Scott’s employment
agreement on March 31, 2008.
EMPLOYMENT
CONTRACTS
On June
27, 2006, the Company entered into employment agreements with three of its
executive officers. The employment agreements are for a period of three years,
which expired in 2009, with prescribed percentage increases beginning in 2007
and can be cancelled upon a written notice by either employee or employer (if
certain employee acts of misconduct are committed). The total aggregate annual
amount due under the employment agreements is approximately $520,000. These
contracts have not been renewed. Each of the executive officers are currently
working for the Company on a month to month basis.
43
In
addition, on June 27, 2006, the Company entered into a Directors agreement with
four individuals to join the Company’s board of directors. Under the terms of
the agreement the non-employee Director (Chris Nichols) will receive annual
compensation in the amount of $5,000 and all Directors receive a onetime grant
of 5,000 shares of the Company’s common stock. The common shares vested
immediately. The value of the common stock granted was determined to be
approximately $67,000 based on the estimated fair market value of the Company’s
common stock over a reasonable period of time. On July 9, 2007, the Company
entered into a Directors agreement with two individuals (Victor Doolan, and
Joseph Emas) to join the Company’s board of directors. Under the terms of the
agreement these non-employee Directors will receive annual compensation in the
amount of $5,000 and all Directors receive a one-time grant of 5,000 shares of
the Company’s common stock. The common shares vest immediately. The value of the
common stock granted was determined to be approximately $50,700 based on the
estimated fair market value of the Company’s common stock over a reasonable
period of time.
In
connection with Christopher Scott’s appointment as the Company’s CFO on March
16, 2007, the Company and Mr. Scott entered into an at-will letter Employment
Agreement containing the following material terms: (i) initial monthly salary of
$7,500, to be raised to $10,000 on the earlier of April 30, 2007 or receipt by
the Company of a qualified investment financing, and (ii) standard employee
benefits; (iii) 50,000 shares of common stock issued throughout the year ended
December 31, 2007 to a consulting Company beneficially owned by him. On March
31, 2008, the Board of Directors of the Company replaced Mr.
Scott’s existing at-will Employment Agreement with a new employment
agreement, effective February 1, 2008, and terminating on May 31, 2009, unless
extended for additional periods by mutual agreement of both parties. The new
agreement contained the following material terms: (i) initial annual salary of
$170,000, paid monthly; and (ii) standard employee benefits; (iii) limited
termination provisions; (iv) rights to Inventions provisions; and (v)
confidentiality and non-compete provisions upon termination of employment. This
employment agreement expired on May 31, 2009, and Mr. Scott currently serves the
company part-time as CFO on a month to month basis.
On July
31, 2008, the Board of Directors approved the re-election of Victor Doolan,
Joseph Emas, Christopher Nichols, Arnold Klann and Necitas Sumait. The Company
also resolved to grant each Board Chair, and the Secretary each an additional
5,000 shares of stock. The value of the common stock granted at the time of the
grant was determined to be approximately $123,000 based on the estimated fair
market value of the Company’s common stock.
On July
23, 2009, the Board of Directors approved the re-election of Victor Doolan,
Joseph Emas, Christopher Nichols, Arnold Klann and Necitas Sumait. The Company
also resolved to grant each Board Chair, and the Secretary each an additional
5,000 shares of stock. The value of the common stock granted at the time of the
grant was determined to be approximately $5,250 based on the estimated fair
market value of the Company’s common stock.
On
December 22, 2009, the Company Board of Directors accepted the resignation of
Joseph I. Emas, which had been submitted on December 21, 2009. Mr. Emas served
on the Audit Committee, Compensation Committee and as Chairman of the Nominating
Committee. Mr. Emas resignation was not a result of any disagreements
relating to the Company’s operations, policies or practices.
On July
15, 2010, the Company entered into a Directors agreement with Roger Petersen to
join the Company’s board of directors. Under the terms of the agreement Mr
Petersen will receive annual compensation in the amount of $5,000 and also
Directors receive an annual grant of 6,000 shares of the Company’s common stock.
The common shares vest immediately. The value of the common stock granted was
determined to be approximately $1,440 based on the estimated fair market value
of the Company’s common stock over a reasonable period of time.
On
December 14, 2010, Victor Doolan resigned from his position on the board of
directors of the Company. His resignation was not the result of any
disagreements with the Company on any matters relating to the Company’s
operations, policies or practices.
44
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
Technology
Agreement with Arkenol, Inc.
On March
1, 2006, the Company entered into a Technology License agreement with Arkenol,
Inc. (“Arkenol”), which the Company’s majority shareholder and other family
members hold an interest in. Arkenol has its own management and board separate
and apart from the Company. According to the terms of the agreement, the Company
was granted an exclusive, non-transferable, North American license to use and to
sub-license the Arkenol technology. The Arkenol Technology, converts
cellulose and waste materials into Ethanol and other high value chemicals. As
consideration for the grant of the license, the Company shall make a one time
payment of $1,000,000 at first project construction funding and for each plant
make the following payments: (1) royalty payment of 4% of the gross sales price
for sales by the Company or its sub licensees of all products produced from the
use of the Arkenol Technology (2) and a one-time license fee of $40.00 per 1,000
gallons of production capacity per plant. According to the terms of the
agreement, the Company made a one-time exclusivity fee prepayment of $30,000
during the period ended December 31, 2006. The agreement term is for 30 years
from the effective date.
During
2008, due to the receipt of proceeds from the Department of Energy, the Board of
Directors determined that the Company had triggered its obligation to incur the
full $1,000,000 Arkenol License fee. The Board of Directors determined that the
receipt of these proceeds constituted “First Project Construction Funding” as
established under the Arkenol technology agreement. As such, the statement of
operation reflects the one-time license fee of $1,000,000 and the unpaid balance
of $970,000 was included in license fee payable to related party on the
accompanying consolidated balance sheet as of December 31, 2008. The
prepaid fee to related party of $30,000 was eliminated as of December 31,
2008. The Company repaid the $970,000 to the related party on March 9,
2009.
Asset
Transfer Agreement with Ark Entergy, Inc.
On March
1, 2006, the Company entered into an Asset Transfer and Acquisition Agreement
with ARK Energy, Inc. (“ARK Energy”), which is owned (50%) by the Company’s CEO.
ARK Energy has its own management and board separate and apart from the Company.
Based upon the terms of the agreement, ARK Energy transferred certain rights,
assets, work-product, intellectual property and other know-how on project
opportunities that may be used to deploy the Arkenol technology (as described in
the above paragraph). In consideration, the Company has agreed to pay a
performance bonus of up to $16,000,000 when certain milestones are met. These
milestones include transferee’s project implementation which would be
demonstrated by start of the construction of a facility or completion of
financial closing whichever is earlier. The payment is based on ARK Energy’s
cost to acquire and develop 19 sites which are currently at different stages of
development.
Related
Party Line of Credit
In March
2007, the Company obtained a line of credit in the amount of $1,500,000 from its
Chairman/Chief Executive Officer and majority shareholder to provide additional
liquidity to the Company as needed. Under the terms of the note, the Company is
to repay any principal balance and interest, at 10% per annum, within 30 days of
receiving qualified investment financing of $5,000,000 or more. As of December
31, 2007, the Company repaid its outstanding balance on line of credit of
approximately $631,000 which included interest of $37,800. This line of credit
was terminated with the closing of the private placement in December 2007 and
the subsequent line of credit balance repayment.
In
February 2009, the Company obtained a line of credit in the amount of $570,000
from Arkenol Inc, its technology licensor, to provide additional liquidity to
the Company as needed. In October 2009 $175,000 was utilized from the line of
credit and in November 2009 the balance was paid in full along with
approximately $500 interest. As of March 31, 2010, there were no amount
outstanding and the line of credit was deemed cancelled as the Company did not
anticipate utilizing funds from the line of credit.
Related
Party 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 (US$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 (US$1,000,000) to the Company or one of its subsidiaries (the
“Due Date”), to be paid in cash or shares of the Company’s common stock, at the
Lender’s option.
45
Purchase
of Property and Equipment
During
the year ended December 31, 2007, the Company purchased various office furniture
and equipment from ARK Energy costing approximately $39,000. In 2008 and
2009, the Company did not purchase any items from ARK Energy.
Notes
Payable
On July
13, 2007, the Company issued several convertible notes aggregating a total of
$500,000 with eight accredited investors including $25,000 invested by the
Company’s Chief Financial Officer. In 2009 and 2008 no additional notes
were issued.
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND
MANAGEMENT
As of
February 10, 2011, our authorized capitalization was 101,000,000 shares of
capital stock, consisting of 100,000,000 shares of common stock, $0.001 par
value per share and 1,000,000 shares of preferred stock, no par value per share.
As of February 10, 2011, there were 29,583,971 shares of our common stock
outstanding, all of which were fully paid, non-assessable and entitled to vote.
Each share of our common stock entitles its holder to one vote on each matter
submitted to the stockholders.
The
following table sets forth, as of February 10, 2011, the number of shares of our
common stock owned by (i) each person who is known by us to own of record
or beneficially five percent (5%) or more of our outstanding shares,
(ii) each of our directors, (iii) each of our executive officers and
(iv) all of our directors and executive officers as a group. Unless
otherwise indicated, each of the persons listed below has sole voting and
investment power with respect to the shares of our common stock beneficially
owned.
Executive
Officers, Directors, and More than 5% Beneficial Owners
The
address of each owner who is an officer or director is c/o the Company at 31
Musick, Irvine California 92618.
Title of
Class
|
Name of Beneficial Owner (1)
|
Number of
shares
|
Percent of
Class (2)
|
|||||||
Common
|
Arnold
Klann, Chairman and Chief Executive Officer
|
14,579,909
|
(3)
|
47.67
|
%
|
|||||
Common
|
Necitas
Sumait, Senior Vice President and Director
|
1,786,750
|
(4)
|
5.93
|
%
|
|||||
Common
|
John
Cuzens, Chief Technology Officer, Senior Vice President
|
1,752,250
|
(5)
|
5.81
|
%
|
|||||
Common
|
Chris
Scott, Chief Financial Officer
|
128,750
|
(6)
|
*
|
||||||
Common
|
Chris
Nichols, Director
|
16,000
|
*
|
|||||||
Common
|
Roger
L. Petersen, Director
|
6,000
|
*
|
|||||||
Common
|
James
G Speirs
|
5,593,124
|
(7)
|
16.53
|
%
|
|||||
|
||||||||||
|
All
officers and directors as a group (6 persons)
|
18,269,659
|
56.21
|
%
|
||||||
|
All
officers, directors and 5% holders as a group (7 persons)
|
23,862,783
|
64.91
|
%
|
(1)
|
Beneficial
ownership is determined in accordance with Rule 13d-3(a) of the Exchange
Act and generally includes voting or investment power with respect to
securities.
|
(2)
|
Figures
may not add up due to rounding of
percentages.
|
(3)
|
Includes
options to purchase 1,653,409 shares of common stock vested at February
10, 2011.
|
(4)
|
Includes
options to purchase 568,750 shares of common stock vested at February 10,
2011.
|
46
(5)
|
Includes
options to purchase 568,750 shares of common stock vested at February
10, 2011.
|
(6)
|
Includes
options and warrants to purchase 128,750 shares of common stock vested at
February 10, 2011.
|
(7)
|
Includes
warrants to purchase 4,260,741 shares of common
stock.
|
SHARE
ISSUANCES/CONSULTING AGREEMENTS
On
January 1, 2007, the Company entered into an employment agreement with a former
consultant to be Vice President of Project Management. Pursuant to the terms of
this agreement, the consultant was issued 10,000 shares of the Company’s
restricted common stock.
On Feb
13, 2007, the Company entered into a consulting agreement with a corporate
technology consultant. The consultant shall review, comment, and implement as
requested by the Company on any Information Technology rollout. Under the terms
of the agreement consultant will receive 12,500 restricted shares of the
Company’s common stock at the signing of the agreement, 12,500 shares on June 1,
2007, 12,500 shares on September 1, 2007, and 12,500 shares on December 1,
2007.
In
addition, on July 7, 2007, the Company entered into a Directors agreement with
two individuals to join the Company’s board of directors. Under the terms of the
agreement these non-employee Directors will receive annual compensation in
the amount of $5,000 and all Directors receive a one time grant of 5,000 shares
of the Company’s common stock. The common shares vest immediately. The value of
the common stock granted was determined to be approximately $66,000 based
on the fair market value of the Company’s common stock of $5.07 on the date of
the grant. As of September 30, 2007, the Company expensed all of the costs
approximating $81,000 to general and administrative expenses.
On August
27, 2009, the Company entered into a six month Consulting Agreement with Mirador
Consulting, Inc. Pursuant to the Agreement, the Company will receive services in
connection with mergers and acquisitions, corporate finance, corporate finance
relations, introductions to other financial relations companies and other
financial services. As consideration for these services, the Company will
make monthly cash payments of $3,000 and has issued, or will issue, 200,000
shares of the Company’s common stock in exchange for $200. The Company valued
the shares at $0.80 based upon the closing price of the Company’s common stock
on the date of the agreement. Under the terms of the agreement, the shares did
not have any future performance requirement nor were they cancellable, thus the
Company expensed the entire value on the date of the agreement and recorded to
general and administrative expense. Under the terms of the agreement, the
Company was to issue 100,000 shares on the date of agreement and November 15,
2009. On May
24, 2010, the Company issued the remaining 100,000 shares.
47
STOCK
OPTION ISSUANCES UNDER AMENDED 2006 PLAN
On
December 20, 2007, the Company’s Board of Directors granted the following stock
options to employees and outside consultants as compensation:
DATE ISSUED:
|
OPTIONEE NAME
|
NUMBER
OF OPTIONS
|
TYPE
|
PRICE
|
EXPIRATON
DATE
|
|||||||
December
20, 2007
|
28,409
|
ISO
|
(1)
|
$
|
3.52
|
December
20, 2012
|
||||||
December
20, 2007
|
Arnold
Klann, Officer and Director
|
250,000
|
NSO
|
(2)
|
$
|
3.20
|
December
20, 2012
|
|||||
December
20, 2007
|
31,250
|
ISO
|
(1)
|
$
|
3.20
|
December
20, 2012
|
||||||
December
20, 2007
|
Necitas
Sumait, Officer and Director
|
175,000
|
NSO
|
(2)
|
$
|
3.20
|
December
20, 2012
|
|||||
December
20, 2007
|
|
31,250
|
ISO
|
(1)
|
$
|
3.20
|
December
20, 2012
|
|||||
December
20, 2007
|
John
Cuzens, Officer
|
175,000
|
NSO
|
(2)
|
$
|
3.20
|
December
20, 2012
|
|||||
December
20, 2007
|
31,250
|
ISO
|
(1)
|
$
|
3.20
|
December
20, 2012
|
||||||
December
20, 2007
|
Chris
Scott, Officer
|
175,000
|
NSO
|
(2)
|
$
|
3.20
|
December
20, 2012
|
|||||
December
20, 2007
|
31,250
|
ISO
|
(1)
|
$
|
3.20
|
December
20, 2012
|
||||||
December
20, 2007
|
Bill
Davis, Employee
|
175,000
|
NSO
|
(2)
|
$
|
3.20
|
December
20, 2012
|
|||||
December
20, 2007
|
31,250
|
ISO
|
(1)
|
$
|
3.20
|
December
20, 2012
|
||||||
December
20, 2007
|
Rigel
Stone, Employee
|
150,000
|
NSO
|
(2)
|
$
|
3.20
|
December
20, 2012
|
|||||
December
20, 2007
|
Barbi
Rios, Employee
|
5,000
|
ISO
|
(1)
|
$
|
3.20
|
December
20, 2012
|
|||||
December
20, 2007
|
Scott
Olson, Outside Consultant
|
10,000
|
NSO
|
(3)
|
$
|
3.20
|
December
20, 2012
|
|||||
December
20, 2007
|
Aleshia
Knickerbocker, Outside Consultant
|
2,500
|
NSO
|
(3)
|
$
|
3.20
|
December
20, 2012
|
|||||
December
20, 2007
|
Bill
Orr, Outside Consultant
|
10,000
|
NSO
|
(3)
|
$
|
3.20
|
December
20, 2012
|
|||||
December
20, 2007
|
Elsa
Ebro, Outside Consultant
|
5,000
|
NSO
|
(3)
|
$
|
3.20
|
December
20, 2012
|
|||||
Totals
|
1,317,159
|
(1)
|
These
Incentive Stock Options (“ISO”) vested
immediately
|
(2)
|
These
Non-Qualified Stock Options (“NSO”) vest as
follows:
|
|
a.
|
50%
vested immediately
|
|
b.
|
25%
vest on BlueFire closing remainder of funding for Lancaster
Project
|
|
c.
|
25%
vest at start of construction of Lancaster
Project
|
(3)
|
These
NSO’s vested monthly over 12 months (1/12th monthly
vesting)
|
The
Company is authorized to issue 100,000,000 shares of $0.001 par value common
stock, and 1,000,000 shares of no par value preferred stock. As of February 10,
2011, the Company had 29,583,971 shares of common stock outstanding, and no
shares of preferred stock outstanding.
COMMON
STOCK
As of
February 10, 2011, we had 29,583,971 shares of common stock outstanding.
The shares of our common stock presently outstanding, and any shares of our
common stock issues upon exercise of stock options and/or warrants, will be
fully paid and non-assessable. Each holder of common stock is entitled to one
vote for each share owned on all matters voted upon by shareholders, and a
majority vote is required for all actions to be taken by shareholders. In the
event we liquidate, dissolve or wind-up our operations, the holders of the
common stock are entitled to share equally and ratably in our assets, if any,
remaining after the payment of all our debts and liabilities and the liquidation
preference of any shares of preferred stock that may then be outstanding. The
common stock has no preemptive rights, no cumulative voting rights, and no
redemption, sinking fund, or conversion provisions. Since the holders of common
stock do not have cumulative voting rights, holders of more than 50% of the
outstanding shares can elect all of our Directors, and the holders of the
remaining shares by themselves cannot elect any Directors. Holders of common
stock are entitled to receive dividends, if and when declared by the Board of
Directors, out of funds legally available for such purpose, subject to the
dividend and liquidation rights of any preferred stock that may then be
outstanding.
Voting
Rights
Each
holder of Common Stock is entitled to one vote for each share of Common Stock
held on all matters submitted to a vote of stockholders.
48
Dividends
Subject
to preferences that may be applicable to any then-outstanding shares of
Preferred Stock, if any, and any other restrictions, holders of Common Stock are
entitled to receive ratably those dividends, if any, as may be declared from
time to time by the Company’s board of directors out of legally available funds.
The Company and its predecessors have not declared any dividends in the past.
Further, the Company does not presently contemplate that there will be any
future payment of any dividends on Common Stock.
PREFERRED
STOCK
As
of February 10, 2011, we had no shares of preferred stock outstanding. We may
issue preferred stock in one or more class or series pursuant to resolution of
the Board of Directors. The Board of Directors may determine and alter the
rights, preferences, privileges, and restrictions granted to or imposed upon any
wholly unissued series of preferred stock, and fix the number of shares and the
designation of any series of preferred stock. The Board of Directors may
increase or decrease (but not below the number of shares of such series then
outstanding) the number of shares of any wholly unissued class or series
subsequent to the issue of shares of that class or series. We have no present
plans to issue any shares of preferred stock.
WARRANTS
As of
February 10, 2011, we had warrants to purchase an aggregate of 7,315,265
shares of our common stock outstanding. The exercise prices for the warrants
range from $0.50 per share to $5.45 per share, with a weighted average exercise
price of approximately per share of $2.69. Some of
our warrants contain a provision in which the exercise price will be adjusted
for future issuances of common stock at prices lower than the current exercise
price.
OPTIONS
As of
February 10, 2011, we had options to purchase an aggregate of 3,287,159
shares of our common stock outstanding, with exercise prices for the options
ranging from $2.00 per share to $3.52 per share, with a weighted average
exercise price per share of $2.48.
ANTI-TAKEOVER
PROVISIONS
Our
Amended and Restated Articles of Incorporation and Amended and Restated Bylaws
contain provisions that may make it more difficult for a third party to acquire
or may discourage acquisition bids for us. Our Board of Directors may, without
action of our stockholders, issue authorized but unissued common stock and
preferred stock. The issuance of additional shares to certain persons allied
with our management could have the effect of making it more difficult to remove
our current management by diluting the stock ownership or voting rights of
persons seeking to cause such removal. The existence of unissued preferred stock
may enable the Board of Directors, without further action by the stockholders,
to issue such stock to persons friendly to current management or to issue such
stock with terms that could render more difficult or discourage an attempt to
obtain control of us, thereby protecting the continuity of our management. Our
shares of preferred stock could therefore be issued quickly with terms that
could delay, defer, or prevent a change in control of us, or make removal of
management more difficult.
FOR
SECURITIES ACT LIABILITIES
The
Company’s Amended and Restated Bylaws provide for indemnification of directors
and officers against certain liabilities. Officers and directors of the Company
are indemnified generally for any threatened, pending or completed action, suit
or proceeding, whether civil, criminal, administrative or investigative, except
an action by or in the right of the corporation, against expenses, including
attorneys’ fees, judgments, fines and amounts paid in settlement actually and
reasonably incurred by him in connection with the action, suit or proceeding if
he acted in good faith and in a manner which he reasonably believed to be in or
not opposed to the best interests of the corporation, and, with respect to any
criminal action or proceeding, has no reasonable cause to believe his conduct
was unlawful.
49
The
Company’s Amended and Restated Articles of Incorporation further provides the
following indemnifications:
(a) a
director of the Corporation shall not be personally liable to the Corporation or
to its shareholders for damages for breach of fiduciary duty as a director of
the Corporation or to its shareholders for damages otherwise existing for (i)
any breach of the director’s duty of loyalty to the Corporation or to its
shareholders; (ii) acts or omission not in good faith or which involve
intentional misconduct or a knowing violation of the law; (iii) acts revolving
around any unlawful distribution or contribution; or (iv) any transaction from
which the director directly or indirectly derived any improper personal benefit.
If Nevada Law is hereafter amended to eliminate or limit further liability of a
director, then, in addition to the elimination and limitation of liability
provided by the foregoing, the liability of each director shall be eliminated or
limited to the fullest extent permitted under the provisions of Nevada Law as so
amended. Any repeal or modification of the indemnification provided in these
Articles shall not adversely affect any right or protection of a director of the
Corporation under these Articles, as in effect immediately prior to such repeal
or modification, with respect to any liability that would have accrued, but for
this limitation of liability, prior to such repeal or modification.
(b) the
Corporation shall indemnify, to the fullest extent permitted by applicable law
in effect from time to time, any person, and the estate and personal
representative of any such person, against all liability and expense (including,
but not limited to attorney’s fees) incurred by reason of the fact that he is or
was a director or officer of the Corporation, he is or was serving at the
request of the Corporation as a director, officer, partner, trustee, employee,
fiduciary, or agent of, or in any similar managerial or fiduciary position of,
another domestic or foreign corporation or other individual or entity of an
employee benefit plan. The Corporation shall also indemnify any person who is
serving or has served the Corporation as a director, officer, employee,
fiduciary, or agent and that person’s estate and personal representative to the
extent and in the manner provided in any bylaw, resolution of the shareholders
or directors, contract, or otherwise, so long as such provision is legally
permissible.
Insofar
as indemnification for liabilities arising under the Securities Act may be
permitted to directors, officers and controlling persons of the Company pursuant
to the foregoing provisions, or otherwise, the Company has been advised that in
the opinion of the SEC such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by us of expenses incurred or paid by our directors, officers or
controlling persons in the successful defense of any action, suit or
proceedings) is asserted by such director, officer, or controlling person in
connection with any securities being registered, we will, unless in the opinion
of our counsel the matter has been settled by controlling precedent, submit to
court of appropriate jurisdiction the question whether such indemnification by
us is against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issues.
THE
LPC TRANSACTION
General
On
January 19, 2011, we executed a Purchase Agreement and a Registration Rights
Agreement with LPC, pursuant to which LPC has purchased 428,571 shares of our
common stock together with warrants to purchase 428,571 shares of our common
stock, which are not included in this offering, at an exercise price of $.55 per
share, for total consideration of $150,000. The warrants have a term of five
years. Under the Purchase Agreement, we also have the right to sell to LPC up to
an additional $9,850,000 of our common stock at our option as described
below.
Pursuant
to the Registration Rights Agreement, we have filed a registration statement
that includes this prospectus with the Securities and Exchange Commission (the
“SEC”) covering the shares that have been issued or may be issued to LPC under
the Purchase Agreement. We do not have the right to commence any
additional sales of our shares to LPC until the SEC has declared effective the
registration statement of which this Prospectus is a part. After the
registration statement is declared effective, over approximately 30 months,
generally we have the right to direct LPC to purchase up to an additional
$9,850,000 of our common stock in amounts up to $35,000 as often as every two
business days under certain conditions. We can also accelerate the amount of our
stock to be purchased under certain circumstances. No sales of shares
may occur below $0.15 per share. There are no trading volume
requirements or restrictions under the Purchase Agreement, and we will control
the timing and amount of any sales of our common stock to Lincoln
Park. The purchase price of the shares will be based on the market
prices of our shares immediately preceding the time of sale as computed under
the Purchase Agreement without any fixed discount. We may at any time
in our sole discretion terminate the Purchase Agreement without fee, penalty or
cost upon one business day notice. LPC may not assign or transfer its
rights and obligations under the Purchase Agreement. We issued
600,000 shares of our stock to LPC as a commitment fee for entering into the
agreement, and we may issue up to 600,000 shares pro rata as LPC purchases the
up to $9,850,000 of our stock as directed by us.
50
As of
February 10, 2011, there were 28,555,400 shares outstanding (11,873,017 shares
held by non-affiliates) excluding the 1,028,571 shares which we have already
issued and are offered by LPC pursuant to this Prospectus. 3,900,000
shares are offered hereby consisting of 428,571 shares together with 428,571
shares underlying a warrant, which are not included in this offering, that we
have sold to LPC for $150,000, 600,000 shares that we issued as a commitment fee
and 2,871,429 shares, of which 600,000 shares that we may issue pro rata as up
to the additional $9,850,000 of our stock is purchased by LPC, the remainder
representing shares we may sell to LPC under the Purchase
Agreement. If all of the 3,900,000 shares offered by LPC hereby were
issued and outstanding as of the date hereof, such shares would represent
approximately 12.02% of the total common stock outstanding or approximately
24.73% of the non-affiliates shares outstanding, as adjusted, as of the date
hereof. The number of shares ultimately offered for sale by LPC is
dependent upon the number of shares that we sell to LPC under the Purchase
Agreement. If we elect to issue more than the 3,900,000 shares offered under
this prospectus, which we have the right but not the obligation to do, we must
first register under the Securities Act any additional shares we may elect to
sell to Lincoln Park before we can sell such additional shares.
Purchase
of Shares under The Purchase Agreement
Under the
Purchase Agreement, on any business day selected by us and as often as every two
business days, we may direct LPC to purchase up to $35,000 of our common
stock. The purchase price per share is equal to the lesser
of:
|
·
|
the
lowest sale price of our common stock on the purchase date;
or
|
|
·
|
the
average of the three (3) lowest closing sale prices of our common stock
during the twelve (12) consecutive business days prior to the date of a
purchase by LPC.
|
The
purchase price will be equitably adjusted for any reorganization,
recapitalization, non-cash dividend, stock split, or other similar transaction
occurring during the business days used to compute the purchase
price.
In
addition to purchases of up to $35,000, we may direct LPC as often as every two
business days to purchase up to $40,000 of our common stock provided on the
purchase date our share price is not below $0.50 per share. We may
increase this amount: up to $100,000 of our common stock provided on
the purchase date our share price is not below $0.75 per share; up to $200,000
of our common stock provided on the purchase date our share price is not below
$1.25 per share; up to $500,000 of our common stock provided on the purchase
date our share price is not below $1.75 per share. The price at which
LPC would purchase these accelerated amounts of our stock will be the lesser of
(i) the lowest sale price of our common stock on the purchase date and (ii) the
lowest purchase price (as described above) during the previous ten (10) business
days prior to the purchase date
Minimum
Purchase Price
Under the
Purchase Agreement, we have set a minimum purchase price (“floor price”) of
$0.15. However, LPC shall not have the right nor the obligation to
purchase any shares of our common stock in the event that the purchase price
would be less than the floor price. Specifically, LPC shall not have the right
or the obligation to purchase shares of our common stock on any business day
that the market price of our common stock is below $0.15.
Events
of Default
The
following events constitute events of default under the Purchase
Agreement:
|
·
|
the
effectiveness of the registration statement of which this prospectus is a
part of lapses for any reason (including, without limitation, the issuance
of a stop order) or is unavailable to LPC for sale of our common stock
offered hereby and such lapse or unavailability continues for a period of
ten (10) consecutive business days or for more than an aggregate of thirty
(30) business days in any 365-day
period;
|
51
|
·
|
suspension
by our principal market of our common stock from trading for a period of
three (3) consecutive business
days;
|
|
·
|
the
de-listing of our common stock from our principal market provided our
common stock is not immediately thereafter trading on the, the Nasdaq
Capital Market, the Nasdaq Global Market, the Nasdaq Global Select Market,
the New York Stock Exchange or the NYSE
AMEX;
|
|
·
|
the
transfer agent’s failure for five (5) business days to issue to LPC shares
of our common stock which LPC is entitled to under the Purchase
Agreement;
|
|
·
|
any
material breach of the representations or warranties or covenants
contained in the Purchase Agreement or any related agreements which has or
which could have a material adverse effect on us subject to a cure period
of five (5) business days; or
|
|
·
|
any
participation or threatened participation in insolvency or bankruptcy
proceedings by or against us.
|
Our
Termination Rights
We have
the unconditional right at any time for any reason to give notice to LPC
terminating the Purchase Agreement without any cost to us.
No
Short-Selling or Hedging by LPC
LPC has
agreed that neither it nor any of its affiliates shall engage in any direct or
indirect short-selling or hedging of our common stock during any time prior to
the termination of the common stock Purchase Agreement.
Effect
of Performance of the Purchase Agreement on Our Stockholders
All
3,900,000 shares registered in this offering are expected to be freely
tradable. It is anticipated that shares registered in this offering
will be sold over a period of up to 30 months from the date of this
prospectus. The sale by LPC of a significant amount of shares
registered in this offering at any given time could cause the market price of
our common stock to decline and to be highly volatile. LPC may
ultimately purchase all, some or none of the 3,900,000 shares of common stock
not yet issued but registered in this offering. After it has acquired
such shares, it may sell all, some or none of such shares. Therefore, sales to
LPC by us under the agreement may result in substantial dilution to the
interests of other holders of our common stock. However, we have the
right to control the timing and amount of any sales of our shares to LPC and the
agreement may be terminated by us at any time at our discretion without any cost
to us.
In
connection with entering into the agreement, we authorized the sale to LPC of up
to 20,000,000 shares of our common stock exclusive of the 600,000 commitment
shares issued, the 600,000 commitment shares that may be issued and the 428,571
shares underlying the warrant and that are not part of this
offering. We have the right to terminate the agreement without any
payment or liability to LPC at any time, including in the event that all
$10,000,000 is sold to LPC under the Purchase Agreement. The number of shares
ultimately offered for sale by LPC under this prospectus is dependent upon the
number of shares purchased by LPC under the agreement. The following
table sets forth the amount of proceeds we would receive from LPC from the sale
of shares that are registered in this offering at varying purchase
prices:
Assumed Average Purchase Price |
Number
of Registered
Shares to be Issued if Full Purchase (1) (2) |
Percentage
of
Outstanding Shares After Giving Effect to the Issuance to LPC (3) |
Proceeds
from the Sale of
Registered Shares to
LPC Under the
LPC
Purchase Agreement
|
|||||||||||
$ |
0.15
|
(4) | 2,871,429 | 8.84 | % | $ | 426,815 | |||||||
$ |
0.46
|
(5) | 2,871,429 | 8.84 | % | $ | 1,284,855 | |||||||
$ |
0.50
|
2,871,429 | 8.84 | % | $ | 1,393,280 | ||||||||
$ |
1.00
|
2,871,429 | 8.84 | % | $ | 2,706,563 | ||||||||
$ |
2.00
|
2,871,429 | 8.84 | % | $ | 5,119,199 |
52
(1)
|
Although
the LPC Purchase Agreement provides that we may sell up to $10,000,000 of
our common stock to LPC, we are only registering 2,871,429 shares to be
purchased thereunder, which may or may not cover all such shares purchased
by LPC under the LPC Purchase Agreement, depending on the purchase price
per share. As a result, we have included in this column only
those shares which are registered in this
offering.
|
(2)
|
The
number of registered shares to be includes a number of shares to be
purchased at the applicable price plus the applicable additional
commitment shares issuable to LPC (but not the initial commitment shares),
and no proceeds will be attributable to such commitment
shares.
|
(3)
|
The
denominator is based on 32,455,400 shares outstanding as of February 10,
2011, which includes the 428,571 shares previously issued to LPC, which
shares are a part of this offering, the 600,000 initial commitment shares
and the number of shares set forth in the adjacent column which includes
the additional commitment shares issued pro rata as up to $9,850,000 of
our stock is purchased by LPC. The numerator is based on the
number of shares issuable under the Purchase Agreement at the
corresponding assumed purchase price set forth in the adjacent
column. The number of shares in such column does not include
shares that may be issued to LPC which are not registered in this
offering.
|
(4)
|
Under
the LPC Purchase Agreement, we may not sell and LPC may not purchase any
shares in the event the purchase price of such shares is below
$0.15.
|
(5)
|
The
closing sale price of our shares on February 10,
2011.
|
The
following table presents information regarding the selling
stockholder. Neither the selling stockholder nor any of its
affiliates has held a position or office, or had any other material
relationship, with us. The selling stockholder may elect to sell
none, some or all of the shares offered under this prospectus and we cannot
estimate the number of shares of common stock that the selling stockholder will
beneficially own after termination of sales under this
prospectus. For purposes of the table below, we have assumed that,
after completion of the offering, none of the shares covered by this prospectus
will be held by the selling stockholder.
Selling
Stockholder |
Shares
Beneficially Owned Before Offering |
Percentage of
Outstanding Shares Beneficially Owned Before Offering |
Shares to be Sold in the
Offering Assuming The Company Issues The Maximum Number of Shares Under the Purchase Agreement |
Percentage of
Outstanding Shares Beneficially Owned After Offering |
||||||||||||
Lincoln
Park Capital Fund, LLC (1)
|
1,028,571 | (2) | 3.48 | % (2) | 3,900,000 | * |
*less
than 1%
(1)
|
Josh
Scheinfeld and Jonathan Cope, the principals of LPC, are deemed to be
beneficial owners of all of the shares of common stock owned by LPC.
Messrs. Scheinfeld and Cope have shared voting and disposition power over
the shares being offered under this
Prospectus.
|
53
(2)
|
1,028,571
shares of our common stock have been previously acquired by LPC under the
Purchase Agreement, consisting of 428,571 shares purchased by LPC and
600,000 shares we issued to LPC as a commitment fee. We may at
our discretion elect to issue to LPC up to an additional 2,871,429 shares
of our common stock in this offering under the Purchase Agreement and
428,571 shares underlying a warrant are not included in this offering such
shares are not included in determining the percentage of shares
beneficially owned before the
offering.
|
The
common stock offered by this prospectus is being offered by Lincoln Park Capital
Fund, LLC, the selling stockholder. The common stock
may be sold or distributed from time to time by the selling stockholder directly
to one or more purchasers or through brokers, dealers, or underwriters who may
act solely as agents at market prices prevailing at the time of sale, at prices
related to the prevailing market prices, at negotiated prices, or at fixed
prices, which may be changed. The sale of the common stock offered by
this Prospectus may be effected in one or more of the following
methods:
|
·
|
ordinary
brokers’ transactions;
|
|
·
|
transactions
involving cross or block trades;
|
|
·
|
through
brokers, dealers, or underwriters who may act solely as
agents;
|
|
·
|
“at
the market” into an existing market for the common
stock;
|
|
·
|
in
other ways not involving market makers or established business markets,
including direct sales to purchasers or sales effected through
agents;
|
|
·
|
in
privately negotiated transactions;
or
|
|
·
|
any
combination of the foregoing.
|
In order
to comply with the securities laws of certain states, if applicable, the shares
may be sold only through registered or licensed brokers or
dealers. In addition, in certain states, the shares may not be sold
unless they have been registered or qualified for sale in the state or an
exemption from the registration or qualification requirement is available and
complied with.
Brokers,
dealers, underwriters, or agents participating in the distribution of the shares
as agents may receive compensation in the form of commissions, discounts, or
concessions from the selling stockholder and/or purchasers of the common stock
for whom the broker-dealers may act as agent. The compensation paid
to a particular broker-dealer may be less than or in excess of customary
commissions.
LPC is an
“underwriter” within the meaning of the Securities Act.
Neither
we nor LPC can presently estimate the amount of compensation that any agent will
receive. We know of no existing arrangements between LPC, any other
shareholder, broker, dealer, underwriter, or agent relating to the sale or
distribution of the shares offered by this Prospectus. At the time a
particular offer of shares is made, a prospectus supplement, if required, will
be distributed that will set forth the names of any agents, underwriters, or
dealers and any compensation from the selling stockholder, and any other
required information.
We will
pay all of the expenses incident to the registration, offering, and sale of the
shares to the public other than commissions or discounts of underwriters,
broker-dealers, or agents. We have also agreed to indemnify LPC and
related persons against specified liabilities, including liabilities under the
Securities Act.
54
Insofar
as indemnification for liabilities arising under the Securities Act may be
permitted to our directors, officers, and controlling persons, we have been
advised that in the opinion of the SEC this indemnification is against public
policy as expressed in the Securities Act and is therefore,
unenforceable.
LPC and
its affiliates have agreed not to engage in any direct or indirect short selling
or hedging of our common stock during the term of the Purchase
Agreement.
We have
advised LPC that while it is engaged in a distribution of the shares included in
this Prospectus it is required to comply with Regulation M promulgated under the
Securities Exchange Act of 1934, as amended. With certain exceptions,
Regulation M precludes the selling stockholder, any affiliated purchasers, and
any broker-dealer or other person who participates in the distribution from
bidding for or purchasing, or attempting to induce any person to bid for or
purchase any security which is the subject of the distribution until the entire
distribution is complete. Regulation M also prohibits any bids or
purchases made in order to stabilize the price of a security in connection with
the distribution of that security. All of the foregoing may affect
the marketability of the shares offered hereby this Prospectus.
This
offering will terminate on the date that all shares offered by this Prospectus
have been sold by LPC.
On
September 14, 2006, we engaged McKennon, Wilson & Morgan LLP (“Wilson
Morgan”) as our independent accountants. There have been no disagreements
on accounting and financial disclosures with our accountants.
In
connection with the audits of the fiscal years ended December 31, 2008 and 2007,
and through May 5, 2009, there were no disagreements with McKennon Wilson &
Morgan LLP on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedures, which disagreements if
not resolved to their satisfaction would have caused them to make reference in
connection with their opinion to the subject matter of the disagreement.
McKennon Wilson & Morgan LLP’s reports on the Company’s consolidated
financial statements as of and for the years ended December 31, 2008 and 2007
did not contain any adverse opinion or disclaimer of opinion, nor were they
qualified or modified as to uncertainty, audit scope, or accounting
principles.
In
connection with the reorganization of Wilson Morgan certain of its audit
partners resigned from Wilson Morgan and have joined DBBMcKennon (“DBB”). On May
5, 2009, Wilson Morgan notified us of their resignation as our independently
registered public accountants.
As a
result of the above, our Audit Committee, and our Board of Directors, on May 5,
2009, approved the resignation of the Wilson Morgan effective May 5, 2009, and
the engagement of DBB as the Company’s independent registered public accounting
firm for the fiscal year ending December 31, 2009 effective May 5,
2009.
The
validity of the shares of our common stock offered by the Selling Stockholders
has been passed upon by the law firm of Lucosky Brookman LLP.
Our
consolidated financial statements included in this prospectus as of December 31,
2009 and for year then ended and for the period from March 28, 2006 (Inception)
through December 31, 2009 (as indicated in their reports) have been audited by
DBB, an independent registered public accounting firm and are included herein in
reliance upon the authority as experts in giving said reports.
Our
consolidated financial statements included in this prospectus as of December 31,
2008, and for the year then ended (as indicated in their reports) have been
audited by WilsonMorgan LLP (formerly McKennon, Wilson & Morgan LLP),
Irvine, California, an independent registered public accounting firm and are
included herein in reliance upon the authority as experts in giving said
reports.
55
We have
filed with the SEC a registration statement on Form S-1 under the Securities Act
for the common stock offered by this prospectus. This prospectus does not
contain all of the information in the registration statement and the exhibits
and schedule that were filed with the registration statement. For further
information with respect to our Common Stock and us, we refer you to the
registration statement and the exhibits that were filed with the
registration statement. Statements contained in this prospectus about the
contents of any contract or any other document that is filed as an exhibit to
the registration statement are not necessarily complete, and we refer you to the
full text of the contract or other document filed as an exhibit to the
registration statement. A copy of the registration statement and the exhibits
that were filed with the registration statement may be inspected without charge
at the public reference facilities maintained by the SEC, 100 F Street N.E.,
Washington, D.C. 20549, and copies of all or any part of the registration
statement may be obtained from the SEC upon payment of the prescribed fee or for
free at the SEC’s website, www.sec.gov. Information regarding the operation of
the Public Reference Room may be obtained by calling the SEC at 1(800)
SEC-0330. The SEC maintains a web site that contains reports, proxy and
information statements, and other information regarding registrants that file
electronically with the SEC. The address of the site is http://www.sec.gov. We
are subject to the information and periodic reporting requirements of the
Exchange Act and, in accordance with the requirements of the Exchange Act, file
periodic reports, proxy statements, and other information with the SEC. These
periodic reports, proxy statements, and other information are available for
inspection and copying at the regional offices, public reference facilities and
web site of the SEC referred to above.
56
INDEX TO
SEPTEMBER 30, 2010 FINANCIALS
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE QUARTER ENDED SEPTEMBER 30, 2010
Consolidated
Balance Sheets
|
F-1
|
Consolidated
Statements of Operations
|
F-2
|
Consolidated
Statements of Cash Flows
|
F-3
|
Notes
to Consolidated Financial Statements
|
F-4
|
BLUEFIRE
RENEWABLES, INC. AND SUBSIDIARIES
(FORMERLY
BLUEFIRE ETHANOL FUELS, INC.)
(A
DEVELOPMENT-STAGE COMPANY)
CONSOLIDATED
BALANCE SHEETS
|
|
September 30,
2010
|
|
|
December 31,
2009
|
|
||
|
|
(unaudited)
|
|
|
(audited)
|
|
||
ASSETS
|
||||||||
Current
assets:
|
||||||||
Cash
and cash equivalents
|
$
|
517,716
|
$
|
2,844,711
|
||||
Department
of Energy grant receivable
|
148,181
|
207,380
|
||||||
Department
of Energy - unbilled receivables
|
261,369
|
-
|
||||||
Prepaid
expenses
|
39,176
|
50,790
|
||||||
Total
current assets
|
966,442
|
3,102,881
|
||||||
Loan
guarantee program costs
|
498,211
|
150,000
|
||||||
Property,
plant and equipment, net of accumulated depreciation of $62,813 and
$44,130, respectively
|
882,691
|
167,995
|
||||||
Total
assets
|
$
|
2,347,344
|
$
|
3,420,876
|
||||
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
||||||||
Current
liabilities:
|
||||||||
Accounts
payable
|
$
|
1,040,374
|
$
|
335,547
|
||||
Accrued
liabilities
|
127,968
|
245,394
|
||||||
Total
current liabilities
|
1,168,342
|
580,941
|
||||||
Long
term stock liability
|
925,007
|
2,274,393
|
||||||
Total
liabilities
|
2,093,349
|
2,855,334
|
||||||
Stockholders’
equity:
|
||||||||
Preferred
stock, no par value, 1,000,000 shares authorized; none issued and
outstanding
|
-
|
-
|
||||||
Common
stock, $0.001 par value; 100,000,000 shares authorized; 28,544,965
and 28,296,965 shares issued; and 28,512,793 and 28,264,793
outstanding, as of September 30, 2010 and December 31, 2009,
respectively
|
28,544
|
28,296
|
||||||
Additional
paid-in capital
|
14,073,993
|
14,033,792
|
||||||
Treasury
stock at cost, 32,172 shares at September 30, 2010 and December 31,
2009
|
(101,581
|
)
|
(101,581
|
)
|
||||
Deficit
accumulated during the development stage
|
(13,746,961
|
)
|
(13,394,965
|
)
|
||||
Total
stockholders’ equity
|
253,995
|
565,542
|
||||||
Total
liabilities and stockholders’ equity
|
$
|
2,347,344
|
$
|
3,420,876
|
See
accompanying notes to consolidated financial statements
F-1
BLUEFIRE
RENEWABLES, INC. AND SUBSIDIARIES
(FORMERLY
BLUEFIRE ETHANOL FUELS, INC.)
(A
DEVELOPMENT-STAGE COMPANY)
CONSOLIDATED
STATEMENTS OF OPERATIONS
(Unaudited)
|
|
For the Nine
Months
ended
September 30,
|
|
|
For the Nine
Months
ended
September 30,
|
|
|
From March
28, 2006
(inception)
Through
September 30,
|
|
|||
|
2010
|
|
|
2009
|
|
|
2010
|
|
||||
Revenues:
|
||||||||||||
Consulting
fees
|
$
|
47,196
|
$
|
14,570
|
$
|
115,766
|
||||||
Department
of energy grant
|
491,209
|
4,091,263
|
5,865,860
|
|||||||||
Department
of energy - unbilled grant Revenue
|
-
|
-
|
-
|
|||||||||
Total
revenues
|
538,405
|
4,105,833
|
5,981,126
|
|||||||||
Operating
expenses:
|
||||||||||||
Project
development
|
956,956
|
947,192
|
18,196,158
|
|||||||||
General
and administrative
|
1,283,935
|
1,799,498
|
14,318,565
|
|||||||||
Related
party license fee
|
-
|
-
|
1,000,000
|
|||||||||
Total
operating expenses
|
2,240,891
|
2,746,690
|
33,514,723
|
|||||||||
Operating
income (loss)
|
(1,702,486
|
)
|
1,359,143
|
(27,533,597
|
)
|
|||||||
Other
income and (expense):
|
||||||||||||
Gain
(loss) from change in fair value of warrant liability
|
1,349,386
|
(1,816,561
|
)
|
1,916,847
|
||||||||
Other
income
|
1,104
|
7,364
|
256,277
|
|||||||||
Financing
related charge
|
-
|
-
|
(211,660
|
)
|
||||||||
Amortization
of debt discount
|
-
|
-
|
(676,982
|
)
|
||||||||
Interest
expense
|
-
|
-
|
(56,097
|
)
|
||||||||
Related
party interest expense
|
-
|
(173
|
)
|
(64,966
|
)
|
|||||||
Loss
on extinguishment of debt
|
-
|
-
|
(2,818,370
|
)
|
||||||||
Loss
on the retirements of warrants
|
-
|
-
|
(146,718
|
)
|
||||||||
Total
other income and (expense)
|
1,350,490
|
(1,809,370
|
)
|
(1,801,669
|
)
|
|||||||
Income
(loss) before income taxes
|
(351,996
|
)
|
(450,227
|
)
|
(29,335,266
|
)
|
||||||
Provision
for income taxes
|
-
|
-
|
83,147
|
|||||||||
Net
income (loss)
|
$
|
(351,996
|
)
|
$
|
(450,227
|
)
|
$
|
(29,418,413
|
)
|
|||
Basic
and diluted income (loss) per common share
|
$
|
(0.01
|
)
|
$
|
(0.02
|
)
|
||||||
Weighted
average common shares outstanding, basic and diluted
|
28,381,276
|
28,116,271
|
|
See
accompanying notes to consolidated financial statements
F-2
BLUEFIRE
RENEWABLES, INC. AND SUBSIDIARIES
(FORMERLY
BLUEFIRE ETHANOL FUELS, INC.)
(A
DEVELOPMENT-STAGE COMPANY)
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
For the Nine
Months Ended
September 30,
|
|
|
For the Nine
Months Ended
September 30,
|
|
|
From March 28,
2006 (inception)
Through
September 30,
|
|
|||
|
2010
|
|
|
2009
|
|
|
2010
|
|
||||
Cash
flows from operating activities:
|
||||||||||||
Net
loss
|
$
|
(351,996
|
)
|
$
|
(450,227
|
)
|
$
|
(29,418,413
|
)
|
|||
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
||||||||||||
Founders’
shares
|
-
|
-
|
17,000
|
|||||||||
Costs
associated with purchase of Sucre Agricultural Corp
|
-
|
-
|
(3,550
|
)
|
||||||||
Interest
expense on beneficial conversion feature of convertible
notes
|
-
|
-
|
676,983
|
|||||||||
Loss
on extinguishment of convertible debt
|
-
|
-
|
2,718,370
|
|||||||||
Loss
on retirement of warrants
|
-
|
146,718
|
||||||||||
Loss
(gain) from change in the fair value of warrant
liability
|
(1,349,386
|
)
|
1,816,561
|
(1,916,847
|
)
|
|||||||
Common
stock issued for interest on Convertible notes
|
-
|
-
|
55,585
|
|||||||||
Discount
on sale of stock associated with private placement
|
-
|
-
|
211,660
|
|||||||||
Share-based
compensation
|
40,449
|
221,804
|
11,378,578
|
|||||||||
Depreciation
|
19,036
|
17,367
|
63,170
|
|||||||||
Changes
in operating assets and liabilities:
|
-
|
|||||||||||
Accounts
receivable
|
-
|
-
|
-
|
|||||||||
Department
of Energy grant receivable
|
59,199
|
(3,287,929
|
)
|
(148,181
|
)
|
|||||||
Prepaid
expenses and other current assets
|
11,614
|
1,144
|
(39,178
|
)
|
||||||||
Accounts
payable
|
343,454
|
(398,115
|
)
|
678,999
|
||||||||
Accrued
liabilities
|
(117,426
|
)
|
(22,293
|
)
|
127,970
|
|||||||
License
fee payable to related party
|
-
|
(970,000
|
)
|
-
|
||||||||
Net
cash used in operating activities
|
(1,345,056
|
)
|
(3,071,688
|
)
|
(15,451,136
|
)
|
||||||
Cash
flows from investing activities:
|
||||||||||||
Acquisition
of property and equipment
|
633,728
|
-
|
845,856
|
|||||||||
Net
cash used in investing activities
|
(633,728
|
)
|
-
|
(845,856
|
)
|
|||||||
Cash
flows from financing activities:
|
||||||||||||
Repurchases
of common stock held in treasury
|
-
|
-
|
(101,581
|
)
|
||||||||
Cash
received in acquisition of Sucre Agricultural Corp.
|
-
|
-
|
690,000
|
|||||||||
Proceeds
from sale of stock through private placement
|
-
|
-
|
544,500
|
|||||||||
Proceeds
from exercise of stock options
|
-
|
-
|
40,000
|
|||||||||
Proceeds
from issuance of common stock
|
-
|
-
|
14,360,000
|
|||||||||
Proceeds
from convertible notes payable
|
-
|
-
|
2,500,000
|
|||||||||
Repayment
of notes payable
|
-
|
-
|
(500,000
|
)
|
||||||||
Proceeds
from related party notes payable
|
-
|
175,000
|
116,000
|
|||||||||
Repayment
of related party notes payable
|
-
|
-
|
(116,000
|
)
|
||||||||
Loan
guarantee program costs
|
(348,211
|
)
|
-
|
(498,211
|
)
|
|||||||
Retirement
of Aurarian warrants
|
-
|
-
|
(220,000
|
)
|
||||||||
Net
cash provided by (used in) financing activities
|
(348,211
|
)
|
175,000
|
16,814,708
|
||||||||
Net
decrease in cash and cash equivalents
|
(2,326,995
|
)
|
(2,896,688
|
)
|
517,716
|
|||||||
Cash
and cash equivalents beginning of period
|
2,844,711
|
2,999,599
|
-
|
|||||||||
Cash
and cash equivalents end of period
|
$
|
517,716
|
$
|
102,911
|
$
|
517,716
|
||||||
Supplemental
disclosures of cash flow information
|
||||||||||||
Cash
paid during the period for:
|
||||||||||||
Interest
|
$
|
-
|
$
|
$
|
56,893
|
|||||||
Income
taxes
|
$
|
-
|
$
|
14,500
|
$
|
18,096
|
||||||
Supplemental
schedule of non-cash investing and financing activities:
|
||||||||||||
Conversion
of senior secured convertible notes payable
|
$
|
-
|
$
|
-
|
$
|
2,000,000
|
||||||
Interest
converted to common stock
|
$
|
-
|
$
|
-
|
$
|
55,569
|
||||||
Fair
Value of warrants issued to placement agents
|
$
|
-
|
$
|
-
|
$
|
725,591
|
||||||
Accounts
payable, net of reimbursement, included in
construction-in-progress
|
$
|
100,004
|
$
|
-
|
$
|
100,004
|
See
accompanying notes to consolidated financial statements
F-3
BLUEFIRE
RENEWABLES, INC. AND SUBSIDIARIES
(FORMERLY
BLUEFIRE ETHANOL FUELS, INC)
(A
DEVELOPMENT-STAGE COMPANY)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1 - ORGANIZATION AND BUSINESS
BlueFire
Ethanol, Inc., a wholly-owned subsidiary of BlueFire Renewables, Inc. (formerly
BlueFire Ethanol Fuels, Inc.) (collectively “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
The
Company is a development-stage company which has incurred losses since
inception. Management has funded operations primarily through proceeds received
in connection with the 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
commencing in 2008 through the current date. 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
September 30, 2010, the Company has a negative working capital of approximately
$202,000. Management has estimated that operating expenses for the next twelve
months will be approximately $1,800,000, 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 2010, 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. The Company expects the
current resources available to them will only be sufficient for a period of
approximately one month unless significant cost cutting measures are
taken. Management has determined that these 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 proposed Lancaster plant is currently shovel ready 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 uses in prior years.
F-4
As of September 30, 2010 the Company’s proposed plant in Fulton, Mississippi was awaiting its storm water pollution prevention plan approval. This is one of the last permits to secure before ground can be broken on the Fulton project.
We
estimate the total construction cost of the bio-refineries to be in the range of
approximately $300 million for the DOE plant in Fulton, Mississippi and
approximately $100 million to $125 million for the Lancaster, California plant.
These cost approximations do not reflect any decrease in raw materials or any
savings in construction cost that might be realized by the weak world economic
environment. The Company is currently in discussions with potential sources of
financing for these facilities but no definitive agreements are in
place.
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, 2009. The
results of operations for the nine months ended September 30, 2010, are not
necessarily indicative of the results that may be expected for the full
year.
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.
Loan
Guarantee Program Costs
We
submitted an application for a $250 million dollar loan guarantee for our
planned biorefinery in Mississippi. The application provides federal loan
guarantees for projects that employ innovative energy efficiency, renewable
energy, and advanced transmission and distribution technologies, was submitted
on February 15, 2010, and serves as a phase one application in a two phase
approval process. If approved, the loan guarantee will secure a substantial
portion of the total costs to construct the facility, although there is no
assurance that the loan guarantee will be approved. We are in the detailed
engineering phase for this project and expect to have all necessary permits for
this facility by the end of the year, putting the Company on a path to commence
construction shortly after the remainder of financing is secured. We estimate
the total cost including contingencies to be in the range of approximately $300
million which includes an approximately $100 million biomass power plant as part
of the facility.
We
incurred costs directly related to the financing arrangement for this project of
approximately $500,000. Such costs are capitalized and will be
amortized to interest expense when, and if, the financing is
completed. In the event the financing is unsuccessful, we will
re-characterize these costs to expense.
Project
Development
Project
development costs are either expensed or capitalized. The costs of materials and
equipment that will be acquired or constructed for project development
activities, and that have alternative future uses, both in project development,
marketing or sales, will be classified as property and equipment and depreciated
over their estimated useful lives. To date, project development costs include
the research and development expenses related to the Company's future
cellulose-to-ethanol production facilities. During the three and
nine months ended September 30, 2010, and for the period from March
28, 2006 (Inception) to September 30, 2010, research and development costs
included in Project Development expense were approximately $241,000,
$957,000 and $18,196,000, respectively.
F-5
Fair
Value of Financial Instruments
On
January 1, 2009, the Company adopted Accounting Standards Codification “ASC” 820
(“ASC 820”) Fair Value Measurements and Disclosures. The Company did not
record an adjustment to retained earnings as a result of the adoption of the
guidance for fair value measurements, and the adoption did not have a material
effect on the Company’s results of operations.
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.
As of
September 30, 2010, the Company’s warrant liability is considered a level 2
item, see Note 4.
Income (loss) per Common Share
The
Company presents basic income (loss) per share (“EPS”) and diluted EPS on the
face of the consolidated statement of operations. Basic income (loss) per share
is computed as net income (loss) divided by the weighted average number of
common shares outstanding for the period. Diluted EPS reflects the potential
dilution that could occur from common shares issuable through stock options,
warrants, and other convertible securities. As of September 30, 2010, the
Company had 3,287,159 options and 6,386,694 warrants outstanding, 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 as dilutive under the treasury-stock method of accounting. As
of September 30, 2009, the Company had approximately 3,287,000 options and
7,487,000 warrants to purchase shares of common stock that were excluded from
the calculation of diluted loss per share as their effects would have been
anti-dilutive due to the loss.
Share-Based
Payments
The
Company accounts for stock options issued to employees and consultants under ASC
718 Compensation – Stock
Compensation. Under ASC 718, share-based compensation cost to employees
is measured at the grant date, based on the estimated fair value of the award,
and is recognized as expense over the employee's requisite vesting
period.
The
Company measures compensation expense for its non-employee stock-based
compensation under ASC 505 Equity. The fair value of the
option issued or committed to be issued is used to measure the transaction, as
this is more reliable than the fair value of the services received. The fair
value is measured at the value of the Company's common stock on the date that
the commitment for performance by the counterparty has been reached or the
counterparty's performance is complete. The fair value of the equity instrument
is charged directly to stock-based compensation expense and credited to
additional paid-in capital.
F-6
Property,
Plant and Equipment
Property,
plant and equipment, is recorded at cost. Depreciation expense is computed using
the straight–line method over the estimated useful lives of the assets,
generally three to seven years, except for leasehold improvements which are
amortized over the lease term. Depreciation for
construction-in-progress does not commence until the asset is ready for
use. Maintenance and repairs are charged to expense as
incurred.
Costs
incurred relating to construction-in-progress for plant facilities are
capitalized when those costs are for the active development of the
facility. Those costs include interest when such costs qualify for
capitalization. Interest capitalization ceases when the construction
of a facility is complete and available for use. During the nine
months ended September 30, 2010, and 2009, the Company did not capitalize any
interest costs related to construction-in-progress. When capitalized
costs qualify for reimbursement under the DOE grant, the reimbursement on those
costs reduces the value of construction-in-progress.
As of
September 30, 2010, the Company had net construction-in-progress of $728,224
included in property, plant and equipment on the accompanying balance
sheet.
Recent
Accounting Pronouncements
In
January 2010, the Financial Accounting Standards Board (“FASB”) amended
authoritative guidance for improving disclosures about fair-value measurements.
The updated guidance requires new disclosures about recurring or nonrecurring
fair-value measurements including significant transfers into and out of Level 1
and Level 2 fair-value measurements and information on purchases, sales,
issuances, and settlements on a gross basis in the reconciliation of Level 3
fair-value measurements. The guidance also clarified existing fair-value
measurement disclosure guidance about the level of disaggregation, inputs, and
valuation techniques. The guidance became effective for interim and annual
reporting periods beginning on or after December 15, 2009, with an
exception for the disclosures of purchases, sales, issuances and settlements on
the roll-forward of activity in Level 3 fair-value measurements. Those
disclosures will be effective for fiscal years beginning after December 15,
2010 and for interim periods within those fiscal years. The Company does not
expect that the adoption of this guidance will have a material impact on the
consolidated financial statements.
NOTE
3 – DEVELOPMENT CONTRACTS
Department
of Energy Awards 1 and 2
In
February 2007, the Company was awarded a grant for up to $40 million from the
U.S. Department of Energy’s (“DOE”) cellulosic ethanol grant program to develop
a solid waste biorefinery project at a landfill in Southern California, which is
now located in Fulton, Mississippi. 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 Award 2 to a total of $81 million for Phase II of its DOE
Biorefinery project. This is in addition to a renegotiated Phase I funding
for development of the DOE Biorefinery of approximately $7 million out of
the previously announced $10 million total. This brings the total eligible
funds for DOE Biorefinery to approximately $88 million. The Company has
completed negotiations with the DOE for Phase II of its DOE Biorefinery project
and the funds have been obligated.
To date,
the Company has received reimbursements of approximately $7,201,000 under these
awards.
F-7
In 2009
and 2010, our operations have been financed to a large degree through funding
provided by the U.S Department of Energy. 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 1and 2 consist of a total reimbursable
amount of $87,560,000, and through September 30, 2010, we have an unreimbursed
amount of approximately $80,359,000 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 U.S. Department of Energy.
NOTE
4 - OUTSTANDING WARRANT LIABILITY
Effective
January 1, 2009, we adopted the provisions of ASC 815 Derivatives and Hedging. ASC
815 applies to any freestanding financial instruments or embedded features that
have the characteristics of a derivative and to any freestanding financial
instruments that are potentially settled in an entity’s own common stock. As a
result of adopting ASC 815, 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
have an exercise price of $2.90; 5,962,563 warrants expire in December 2012,
426,800 expired August 2010, and 673,200 were cancelled in October 2009.
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.
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. Prior to October 19, 2009, the warrants were
previously accounted for as a derivative liability and marked to their fair
value at each reporting period in 2009. The Company valued these warrants the
day immediately preceding the cancellation date which indicated a gain on the
change in fair value of $208,562 and a remaining fair value of $73,282. Upon
cancellation the remaining value was extinguished for payment of $220,000 in
cash, resulting in a loss on extinguishment of $146,718. In connection with the
remaining 326,800 warrants that expired in August 2010, and the 5,962,963
warrants set to expire in December 2012, the Company recognized a loss of
approximately $847,000 and a gain of approximately
$1,349,000 from the change in fair value of these warrants for the
three and nine months ended September 30, 2010, respectively.
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, all future changes in the fair value of these warrants
will be recognized currently in earnings until such time as the warrants are
exercised or expire. These common stock purchase warrants do not trade in an
active securities market, and as such, we estimate the fair value of these
warrants quarterly using the Black-Scholes option pricing model using the
following assumptions:
|
|
September 30,
|
|
|
December 31,
|
|
||
|
|
2010
|
|
|
2009
|
|
||
Annual
dividend yield
|
-
|
-
|
||||||
Expected
life (years) of August 2007 issuance
|
N/A
|
0.64
|
||||||
Expected
life (years) of December 2007 issuance
|
2.25
|
3.00
|
||||||
Risk-free
interest rate
|
0.61
|
%
|
2.69
|
%
|
||||
Expected
volatility of August 2007 issuance
|
N/A
|
101
|
%
|
|||||
Expected
volatility of December 2007 issuance
|
122
|
%
|
95
|
%
|
F-8
Expected
volatility is based primarily on historical volatility. Historical
volatility for the August 2007 and December 2007 issuances were computed using
weekly pricing observations for recent periods that correspond to the expected
life of the warrants. Management 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
5 - COMMITMENTS AND CONTINGENCIES
Professional
Service Agreements
As of
September 30, 2010, the Company has contracts with several engineering firms.
During the nine months ended September 30, 2010, the Company paid approximately
$1,905,000 to various engineering firms.
Related-Party
Line of Credit
In
February 2009, the Company obtained a line of credit in the amount of $570,000
from Arkenol Inc, its technology licensor, to provide additional liquidity to
the Company as needed. In October 2009, $175,000 was utilized from the line of
credit and in November 2009, the balance was paid in full along with
approximately $500 interest. As of September 30, 2010, the line of
credit is cancelled and thus no funds are available.
NOTE 6 - STOCKHOLDERS’
EQUITY
Stock-Based
Compensation under the Company’s Employee Stock Option Plan
During
the nine months ended September 30, 2010 and 2009, and for the period from March
28, 2006 (Inception) to September 30, 2010, the Company recognized stock-based
compensation, including consultants, of approximately $0, $0, and $4,487,000 to
general and administrative expenses and $0, $0, and $4,368,000 to project
development expenses, respectively. There is no additional future
compensation expense to record as of September 30, 2010 based on the previous
awards.
On July
15, 2010, the Company renewed all of its existing Directors’ appointments, as
well as electing a new Director and issued 6,000 shares to each and paid $5,000
to each of the three 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 value of the common stock granted
was determined to be approximately $7,200 based on the fair market value of the
Company's common stock of $0.24 on the date of the grant. The value was expensed
upon the date of grant due to no future performance requirements.
Shares
Issued for Services
On August
27, 2009, the Company entered into a six month consulting agreement with Mirador
Consulting, Inc (the “Consulting Agreement”). Pursuant to the Consulting
Agreement, the Company received services in connection with mergers and
acquisitions, corporate finance, corporate finance relations, introductions to
other financial relations companies and other financial services. As
consideration for these services, the Company made monthly cash payments of
$3,000 and issued 200,000 shares of the Company’s common stock in exchange for
$200. The Company valued the shares at $0.80 based upon the closing price of the
Company’s common stock on the date of the Consulting Agreement. Under the terms
of the Consulting Agreement, the shares did not have any future performance
requirement nor were they cancellable. The Company expensed the entire value on
the date of the Consulting Agreement and recorded to general and administrative
expense. Under the terms of the Consulting Agreement the Company was to issue
100,000 shares upon execution of the agreement and November 15, 2009. On May 24,
2010, the Company issued the remaining 100,000
shares.
F-9
During
the nine months ended September 30, 2010, the Company issued 118,000 shares of
common stock for legal and professional services provided. In
connection with this issuance the Company recorded $33,250 in legal and
professional fees expense which is included in general and administrative
expense. The Company valued the shares using the closing market price on the
date of issuance. The Company expensed the shares on the date of issuance as the
services had been provided and there were no future performance
criteria.
NOTE
7 –SUBSEQUENT EVENTS
On
October 5, 2010, the Company announced that it has finalized and signed an
Engineering, Procurement and Construction (“EPC”) contract for its planned DOE
Biorefinery in Fulton, Mississippi. The facility will be engineered
and built by Wanzek Construction, Inc., a wholly owned subsidiary of MasTec,
Inc. (NYSE:MTZ - News), for a fixed price of $296 million which includes an
approximately $100 million biomass power plant as part of the facility. The
contract was negotiated in a manner to be appealing for non-recourse project
bank financing and serves as a final key project contract agreement to move
forward with both the DOE and USDA Loan Guarantee Programs.
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 (US$200,000) (the “Loan”). The proceeds of the
Loan were used to fund operations. 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
(US$1,000,000) to the Company or one of its subsidiaries (the “Due Date”), to be
paid in cash or shares of the Company’s common stock, at the Lender’s option.
The Company is currently determining the accounting impact of the
transaction.
On
December 23, 2010, the Company sold a one percent (1%) membership interest in
its operating subsidiary, BlueFire Fulton Renewable Energy, LLC (“BlueFire
Fulton”), to an accredited investor for a purchase price of $750,000 (“Purchase
Price”). The Company maintains a 99% ownership interest in BlueFire
Fulton. In addition, the investor received a right to require the Company to
redeem the 1% interest for $875,000, or any pro-rata amount thereon. The
redemption is based upon future contingent events based upon obtaining financing
for the construction of the Fulton ethanol plant, The Company is
currently determining the accounting impact of the transaction.
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. 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 provision in which the exercise price will be
adjusted for future issuances of common stock at prices lower than the current
exercise price. We 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. The registration statement must be declared effective by March 31,
2011. After the SEC has declared effective the registration statement related to
the transaction, we have the right, in our sole discretion, over a 30-month
period to sell our shares of common stock to LPC in amounts up to $500,000 per
sale, depending on certain conditions 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 $9.85 million of future additional 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. 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. 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. The proceeds received by the Company under the purchase
agreement are expected to be used for general working capital purposes. The
Company is currently determining the accounting impact of the
transaction.
F-10
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED
DECEMBER
31, 2009 AND
DECEMBER
31, 2008
Reports
of Independent Registered Public Accounting Firms
|
F-1
and F-2
|
|
Consolidated
Balance Sheets as of December 31, 2009 and December 31,
2008
|
F-3
|
|
Consolidated
Statements of Operations for the years ended December 31, 2009, December
31, 2008 and for the period from March 28, 2006 (Inception) to December
31, 2009
|
F-4
|
|
Consolidated
Statements of Stockholders’ Equity from March 28, 2006 (inception) to
December 31, 2009
|
F-5
|
|
Consolidated
Statements of Cash Flows for the years ended December 31, 2009 and
December 31, 2008, and for the period from March 28, 2006 (Inception) to
December 31, 2009
|
F-9
|
|
Notes
to Consolidated Financial Statements
|
F-11
|
Report
of Independent Registered Public Accounting Firm
The
Board of Directors and Shareholders of BlueFire Renewables, Inc. and
Subsidiaries
We have
audited the accompanying consolidated balance sheet of BlueFire Renewables, Inc.
and subsidiaries, a development-stage company, (collectively the “Company”) as
of December 31, 2009 and the related consolidated statements of operations,
stockholders’ equity, and cash flows for the year then ended and for the period
from March 28, 2006 (“Inception”) to December 31, 2009. These consolidated
financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of BlueFire Renewables, Inc.
and subsidiaries, as of December 31, 2009, and the results of their operations
and their cash flows for the year ended, and for the period from Inception to
December 31, 2009, in conformity with accounting principles generally accepted
in the United States of America.
/s/
dbbmckennon
Newport
Beach, California
March 29,
2010
F-1
Report
of Independent Registered Public Accounting Firm
The
Board of Directors and Shareholders of BlueFire Renewables, Inc. and
Subsidiaries
We have
audited the accompanying consolidated balance sheet of BlueFire Renewables, Inc.
and subsidiaries, a development-stage company, (collectively the “Company”) as
of December 31, 2008 and the related consolidated statements of operations,
stockholders’ equity, and cash flows for the year then ended. These consolidated
financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Compa ny’s internal control
over financial reporting. Accordingly, we express no such opinion. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of BlueFire Renewables, Inc.
and subsidiaries, as of December 31, 2008, and the results of their operations
and their cash flows for the year then ended, in conformity with accounting
principles generally accepted in the United States of America.
/s/
WilsonMorgan LLP
(formerly
McKennon, Wilson & Morgan LLP)
Irvine,
California
March 26,
2009
F-2
BLUEFIRE
RENEWABLES, INC. AND SUBSIDIARIES
(FORMERLY
BLUEFIRE ETHANOL FUELS, INC.)
(A
DEVELOPMENT-STAGE COMPANY)
CONSOLIDATED
BALANCE SHEETS
December
31,
2009
|
December
31,
2008
|
|||||||
ASSETS
|
||||||||
Current
assets:
|
||||||||
Cash
and cash equivalents
|
$ | 2,844,711 | $ | 2,999,599 | ||||
Department
of Energy grant receivable
|
207,380 | 692,014 | ||||||
Prepaid
expenses
|
50,790 | 89,871 | ||||||
Total
current assets
|
3,102,881 | 3,781,484 | ||||||
Debt
issuance costs
|
150,000 | - | ||||||
Property
and equipment, net of accumulated depreciation of $44,130 and $20,761,
respectively
|
167,995 | 186,112 | ||||||
Total
assets
|
$ | 3,420,876 | $ | 3,967,596 | ||||
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
||||||||
Current
liabilities:
|
||||||||
Accounts
payable
|
$ | 335,547 | $ | 711,884 | ||||
License
fee payable to related party
|
- | 970,000 | ||||||
Accrued
liabilities
|
245,394 | 173,618 | ||||||
Total
current liabilities
|
580,941 | 1,855,502 | ||||||
Outstanding
warrant liability
|
2,274,393 | - | ||||||
Total
liabilities
|
2,855,334 | 1,855,502 | ||||||
Stockholders’
equity:
|
||||||||
Preferred
stock, no par value, 1,000,000 shares authorized; none issued and
outstanding
|
- | - | ||||||
Common
stock, $0.001 par value; 100,000,000 shares authorized; 28,296,965
and 28,133,053 shares issued and 28,264,793 and 28,100,881
outstanding, respectively
|
28,296 | 28,132 | ||||||
Additional
paid-in capital
|
14,033,792 | 32,388,052 | ||||||
Treasury
stock at cost, 32,172 shares
|
(101,581 | ) | (101,581 | |||||
Deficit
accumulated during the development stage
|
(13,394,965 | ) | (30,202,509 | ) | ||||
Total
stockholders’ equity
|
565,542 | 2,112,094 | ||||||
Total
liabilities and stockholders’ equity
|
$ | 3,420,876 | $ | 3,967,596 |
See
accompanying notes to consolidated financial statements
F-3
BLUEFIRE
RENEWABLES, INC. AND SUBSIDIARIES
(FORMERLY BLUEFIRE ETHANOL FUELS,
INC.)
(A
DEVELOPMENT-STAGE COMPANY)
CONSOLIDATED
STATEMENTS OF OPERATIONS
For
the year
ended
|
For
the year
ended
|
From
March
28,
2006
(inception)
Through
|
||||||||||
December
31,
2009
|
December
31,
2008
|
December
31,
2009
|
||||||||||
Revenues:
|
||||||||||||
Consulting
fees
|
$ | 19,570 | $ | - | $ | 68,570 | ||||||
Department
of Energy grant
|
4,298,643 | 1,075,508 | 5,374,151 | |||||||||
Total
revenues
|
4,318,213 | 1,075,508 | 5,442,721 | |||||||||
Operating
expenses:
|
||||||||||||
Project
development, including stock based compensation of $0, $2,078,356, and
$4,468,490, respectively
|
1,307,185 | 10,535,278 | 17,239,202 | |||||||||
General
and administrative, including stock based compensation of $232,292,
$1,690,921, and $6,097,332 respectively
|
2,220,073 | 4,136,235 | 13,034,630 | |||||||||
Related
party license fee
|
- | 1,000,000 | 1,000,000 | |||||||||
Total
operating expenses
|
3,527,258 | 15,671,513 | 31,273,832 | |||||||||
Operating
income (loss)
|
790,955 | (14,596,005 | ) | (25,831,111 | ) | |||||||
Other
income and (expense):
|
||||||||||||
Other
income
|
8,059 | 225,411 | 255,173 | |||||||||
Financing
related charge
|
- | - | (211,660 | ) | ||||||||
Amortization
of debt discount
|
- | - | (676,982 | ) | ||||||||
Interest
expense
|
- | - | (56,097 | ) | ||||||||
Related
party interest expense
|
(518 | ) | - | (64,966 | ) | |||||||
Loss
on extinguishment of debt
|
- | - | (2,818,370 | ) | ||||||||
Gain
from change in fair value of warrant liability
|
567,461 | - | 567,461 | |||||||||
Loss
on the retirement of warrants
|
(146,718 | ) | (146,718 | ) | ||||||||
Total
other income and (expense)
|
428,284 | 225,411 | (3,152,159 | ) | ||||||||
Income
(loss) before income taxes
|
1,219,239 | (14,370,594 | ) | (28,983,270 | ) | |||||||
Provision
for income taxes
|
83,147 | - | 83,147 | |||||||||
Net
income (loss)
|
$ | 1,136,092 | $ | (14,370,594 | ) | $ | (29,066,417 | ) | ||||
Basic
and diluted income (loss) per common share
|
$ | 0.04 | $ | (0.51 | ) | |||||||
Weighted
average common shares outstanding, basic and diluted
|
28,159,629 | 28,064,572 |
See
accompanying notes to consolidated financial statements
F-4
BLUEFIRE
RENEWABLES, INC. AND SUBSIDIARIES
(FORMERLY
BLUEFIRE ETHANOL FUELS, INC.)
(A
DEVELOPMENT-STAGE COMPANY)
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
Common
Stock
|
Additional
Paid-in
|
Deficit
Accumulated
During
Development
|
Stockholders'
Equity
|
|||||||||||||||||
Shares
|
Amount
|
Capital
|
Stage
|
(Deficit)
|
||||||||||||||||
Balance
at March 28, 2006 (inception)
|
- | $ | - | $ | - | $ | - | $ | - | |||||||||||
Issuance
of founder’s share at $.001 per share
|
17,000,000 | 17,000 | 17,000 | |||||||||||||||||
Common
shares retained by Sucre Agricultural Corp., Shareholders
|
4,028,264 | 4,028 | 685,972 | - | 690,000 | |||||||||||||||
Costs
associated with the acquisition of Sucre Agricultural
Corp.
|
(3,550 | ) | (3,550 | ) | ||||||||||||||||
Common
shares issued for services in November 2006 at $2.99 per
share
|
37,500 | 38 | 111,962 | - | 112,000 | |||||||||||||||
Common
shares issued for services in November 2006 at $3.35 per
share
|
20,000 | 20 | 66,981 | - | 67,001 | |||||||||||||||
Common
shares issued for services in December 2006 at $3.65 per
share
|
20,000 | 20 | 72,980 | - | 73,000 | |||||||||||||||
Common
shares issued for services in December 2006 at $3.65 per
share
|
20,000 | 20 | 72,980 | - | 73,000 | |||||||||||||||
Estimated
value of common shares at $3.99 per share and warrants at $2.90 issuable
for services upon vesting in February 2007
|
- | - | 160,000 | - | 160,000 | |||||||||||||||
Share-based
compensation related to options
|
- | - | 114,811 | - | 114,811 | |||||||||||||||
Share-based
compensation related to warrants
|
- | - | 100,254 | - | 100,254 | |||||||||||||||
Net
Loss
|
- | - | - | (1,555,497 | ) | (1,555,497 | ) | |||||||||||||
Balances
at December 31, 2006
|
21,125,764 | $ | 21,126 | $ | 1,382,390 | $ | (1,555,497 | ) | $ | (151,981 | ) |
See
accompanying notes to consolidated financial statements
F-5
BLUEFIRE
RENEWABLES, INC. AND SUBSIDIARIES
(FORMERLY
BLUEFIRE ETHANOL FUELS, INC.)
(A
DEVELOPMENT-STAGE COMPANY)
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
Common
Stock
|
Additional
Paid-in
|
Deficit
Accumulated
During
Development
|
Stockholders’
|
|||||||||||||||||
Shares
|
Amount
|
Capital
|
Stage
|
Equity
|
||||||||||||||||
Balances
at December 31, 2006
|
21,125,764 | $ | 21,126 | $ | 1,382,390 | $ | (1,555,497 | ) | $ | (151,981 | ) | |||||||||
Common
shares issued for cash in January 2007, at $2.00 per share to unrelated
individuals, including costs associated with private placement of 6,250
shares and $12,500 cash paid
|
284,750 | 285 | 755,875 | - | 756,160 | |||||||||||||||
Amortization
of share based compensation related to employment agreement in January
2007 $3.99 per share
|
10,000 | 10 | 39,890 | - | 39,900 | |||||||||||||||
Common
shares issued for services in February 2007 at $5.92 per
share
|
37,500 | 38 | 138,837 | - | 138,875 | |||||||||||||||
Adjustment
to record remaining value of warrants at $4.70 per share issued for
services in February 2007
|
- | - | 158,118 | - | 158,118 | |||||||||||||||
Common
shares issued for services in March 2007 at $7.18 per
share
|
37,500 | 37 | 269,213 | - | 269,250 | |||||||||||||||
Fair
value of warrants at $6.11 for services vested in March
2007
|
- | - | 305,307 | - | 305,307 | |||||||||||||||
Fair
value of warrants at $5.40 for services vested in June
2007
|
- | - | 269,839 | - | 269,839 | |||||||||||||||
Common
shares issued for services in June 2007 at $6.25 per share
|
37,500 | 37 | 234,338 | - | 234,375 | |||||||||||||||
Share
based compensation related to employment agreement in February 2007 $5.50
per share
|
50,000 | 50 | 274,951 | - | 275,001 | |||||||||||||||
Common
Shares issued for services in August 2007 at $5.07 per
share
|
13,000 | 13 | 65,901 | 65,914 | ||||||||||||||||
Share
based compensation related to options
|
- | - | 4,692,863 | - | 4,692,863 | |||||||||||||||
Value
of warrants issued in August, 2007 for debt replacement services valued at
$4.18 per share
|
- | - | 107,459 | - | 107,459 | |||||||||||||||
Relative
fair value of warrants associated with July 2007 convertible note
agreement
|
- | - | 332,255 | - | 332,255 | |||||||||||||||
Exercise
of stock options in July 2007 at $2.00 per share
|
20,000 | 20 | 39,980 | - | 40,000 | |||||||||||||||
Relative
fair value of warrants and beneficial conversion feature in connection
with the $2,000,000 convertible note payable in August
2007
|
- | - | 2,000,000 | - | 2,000,000 | |||||||||||||||
Stock
issued in lieu of interest payments on the senior secured convertible note
at $4.48 and $2.96 per share in October and December
2007
|
15,143 | 15 | 55,569 | - | 55,584 | |||||||||||||||
Conversion
of $2,000,000 note payable in August 2007 at $2.90 per
share
|
689,655 | 689 | 1,999,311 | - | 2,000,000 | |||||||||||||||
Common
shares issued for cash at $2.70 per share, December 2007, net of legal
costs of $90,000 and placement agent cost of $1,050,000
|
5,740,741 | 5,741 | 14,354,259 | - | 14,360,000 | |||||||||||||||
Loss
on Extinguishment of debt in December 2007
|
- | - | 955,637 | - | 955,637 | |||||||||||||||
Net
loss
|
- | - | - | (14,276,418 | ) | (14,276,418 | ) | |||||||||||||
Balances
at December 31, 2007
|
28,061,553 | $ | 28,061 | $ | 28,431,992 | $ | (15,831,915 | ) | $ | 12,628,138 |
See
accompanying notes to consolidated financial statements
F-6
BLUEFIRE
RENEWABLES, INC. AND SUBSIDIARIES
(FORMERLY
BLUEFIRE ETHANOL FUELS, INC.)
(A
DEVELOPMENT-STAGE COMPANY)
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
Common
Stock
|
Additional
Paid-in
|
Deficit
Accumulated
During
Development
|
Treasury
|
Stockholders’
|
||||||||||||||||||||
Shares
|
Amount
|
Capital
|
Stage
|
Stock
|
Equity
|
|||||||||||||||||||
Balances
at December 31, 2007
|
28,061,553 | $ | 28,061 | $ | 28,431,992 | $ | (15,831,915 | ) | $ | - | $ | 12,628,138 | ||||||||||||
Share
based compensation relating to options
|
- | - | 3,769,276 | - | - | 3,769,276 | ||||||||||||||||||
Common
shares issued for services in July 2008 at $4.10 per share
|
30,000 | 30 | 122,970 | - | - | 123,000 | ||||||||||||||||||
Common
shares issued for services in July, September, and December 2008 at $3.75,
$2.75, and $.57 per share, respectively
|
41,500 | 41 | 63,814 | - | - | 63,855 | ||||||||||||||||||
Purchase
of treasury shares between April to September 2008 at an average of
$3.12
|
(32,172 | ) | - | - | - | (101,581 | ) | (101,581 | ) | |||||||||||||||
Net
loss
|
- | - | - | (14,370,594 | ) | - | (14,370,594 | ) | ||||||||||||||||
Balances
at December 31, 2008
|
28,100,881 | $ | 28,132 | $ | 32,388,052 | $ | (30,202,509 | ) | $ | (101,581 | ) | $ | 2,112,094 |
See
accompanying notes to consolidated financial statements
F-7
BLUEFIRE
RENEWABLES, INC. AND SUBSIDIARIES
(FORMERLY
BLUEFIRE ETHANOL FUELS, INC.)
(A
DEVELOPMENT-STAGE COMPANY)
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
Common
Stock
|
Additional
Paid-in
|
Deficit
Accumulated
During
Development
|
Treasury
|
Stockholders’
|
||||||||||||||||||||
Shares
|
Amount
|
Capital
|
Stage
|
Stock
|
Equity
|
|||||||||||||||||||
Balances
at December 31, 2008
|
28,100,881 | $ | 28,132 | $ | 32,388,052 | $ | (30,202,509 | ) | $ | (101,581 | ) | $ | 2,112,094 | |||||||||||
Cumulative
effect of warrants reclassified
|
- | - | (18,586,588 | ) | 18,586,588 | - | - | |||||||||||||||||
Reclassification
of long term warrant liability
|
- | - | - | (2,915,136 | ) | - | (2,915,136 | ) | ||||||||||||||||
Common
shares issued for services in June 2009 at $1.50 per share
|
11,412 | 11 | 17,107 | - | - | 17,118 | ||||||||||||||||||
Common
shares issued for services in July 2009 at $0.88 per share
|
30,000 | 30 | 26,370 | - | - | 26,400 | ||||||||||||||||||
Common
shares issued for services in August 2009 at $0.80 per
share
|
100,000 | 100 | 79,900 | - | - | 80,000 | ||||||||||||||||||
Option
to purchase Common shares for services in August 2009 at an option price
of $3.00 for 100,000 shares
|
- | - | 8,273 | - | - | 8,273 | ||||||||||||||||||
Common
shares issued for services in September and October 2009 at $0.89 and
$0.95 per share respectively
|
22,500 | 23 | 20,678 | - | - | 20,701 | ||||||||||||||||||
Common
shares to be issued for services in August 2009 at $0.80 per
share
|
- | - | 80,000 | - | - | 80,000 | ||||||||||||||||||
Net
income
|
- | - | - | 1,136,092 | - | 1,136,092 | ||||||||||||||||||
Balances
at December 31, 2009
|
28,264,793 | $ | 28,296 | $ | 14,033,792 | $ | (13,394,965 | ) | $ | (101,581 | ) | $ | 565,542 |
See
accompanying notes to consolidated financial statements
F-8
BLUEFIRE
RENEWABLES, INC. AND SUBSIDIARIES
(FORMERLY
BLUEFIRE ETHANOL FUELS, INC.)
(A
DEVELOPMENT-STAGE COMPANY)
CONSOLIDATED
STATEMENTS OF CASH FLOWS
For
the
year
ended
|
For
the
year
ended
to
|
From
March
28,
2006
(Inception)
to
|
||||||||||
December
31,
2009
|
December
31,
2008
|
December
31,
2009
|
||||||||||
Cash
flows from operating activities:
|
||||||||||||
Net
income (loss)
|
$ | 1,136,092 | $ | (14,370,594 | ) | $ | (29,066,417 | ) | ||||
Adjustments
to reconcile net income (loss) to net cash used in operating
activities:
|
||||||||||||
Founders
shares
|
- | - | 17,000 | |||||||||
Costs
associated with purchase of Sucre Agricultural Corp
|
- | - | (3,550 | ) | ||||||||
Interest
expense on beneficial conversion feature of convertible
notes
|
- | - | 676,983 | |||||||||
Loss
on extinguishment of convertible debt
|
- | - | 2,718,370 | |||||||||
Loss
on retirement of warrants
|
146,718 | - | 146,718 | |||||||||
Gain
from change in fair value of warrant liability
|
(567,461 | ) | - | (567,461 | ) | |||||||
Common
stock issued for interest on convertible notes
|
- | - | 55,585 | |||||||||
Discount
on sale of stock associated with private placement
|
- | - | 211,660 | |||||||||
Share-based
compensation
|
232,491 | 3,956,131 | 11,338,129 | |||||||||
Depreciation
|
23,373 | 20,352 | 44,134 | |||||||||
Changes
in operating assets and liabilities:
|
||||||||||||
Accounts
receivable
|
- | 49,000 | - | |||||||||
Department
of energy grant receivable
|
484,634 | (692,014 | ) | (207,380 | ) | |||||||
Prepaid
fees to related party
|
- | 30,000 | - | |||||||||
Prepaid
expenses and other current assets
|
39,080 | (73,329 | ) | (50,792 | ) | |||||||
Accounts
payable
|
(376,338 | ) | 329,205 | 335,545 | ||||||||
License
fee payable to related party
|
(970,000 | ) | 970,000 | - | ||||||||
Accrued
liabilities
|
71,778 | (94,053 | ) | 245,396 | ||||||||
Net
cash provided by (used in) operating activities
|
220,367 | ( 9,875,302 | ) | (14,106,080 | ) | |||||||
Cash
flows from investing activities:
|
||||||||||||
Acquisition
of property and equipment
|
(5,255 | ) | (55,457 | ) | (212,128 | ) |
See
accompanying notes to consolidated financial statements
F-9
BLUEFIRE
RENEWABLES, INC. AND SUBSIDIARIES
(FORMERLY
BLUEFIRE ETHANOL FUELS, INC.)
(A
DEVELOPMENT-STAGE COMPANY)
CONSOLIDATED
STATEMENT OF CASH FLOWS
(continued)
For
the
year
ended
|
For
the
year
ended
to
|
From
March
28,
2006
(Inception)
to
|
||||||||||
December
31,
2009
|
December
31,
2008
|
December
31,
2009
|
||||||||||
Cash
flows from financing activities:
|
||||||||||||
Cash
paid for treasury stock
|
- | (101,581 | ) | (101,581 | ) | |||||||
Cash
received in acquisition of Sucre Agricultural Corp.
|
- | - | 690,000 | |||||||||
Proceeds
from sale of stock through private placement
|
- | - | 544,500 | |||||||||
Proceeds
from exercise of stock options
|
- | - | 40,000 | |||||||||
Proceeds
from issuance of common stock
|
- | - | 14,360,000 | |||||||||
Proceeds
from convertible notes payable
|
- | - | 2,500,000 | |||||||||
Repayment
of notes payable
|
- | - | (500,000 | ) | ||||||||
Proceeds
from related party line of credit/notes payable
|
- | - | 116,000 | |||||||||
Repayment
from related party line of credit/notes payable
|
- | - | (116,000 | ) | ||||||||
Debt
issuance costs
|
(150,000 | ) | - | (150,000 | ) | |||||||
Retirement
of warrants
|
(220,000 | ) | - | (220,000 | ) | |||||||
Net
cash provided by (used in) financing activities
|
(370,000 | ) | (101,581 | ) | 17,162,919 | |||||||
Net
increase (decrease) in cash and cash equivalents
|
(154,888 | ) | (10,032,340 | ) | 2,844,711 | |||||||
Cash
and cash equivalents beginning of period
|
2,999,599 | 13,031,939 | - | |||||||||
Cash
and cash equivalents end of period
|
$ | 2,844,711 | $ | 2,999,599 | $ | 2,844,711 | ||||||
Supplemental
disclosures of cash flow information
|
||||||||||||
Cash
paid during the period for:
|
||||||||||||
Interest
|
$ | 518 | $ | - | $ | 56,893 | ||||||
Income
taxes
|
$ | 14,896 | $ | 2,400 | $ | 18,096 | ||||||
Supplemental
schedule of non-cash investing and financing activities:
|
||||||||||||
Conversion
of senior secured convertible notes payable
|
$ | - | $ | - | $ | 2,000,000 | ||||||
Interest
converted to common stock
|
$ | - | $ | - | $ | 55,569 | ||||||
Fair
value of warrants issued to placement agents
|
$ | - | $ | - | $ | 725,591 |
See
accompanying notes to consolidated financial statements
F-10
BLUEFIRE
RENEWABLES, INC. AND SUBSIDIARIES
(FORMERLY
BLUEFIRE ETHANOL FUELS, INC.)
(A
DEVELOPMENT-STAGE COMPANY)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1 - ORGANIZATION AND BUSINESS
BlueFire
Renewables, Inc. (formerly BlueFire Ethanol, Inc.) (“BlueFire”) 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.
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Management’s
Plans
The
Company is a development-stage company which has incurred losses since
inception. Management has funded operations primarily through proceeds received
in connection with the 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
throughout 2008 and 2009. 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
December 31, 2009, the Company has working capital of approximately $2,522,000.
Management has estimated that operating expenses for the next 12 months will be
approximately $2,200,000, excluding engineering costs related to the development
of bio-refinery projects. During 2010, the Company intends to fund its
operations with its current working capital, and proceeds from reimbursements
under the Department of Energy contract. The Company expects the current
resources available to them will be sufficient for a period in excess of 12
months. If necessary, management has determined that general expenditures will
be reduced and additional capital will be required in the form of equity or debt
securities. There are no assurances that management will be able to raise
capital on terms acceptable to the Company
Additionally,
the Company’s Lancaster plant is currently shovel ready 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
2008.
We
estimate the total cost of the bio-refinery, including contingencies to be in
the range of approximately $100 million to $120 million for this first plant.
This amount is significantly greater than our previous estimations communicated
to the public This is due in part to a combination of significant increases in
material costs on the world market from the last estimate until now, and the
complexity of our first commercial deployment. At the end of 2008 and early
2009, prices for materials have declined, and we expect, that items like
structural and specialty steel may continue to decline in price in 2010 with
other materials of construction following suit. The cost approximations above
do not reflect any decrease in raw mat erials or any savings in
construction cost. The Company is currently in discussions with potential
sources of financing for this facility but no definitive agreements are in
place.
F-11
Changes
in Reporting Entity
The
acquisition of Sucre Agricultural Corp. by BlueFire Ethanol, Inc., as discussed
in Note 1, was accounted for as a reverse acquisition, whereby the assets and
liabilities of BlueFire are reported at their historical cost since the entities
are under common control immediately after the acquisition in accordance with
(“ASC”) No. 805 “Business Combinations” (formerly Statement of Financial
Accounting Standards (“SFAS”) No. 141 “Business Combinations." The assets and
liabilities of Sucre, which were not significant, were recorded at fair value on
June 27, 2006, the date of the acquisition. No goodwill was recorded in
connection with the reverse acquisition since Sucre had no business. The reverse
acquisition resulted in a change in the reporting entity of Sucre, for
accounting and reporting pur poses. Accordingly, the financial statements herein
reflect the operations of BlueFire from Inception and Sucre from June 27, 2006,
the date of acquisition, through December 31, 2006. The 4,028,264 shares
retained by the stockholders of Sucre have been recorded on the date of
acquisition of June 27, 2006.
Principles
of Consolidation
The
consolidated financial statements include the accounts of BlueFire Ethanol
Fuels, Inc., and its wholly-owned subsidiary, BlueFire Ethanol, Inc. BlueFire
Ethanol Lancaster, LLC and BlueFire Fulton Renewable Energy 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.
Cash
and Cash Equivalents
For
purpose of the statement of cash flows, the Company considers all highly liquid
debt instruments purchased with an original maturity of three months or less to
be cash equivalents.
Accounts
Receivable
Accounts
receivable are reported net of allowance for expected losses. It represents the
amount management expects to collect from outstanding balances. Differences
between the amount due and the amount management expects to collect are charged
to operations in the year in which those differences are determined, with an
offsetting entry to a valuation allowance. As of December 31, 2009, there have
been no such charges.
Intangible
Assets
License
fees acquired are either expensed or recognized as intangible assets. The
Company recognizes intangible assets when the following criteria is met: 1) the
asset is identifiable, 2) the Company has control over the asset, 3) the cost of
the asset can be measured reliably, and 4) it is probable that economic benefits
will flow to the Company. During the year ended December 31, 2008, the Company
purchased a license (see Note 8) from Arkenol, Inc., a related party. The
license fee was expensed because the Company is still in the research and
development stage and cannot readily determine the probability of future
economic benefits for said license.
Depreciation
The
Company’s fixed assets are depreciated using the straight-line method over a
period ranging from one to five years.
F-12
Revenue
Recognition
The
Company is currently a developmental-stage company. The Company will recognize
revenues from 1) consulting services rendered to potential sub licensees for
development and construction of cellulose to ethanol projects, 2) sales of
ethanol from its production facilities when (a) persuasive evidence that an
agreement exists; (b) the products have been delivered; (c) the prices are fixed
and determinable and not subject to refund or adjustment; and (d) collection of
the amounts due is reasonably assured.
As
discussed in Note 3, the Company received a federal grant from the United States
Department of Energy, (“U.S. DOE”). The grant generally provides for payment in
connection with related development and construction costs involving
commercialization of our technologies. Revenues from the grant are recognized in
the period during which the conditions under the grant have been met and the
reimbursement is estimatable. The Company determined that the payment received
from the U.S. Department of Energy should be accounted for as revenues. This
determination was based on the fact the Company views the obtaining of future
grants as an ongoing function of its intended operations. In addition, costs
related to government grant revenues are not readily identifiable, and such
costs are recorded in general and administrative expenses and project
development costs and thus could not be offset.
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 years ended December 31,
2009 and 2008 and for the period from March 28, 2006 (Inception) to December 31,
2009, research and development costs included in Project Development were
approximately $1,307,185, $8,45 7,000, and $12,770,000
respectively.
Convertible
Debt
Convertible
debt is accounted for under the guidelines established by ASC 470 “Debt with
Conversion and Other Options” (formerly APB Opinion No. 14 “Accounting for
Convertible Debt and Debt issued with Stock Purchase Warrants” under
the direction of Emerging Issues Task Force (“EITF”) 98-5, Accounting
for Convertible Securities with Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios, (“EITF 98-5”) EITF 00-27 Application of Issue No
98-5 to Certain Convertible Instruments “EITF 00-27”), and ASC 740 “Beneficial
Conversion Features” (formerly EITF 05-8 Income Tax Consequences of Issuing
Convertible Debt with Beneficial Conversi on Features). 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” (formerly SFAS No. 123R), 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 con version 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.
F-13
The
Company accounts for modifications of its Embedded Conversion Features (“ECF’s”)
in accordance with ASC 470 “Modifications and Exchanges” (formerly EITF 06-6).
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 (formerly SFAS No. 5, “Accounting for
Contingencies”). This accounting is consistent with views established by the
EITF in its consensus set forth in ASC 825 formerly EITF 05-04 and FASB Staff
Positions FSP EITF 00-19-2 “Accounting for Registration Payment Arrangements”,
which was issued December 21, 2006. Accordingly, the Company recognizes damages
when it becomes probable that they will be incurred and amounts are reasonably
estimable.
In
connection with the issuance of common stock on for gross proceeds of
$15,500,000 in December 2007 and the $2,000,000 convertible note financing in
August 2007, the Company was required to file a registration statement on Form
SB-2 or Form S-3 with the Securities and Exchange Commission in order to
register the resale of the common stock under the Securities Act. The Company
filed that registration statement on December 18, 2007 and as required under the
registration rights agreement had the registration statement declared effective
by the Securities and Exchange Commission (“SEC”) on March 27, 2008 and in so
doing incurred no liquidated damages. As of December 31, 2008, the Company does
not believe that any liquidated damages are probable and thus no amounts have
been accrued in the accompanying financial statements.</f
ont>
Income
Taxes
The
Company accounts for income taxes in accordance with ASC 740 formerly Financial
Accounting Standards Board (“FASB”) Statement No. 109 “Accounting for Income
Taxes.” SFAS No. 109 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.
In July
2006, the ASC 740 formerly FASB issued Interpretation No. (“FIN”) 48,
“Accounting for Uncertainty in Income Taxes”. 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. In addition, previously recognized benefits from tax
positions that no longer meet the new criteria would no longer be recognized.
The application of this Interpretation will be considered a change in accounting
principle with the cumulative effect of the change recorded to the opening
balance of retained earnings in the period of adoption. This Interpretation was
effective for the Company on January 1, 2007. Adoption of this new standard did
not have a material impact on our financial position, results of operations or
cash flows.
Fair
Value of Financial Instruments
On
January 1, 2009, the Company adopted ASC 820 (“ASC 820”) Fair Value Measurements
and Disclosures. The Company did not record an adjustment to retained earnings
as a result of the adoption of the guidance for fair value measurements, and the
adoption did not have a material effect on the Company’s results of
operations.
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:
F-14
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.
As of
December 31, 2009, the Company’s warrant liability is considered a level 2 item,
see Note 6.
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.
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,
although on January 1, 2014 this amount is scheduled to return to $100,000 per
depositor, 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 $100,000 for cash. At times, the Company
has cash deposits in excess of federally and institutional insured
limits.
As of
December 31, 2009 and 2008, the Department of Energy made up 100% of Grant
Revenue and Department of Energy grant receivables. Management believes
the loss of these organizations would have a material impact on the Company’s
financial position, results of operations, and cash flows.
Income
(loss) per Common Share
The
Company presents basic income (loss) per share (“EPS”) and diluted EPS on the
face of the consolidated statement of operations. Basic income (loss) per share
is computed as net income (loss) divided by the weighted average number of
common shares outstanding for the period. Diluted EPS reflects the potential
dilution that could occur from common shares issuable through stock options,
warrants, and other convertible securities. For the year ended December 31,
2009, the Company had approximately 3,287,159 options and 6,813,494 warrants
outstanding, for which all of the exercise prices were in excess of the average
closing price of the Company’s common stock during the corresponding year and
thus no shares are considered a s dilutive under the treasury-stock method of
accounting. For the year ended December 31, 2008, the Company had approximately
3,287,159 options and 7,386,694 warrants, to purchase shares of common stock
that were excluded from the calculation of diluted loss per share as their
effects would have been anti-dilutive due to the loss.
F-15
Debt
Issuance Costs
During
2007 debt issuance costs represent costs incurred related to the Company’s
senior secured convertible note payable. These costs were amortized over the
term of the note using the effective interest method and expensed upon
conversion of senior secured convertible note. During 2009, debt issuance costs
represent the fees related to the loan fee application filed under the
Department of Energy (DOE) Program. (see Note 5).
Share-Based
Payments
The
Company accounts for stock options issued to employees and consultants under ASC
718 formerly SFAS No. 123(R), “Share-Based Payment”. Under SFAS 123(R),
share-based compensation cost to employees is measured at the grant date, based
on the estimated fair value of the award, and is recognized as expense over the
employee's requisite vesting period.
The
Company measures compensation expense for its non-employee stock-based
compensation under ASC 505 formerly EITF No. 96-18 “Accounting for Equity
Instruments that are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services” (“EITF 96-18”). The fair value of
the option issued or committed to be issued is used to measure the transaction,
as this is more reliable than the fair value of the services received. The fair
value is measured at the value of the Company's common stock on the date that
the commitment for performance by the counterparty has been reached or the
counterparty's performance is complete. The fair value of the equity instrument
is charged directly to stock-based compensation expense and credited to
additional paid-in capital.
New
Accounting Pronouncements
In May
2009, the FASB issued ASC 855 “Subsequent Events” (formerly SFAS No. 165,
Subsequent Events). FASB ASC 855 establishes general standards of accounting for
and disclosure of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. ASC 855 is
effective for interim and annual financial periods ending after June 15, 2009
with no impact on the accompanying finanacial statements.
In June
2009, the FASB issued ASC 105 “Generally Accepted Accounting Principles”
(formerly SFAS No. 168 The FASB Accounting Standards Codification and the
Hierarchy of Generally Accepted Accounting Principles – a replacement of FASB
Statement No. 162). ASC 105 establishes the FASB Accounting Standards
Codification as the source of authoritative U.S. GAAP recognized by the FASB to
be applied by nongovernmental entities. ASC 105, which changes the referencing
of financial standards, is effective for interim or annual financial periods
ending after September 15, 2009. The Company adopted ASC 105 during the three
months ended September 30, 2009 with no impact to its financial statements,
except for the changes related to the referencing of financial
standards.
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 October 2009 the Company received from the
DOE a one-time reimbursement of approximately $3,841,000. This was primarily
related to the Company amending its award to include costs previously incurred
in connecti on with the development of the Lancaster site which have a direct
attributable benefit to the DOE Biorefinery.
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 DOE
Biorefinery project. This brings the DOE’s total award to the Fulton project to
approximately $88 million. This is in addition to a renegotiated Phase I funding
for development of the DOE Biorefinery of approximately $7 million out of the
previously announced $10 million total. This brings the total eligible funds for
DOE Biorefinery to approximately $88 million. The Company is currently in
negotiations with the DOE for Phase II of its DOE Biorefinery
project.
F-16
NOTE
4 – PROPERTY AND EQUIPMENT
Property
and Equipment consist of the following:
December
31,
2009
|
December
31,
2008
|
|||||||
Land
|
$ | 109,108 | $ | 109,108 | ||||
Office
equipment
|
60,341 | 55,089 | ||||||
Furniture
and fixtures
|
42,676 | 42,676 | ||||||
212,125 | 206,873 | |||||||
Accumulated
depreciation
|
(44,130 | ) | (20,761 | ) | ||||
$ | 167,995 | $ | 186,112 |
Depreciation
expense for the years ended December 31, 2009 and 2008 and for the period from
inception to December 31, 2009 was $23,373, $20,352 and $44,134,
respectively.
Purchase
of Lancaster Land
On
November 9, 2007, the Company purchased approximately 95 acres of land in
Lancaster, California for approximately $109,000, including certain site
surveying and other acquisition costs. The Company intends to use the land for
the construction of their first pilot refinery plant.
NOTE
5 – NOTES PAYABLE
Convertible
Notes Payable
On July
13, 2007, the Company issued several convertible notes aggregating a total of
$500,000 with eight accredited investors including $25,000 from the Company’s
Chief Financial Officer. Under the terms of the notes, the Company was to repay
any principal balance and interest, at 10% per annum within 120 days of the
note. The holders also received warrants to purchase common stock at $5.00 per
share. The warrants vested immediately and expire in five years. The total
warrants issued pursuant to this transaction were 200,000 on a pro-rata basis to
investors. The convertible promissory notes were only convertible into shares of
the Company’s common stock in the event of a default. The conversion price was
determined based on one third of the average of the last-trade prices of the
Company’s common stoc k for the ten trading days preceding the default
date.
The fair
value of the warrants was $990,367 as determined by the Black-Scholes option
pricing model using the following weighted-average assumptions: volatility of
113%, risk-free interest rate of 4.94%, dividend yield of 0%, and a term of five
years.
The
proceeds were allocated between the convertible notes payable and the warrants
issued to the convertible note holders based on their relative fair
values which resulted in $167,744 allocated to the convertible notes and
$332,256 allocated to the warrants. The amount allocated to the warrants
resulted in a discount to the convertible notes. The Company amortized the
discount over the term of the convertible notes. During the year ended December
31, 2007, the Company amortized $332,256 of the discount to interest
expense.
F-17
In
accordance with ASC 470 formerly EITF 98-05 “Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently Adjustable
Conversion Ratios”, the Company calculated the value of the beneficial
conversion feature to be approximately $332,000 of which $167,744 was allocated
to the convertible notes. However, since the convertible notes were convertible
upon a contingent event, the value was recorded when such event was
triggered.
On
November 7, 2007, the Company re-paid the 10% convertible promissory notes
totaling approximately $516,000 including interest of approximately $16,000.
This included approximately $800 of accrued interest to the Company’s Chief
Financial Officer.
Senior
Secured Convertible Notes Payable
On August
21, 2007, the Company issued senior secured convertible notes aggregating a
total of $2,000,000 with two institutional accredited investors. Under the terms
of the notes, the Company was to repay any principal balance and interest, at 8%
per annum, due August 21, 2009. On a quarterly basis, the Company has the option
to pay interest due in cash or in stock. The senior secured convertible notes
were secured by substantially all of the Company’s assets. The total warrants
issued pursuant to this transaction were 1,000,000 on a pro-rata basis to
investors. These include class A warrants to purchase 500,000 common stock at
$5.48 per share and class B warrants to purchase an additional 500,000 shares of
common stock at $6.32 per share. The warrants vested immediately and expire in
three years. The senio r secured convertible note holders had the option to
convert the note into shares of the Company’s common stock at $4.21 per share at
any time prior to maturity. If, before maturity, the Company consummated a
Financing of at least $10,000,000 then the principal and accrued unpaid interest
of the senior secured convertible notes would be automatically converted into
shares of the Company’s common stock at $4.21 per share.
The fair
value of the warrants was approximately $3,500,000 as determined by the
Black-Scholes option pricing model using the following weighted-average
assumptions: volatility of 118%, risk-free interest rate of 4.05%, dividend
yield of 0% and a term of three years. The proceeds were allocated between the
senior secured convertible notes and the warrants issued to the convertible note
holders based on their relative fair values and resulted in $728,571 being
allocated to the senior secured convertible promissory notes and $1,279,429
allocated to the warrants. The resulting discount was to be amortized over the
life of the notes.
In
accordance with ASC 470 formerly EITF 98-05 “Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently Adjustable
Conversion Ratios”, as amended by EITF 00-27, the Company calculated the value
of the beneficial conversion feature to be approximately $1,679,000 of which
approximately $728,000 was allocated to the beneficial conversion feature
resulting in 100% discount to the convertible promissory notes. During the year
ended December 31, 2007, the Company amortized approximately $312,000 of the
discount related to the warrants and beneficial conversion feature to interest
expense and $1,688,000 to loss on extinguishment, see below for
discussion.
In
addition, the Company entered into a registration rights agreement with the
holders of the senior secured convertible notes agreement whereby the Company
was required to file an initial registration statement with the Securities and
Exchange Commission in order to register the resale of the maximum amount of
common stock underlying the secured convertible notes within 120 days of the
Exchange Agreement (December 19, 2007). The registration statement was filed
with the SEC on December 19, 2007. The registration statement was then declared
effective on March 27, 2008. The Company incurred no liquidated
damages.
Modification
of Conversion Price and Warrant Exercise Price on Senior Secured Convertible
Note Payable
On
December 3, 2007, the Company modified the conversion price into common stock on
its outstanding senior secured convertible notes from $4.21 to $2.90 per share.
The Company also modified the exercise price of the Class A and B warrants
issued with convertible notes from $5.48 and $6.32, respectively, to $2.90 per
share.
F-18
In
accordance with ASC 470 formerly EITF 96-19 and EITF 06-6, the Company recorded
an extinguishment loss of approximately $2,818,000 for the modification of the
conversion price as the fair value of the conversion price immediately before
and after the modification was greater than 10% of the carrying amount of the
original debt instrument immediately prior to the modification. The loss on
extinguishment was determined based on the difference between the fair value of
the new instruments issued and the previous carrying value of the convertible
debt at the date of extinguishment. Upon modification, the carrying amount of
the senior secured convertible notes payable of $2,000,000 and accrued interest
of approximately $33,000 was converted into a total of 700,922 shares of common
stock at $2.90 and $2.96 per share, respective ly. Prior to the modification,
during the quarter ended September 30, 3007, the Company satisfied its interest
obligation of approximately $20,000 by issuing 3,876 shares of the Company’s
common stock at $4.48 per share in lieu of cash.
The
extinguishment loss and non-cash interest expense for the warrants was
determined using the Black-Scholes option pricing model using the following
assumptions: volatility of 122.9%, expected life of 4.72 years, risk free
interest rate of 3.28%, market price per share of $3.26, and no
dividends.
Debt
Issuance Costs
During
2007, debt issuance fees and expenses of approximately $207,000 were incurred in
connection with the senior secured convertible note. These fees consisted of a
cash payment of $100,000 and the issuance of warrants to purchase 23,731 shares
of common stock. The warrants have an exercise price of $5.45, vested
immediately and expire in five years. The warrants were valued at approximately
$107,000 as determined by the Black-Scholes option pricing model using the
following weighted-average assumptions: volatility of 118%, risk-free interest
rate of 4.05%, dividend yield of 0% and a term of five years. These costs were
amortized over the term of the note using the effective interest method and
expensed upon conversion of senior secured convertible note. During the year
ended December 31, 2007, the Company amortized approxi mately $32,000 of the
debt issuance costs to interest expense and approximately $175,000 to loss on
extinguishment, see above for further discussion.
During
2009, debt issuance costs of $150,000 have been incurred in connection with the
Company submitting an application for a $58 million dollar loan guarantee for
the Company's planned cellulosic ethanol biorefinery planned at Lancaster. The
application, filed under the Department of Energy (DOE) Program DE-FOA-0000140,
which provides federal loan guarantees for projects that employ innovative
energy efficiency, renewable energy, and advanced transmission and distribution
technologies.
NOTE
6 - OUTSTANDING WARRANT LIABILITY
Effective
January 1, 2009 we adopted the provisions of Derivatives and Hedging (“ASC
815”) formerly EITF 07-5, "Determining Whether an
Instrument (or Embedded Feature) is Indexed to an Entity’s Own Stock” (“EITF
07-5”). ASC 815 applies to any freestanding financial instruments or embedded
features that have the characteristics of a derivative and to any freestanding
financial instruments that are potentially settled in an entity’s own common
stock. As a result of adopting ASC 815 , 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 have an exercise price of $2.90; 5,962,563 warrants expire in December
2012 and 1,000,000 expire August 2010. 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.
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.
In
connection with the 5,962,963 warrants to expire in December 2012, the Company
recognized a gain of $241,431 from the change in fair value of these warrants
during the year ended December 31, 2009.
F-19
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. Prior to October 19, 2009, the warrants were
previously accounted for as a derivative liability and marked to their fair
value at each reporting period in 2009. The Company valued these warrants the
day immediately preceding the cancellation date which indicated a gain on the
changed in fair value of $208,562 and a remaining fair value of $73,282. Upon
cancellation the remaining value was extinguished for payment of $220,000 in
cash, resulting in a loss on extinguishment of $146,718. In connection with the
remaining 326,800 warrants set to expire in August 2010, the Company recognized
a gain of $117,468 for the change in fair value of these warran ts during the
year ended December 31, 2009.
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, all future changes in the fair value of these warrants will be recognized
currently in earnings until such time as the warrants are exercised or expire.
These common stock purchase warrants do not trade in an active securities
market, and as such, we estimate the fair value of these warrants using the
Black-Scholes option pricing model using the following assumptions:
December
31,
|
January
1,
|
|||||||
2009
|
2009
|
|||||||
Annual
dividend yield
|
- | - | ||||||
Expected
life (years) of August 2007 issuance
|
.64 | 1.6 | ||||||
Expected
life (years) of December 2007 issuance
|
3.0 | 4.0 | ||||||
Risk-free
interest rate
|
2.69 | % | 1.55 | % | ||||
Expected
volatility of August 2007 issuance
|
101 | % | 150 | % | ||||
Expected
volatility of December 2007 issuance
|
95 | % | 150 | % |
Expected
volatility is based primarily on historical volatility. Historical volatility
for the August 2007 issuance 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
7 - COMMITMENTS AND CONTINGENCIES
Employment
Agreements
On June
27, 2006, the Company entered into employment agreements with three key
employees. The employment agreements are for a period of three years, which
expired in 2009, with prescribed percentage increases beginning in 2007 and can
be cancelled upon a written notice by either employee or employer (if certain
employee acts of misconduct are committed). The total aggregate annual amount
due under the employment agreements was approximately $586,000 per year. These
contracts have not been renewed. Each of the executive officers are currently
working for the Company on a month to month basis.
On March
31, 2008, the Board of Directors of the Company replaced our Chief Financial
Officer’s previously existing at-will Employment Agreement with a new employment
agreement, effective February 1, 2008, and terminating on May 31, 2009, unless
extended for additional periods by mutual agreement of both parties. The new
agreement contained the following material terms: (i) initial annual salary of
$120,000, paid monthly; and (ii) standard employee benefits; (iii) limited
termination provisions; (iv) rights to Invention provisions; and (v)
confidentiality and non-compete provisions upon termination of employment. This
employement agreement expired on May 31, 2009, and Mr. Scott currently serves
the Company on a part-time basis as CFO o n a month to month
basis.
F-20
Board
of Director Arrangements
On July
23, 2009, the Company renewed all of its existing Directors’ appointment, issued
6,000 shares to each and paid $5,000 to the three outside member. 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 value
of the common stock granted was determined to be approximately $26,400 based on
the fair market value of the Company’s common stock of $0.88 on the date of the
grant. During the year 2009 the Company expensed approximately $41,400
related to these agreements.
Investor
Relations Agreements
On
November 9, 2006, the Company entered into an agreement with a consultant. Under
the terms of the agreement, the Company is to receive investor relations and
support services in exchange for a monthly fee of $7,500, 150,000 shares of
common stock, warrants to purchase 200,000 shares of common stock at $5.00 per
share, expiring in five years, and the reimbursement of certain travel expenses.
The common stock and warrants vested in equal amounts on November 9, 2006,
February 1, 2007, April 1, 2007 and June 1, 2007. The Company accounted for the
agreement under the provisions of ASC 505 formerly EITF 96-18.
At
December 31, 2006, the consultant was vested in 37,500 shares of common stock.
The shares were valued at $112,000 based upon the closing market price of the
Company’s common stock on the vesting date. The warrants were valued on the
vesting date at $100,254 based on the Black-Scholes option pricing model using
the following assumptions: volatility of 88%, expected life of five years, risk
free interest rate of 4.75% and no dividends. The value of the common stock and
warrants was recorded in general and administrative expense on the accompanying
statement of operations.
The
Company revalued the shares on February 1, 2007, vesting date, and recorded an
additional adjustment of $138,875. On February 1, 2007 the warrants were
revalued at $4.70 per share based on the Black-Scholes option pricing method
using the following assumptions: volatility of 102%, expected life of five
years, risk free interest rate of 4.96% and no dividends. The Company recorded
an additional expense of $158,118 related to these vested warrants.
On March
31, 2007, the fair value of the vested common stock issuable under the contract
based on the closing market price of the Company’s common stock was $7.18 per
share and thus expensed $269,250. As of March 31, 2007, the Company estimated
the fair value of the vested warrants issuable under the contract to be $6.11
per share. The warrants were valued on March 31, 2007 based on the Black-Scholes
option pricing model using the following assumptions: volatility of 114%,
expected life of five years, risk free interest rate of 4.58% and no dividends.
The Company recorded an additional estimated expense of approximately $305,000
related to the remaining unvested warrants.
The
Company revalued the shares on June 1, 2007, vesting date, and recorded an
additional adjustment of $234,375. On June 1, 2007 the warrants were revalued at
$5.40 per share based on the Black-Scholes option pricing method using the
following assumptions: volatility of 129%, expected life of four and a half
years, risk free interest rate of 4.97% and no dividends. The Company recorded
an additional expense of $269,839 related to these vested warrants during the
three months ended June 30, 2007.
NOTE
8 -STOCKHOLDERS' EQUITY
Amended
and Restated 2006 Incentive and Nonstatutory Stock Option Plan
On
December 14, 2006, the Company established the 2006 incentive and nonstatutory
stock option plan (the “Plan”). The Plan is intended to further the growth and
financial success of the Company by providing additional incentives to selected
employees, directors, and consultants. Stock options granted under the Plan may
be either "Incentive Stock Options" or "Nonstatutory Options" at the discretion
of the Board of Directors. The total number of shares of Stock which may be
purchased through exercise of Options granted under this Plan shall not exceed
ten million (10,000,000) shares, they become exercisable over a period of no
longer than five (5) years and no less than 20% of the shares covered thereby
shall become exercisable annually.
F-21
On
October 16, 2007, the Board reviewed the Plan. As such, it determined that the
Plan was to be used as a comprehensive equity incentive program for which the
Board serves as the Plan administrator; and therefore added the ability to grant
restricted stock awards under the Plan.
Under the
amended and restated Plan, an eligible person in the Company’s service may
acquire a proprietary interest in the Company in the form of shares or an option
to purchase shares of the Company’s common stock. The amendment includes certain
previously granted restricted stock awards as having been issued under the
amended and restated Plan. As of December 31, 2009, 3,307,159 options and
268,412 shares have been issued under the plan. As of December 31, 2009,
6,424,429 shares are still issuable under the Plan.
Stock
Options
On
December 14, 2006, the Company granted options to purchase 1,990,000 shares of
common stock to various employees and consultants having a $2.00 exercise price.
The value of the options granted was determined to be approximately $4,900,000
based on the Black-Scholes option pricing model using the following assumptions:
volatility of 99%, expected life of five (5) years, risk free interest rate of
4.73%, market price per share of $3.05, and no dividends. The Company expensed
the value of the options over the vesting period of two years for the employees.
For non-employees the Company revalued the fair market value of the options at
each reporting period under the provisions of ASC 505.
On
December 20, 2007, the Company granted options to purchase 1,038,750 shares of
the Company’s common stock to various employees and consultants having an
exercise price of $3.20 per share. In addition, on the same date, the Company
granted its President and Chief Executive Officer 250,000 and 28,409 options to
purchase shares of the Company’s common stock having an exercise price of $3.20
and $3.52, respectively. The value of the options granted was determined to be
approximately $3,482,000 based on the Black-Scholes option pricing model using
the following assumptions: volatility of 122.9%, expected life of five (5)
years, risk free interest rate of 3.09%, market price per share of $3.20, and no
dividends. Of the total 1,317,159 options granted on December 20, 2007, 739,659
vested immediately and 27,500 i ssued to consultants vested monthly over a one
year period, and 550,000 of the options vested upon two contingent future
events. Management’s belief at the time of the grant was that the events were
probable to occur and were within their control, and thus accounted for the
remaining vesting under ASC 718 by straight-lining the vesting through the
expected date on which the future events were to occur. At the time, management
believed that future date was June 30, 2008. This determination was based on the
fact that the Company appeared to be on track to receive the permits and the
related funding was available. In June 2008, the Company determined that the
June 30, 2008 estimate would not be met due to delays in receiving the necessary
permits and thus modified the date to September 30, 2008. In September 2008, the
Company determined that the September 30, 2008 deadline would not be met due to
the difficulty in obtaining financing due to the pending collapse of the capital
markets . At that point the remaining unamortized portion was immaterial and
thus, the Company expensed the remaining amounts. Although the options were
expensed according to ASC 718, the recipients are still not fully vested as the
triggering events have not yet occurred.
The
Company accounts for the stock options to consultants under the provisions of
ASC 505. In accordance with ASC 505, as of December 31, 2008, the options
awarded to consultants under the 2006 and 2007 Stock Option Grant were re-valued
using the Black-Scholes option pricing model with the following assumptions:
volatility of 150%, risk free interest rate of 1.55%, no dividends, expected
life for the 2006 stock option award of three years; and expected life for the
2007 stock option award of four years. As of December 31, 2009 stock options to
consultants were fully expensed and vested.
F-22
In
connection with the Company’s 2007 and 2006 stock option awards, during the
years ended December 31, 2009, 2008 and for the period from March 28, 2006
(Inception) to December 31, 2009, the Company recognized stock based
compensation, including consultants, of approximately $232,000, $1,691,000 and
$4,487,000 to general and administrative expenses and $0, $2,078,000 and
$4,368,000 to project development expenses, respectively. There is no additional
future compensation expense to record at December 31, 2009 based on previous
awards.
A summary
of the status of the stock option grants under the Plan as of the years ended
December 31, 2007, 2008, and 2009 and changes during this period are presented
as follows:
Options
|
Weighted
Average
Exercise
Price
|
Weighted
Average
Remaining
Contractual
Term
(Years)
|
||||||||||
Outstanding
January 1, 2007
|
1,990,000 | $ | 2.00 | |||||||||
Granted
during the year
|
1,317,159 | 3.21 | ||||||||||
Exercised
during the year
|
(20,000 | ) | 2.00 | |||||||||
Outstanding
December 31, 2007
|
3,287,159 | $ | 2.48 | 4.40 | ||||||||
Granted
during the year
|
- | - | ||||||||||
Exercised
during the year
|
- | - | ||||||||||
Outstanding
December 31, 2008
|
3,287,159 | $ | 2.48 | 3.40 | ||||||||
Granted
during the year
|
- | - | ||||||||||
Exercised
during the year
|
- | - | ||||||||||
Outstanding
December 31, 2009
|
3,287,159 | $ | 2.48 | 2.40 | ||||||||
Options
exercisable at December 31, 2009
|
2,737,159 | $ | 2.34 | 2.40 |
There
were no amounts received for the exercise of stock options in 2008 or
2009.
As of
December 31, 2009, the average intrinsic value of the options outstanding is
zero as the exercise prices were in excess of the closing price of the Company’s
common stock as of December 31, 2009.
Private
Offerings
On
January 5, 2007, the Company completed a private offering of its stock, and
entered into subscription agreements with four accredited investors. In this
offering, the Company sold an aggregate of 278,500 shares of the Company’s
common stock at a price of $2.00 per share for total proceeds of $557,000. The
shares of common stock were offered and sold to the investors in private
placement transactions made in reliance upon exemptions from registration
pursuant to Section 4(2) under the Securities Act of 1933. In addition, the
Company paid $12,500 in cash and issued 6,250 shares of their common stock as a
finder’s fee.
On
December 3, 2007 and December 14, 2007, the Company issued an aggregate of
5,740,741 shares of common stock at $2.70 per share and issued warrants to
purchase 5,740,741 shares of common stock for gross proceeds of $15,500,000. The
warrants have an exercise price of $2.90 per share and expire five years from
the date of issuance.
The value
of the warrants was determined to be approximately $15,968,455 based on the
Black-Scholes option pricing model using the following assumptions: volatility
of 122.9%, expected life of five (5) years, risk free interest rate of 3.28%,
market price per share of $3.26, and no dividends. The relative fair value of
the warrants did not have an impact on the financial statements as they were
issued in connection with a capital raise and recorded as additional paid-in
capital.
F-23
The
warrants are subject to “full-ratchet” anti-dilution protection in the event the
Company (other than excluded issuances, as defined) issues any
additional shares of stock, stock options, warrants or any securities
exchangeable into common stock at a price of less than $2.90 per share. If the
Company issues securities for less $2.90 per share then the exercise price for
the warrants shall be adjusted to equal to the lower price.
In
connection with the capital raise, the Company paid $1,050,000 to placement
agents, $90,000 in legal fees and issued warrants for the purchase of 222,222
shares of common stock. The warrants were valued at $618,133 based on the
Black-Scholes assumptions above as recorded as a cost of the capital raised by
the Company.
Issuance
of Common Stock related to Employment Agreements
In
January 2007, the Company issued 10,000 shares of common stock to an employee in
connection with an employment agreement. The shares were valued on the initial
date of employment at $40,000 based on the closing market of the Company’s
common stock on that date.
On
February 12, 2007, the Company entered into an employment agreement with a key
employee, and simultaneously entered into a consulting agreement with an entity
controlled by such employee; both agreements were effective March 16, 2007.
Under the terms of the consulting agreement, the consulting entity received
50,000 restricted shares of the Company’s common stock. The common stock was
valued at approximately $275,000 based on the closing market price of the
Company’s common stock on the date of the agreement. The shares vest in equal
quarterly installments on February 12, 2007, June 1, December 1, and December 1,
2007. The Company amortized the entire fair value of the common stock of
$275,000 over the vesting period during the year ended December 31, 2007. No
additional issuances were made in 2008 or 2009.</f ont>
Shares
Issued for Services
On August
27, 2009, the Company entered into a 6-month Consulting Agreement with Mirador
Consulting, Inc. Pursuant to the Agreement, the Company will receive services in
connection with mergers and acquisitions, corporate finance, corporate finance
relations, introductions to other financial relations companies and other
financial services. As consideration for these services, the Company will make
monthly cash payments of $3,000 and has issued, or will issue, 200,000 shares of
the Company’s common stock in exchange for $200. The Company valued the shares
at $0.80 based upon the closing price of the Company’s common stock on the date
of the agreement. Under the terms of the agreement, the shares did not have any
future performance requirement nor were they cancellable. The Company expensed
the entire value on the date of the agreement and recorded to general and
administrative expense. Under the terms of the agreement the Company was to
issue 100,000 shares on execution of the agreement and November 15, 2009. As of
December 31, 2009, the Company has yet to issue the remaining 100,000 shares due
to the pending negotiation of a new agreement.
Throughout
the year the Company issued 33,912 shares of common stock for legal services
provided. In connection with this issuance the Company recorded $37,818 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. The
Company expensed the shares on the date of issuance as the services had been
provided and there was no future performance criteria.
Private
Placement Agreements
During
the year ended December 31, 2007, the Company entered into various placement
agent agreements, whereby payments are only ultimately due if capital is
raised.
Warrants
Issued
On August
27, 2009, the Company entered into a six month consulting agreement. Pursuant to
the agreement, the Company grated the consultant a warrant to purchase 100,000
shares of common stock at an exercise price of $3.00 per share. The value of the
warrant issued was determined to be approximately $8,300 based on the
Black-Scholes option pricing model using the following assumptions: volatility
of 108%, expected life of one (1) year, risk free interest rate of 2.48%, market
price per share of $0.80, and no dividends.
F-24
Warrants
Cancelled
On
October 19, 2009, the Company cancelled 673,200 warrants for $220,000 in cash.
(see Note 6).
Warrants
Outstanding
A summary
of the status of the warrants for the years ended December 31, 2007, 2008 and
2009 changes during the periods is presented as follows:
Warrants
|
Weighted
Average
Exercise
Price
|
Weighted
Average
Remaining
Contractual
Term
(Years)
|
||||||||||
Outstanding
January 1, 2007 (with 50,000 warrants exercisable)
|
200,000 | $ | 5.00 | |||||||||
Issued
during the year
|
7,186,694 | 2.96 | ||||||||||
Outstanding
and exercisable at December 31, 2007
|
7,386,694 | $ | 3.02 | 4.60 | ||||||||
Issued
during the year
|
- | - | ||||||||||
Outstanding
and exercisable at December 31, 2008
|
7,386,694 | $ | 3.02 | 3.60 | ||||||||
Issued
during the year
|
100,000 | 3.00 | ||||||||||
Cancelled
during the year
|
(673,200 | ) | (2.90 | ) | ||||||||
Outstanding
and exercisable at December 31, 2009
|
6,813,494 | $ | 3.03 | 2.76 |
NOTE
9 - RELATED PARTY TRANSACTIONS
Technology
Agreement with Arkenol, Inc.
On March
1, 2006, the Company entered into a Technology License agreement with Arkenol,
Inc. (“Arkenol”), which the Company’s majority shareholder and other family
members hold an interest in. Arkenol has its own management and board separate
and apart from the Company. According to the terms of the agreement, the Company
was granted an exclusive, non-transferable, North American license to use and to
sub-license the Arkenol technology. The Arkenol Technology, converts cellulose
and waste materials into Ethanol and other high value chemicals. As
consideration for the grant of the license, the Company shall make a one time
payment of $1,000,000 at first project construction funding and for each plant
make the following payments: (1) royalty payment of 4% of the gross sales price
for sales by the Company or its sub licensees of all products produced from the
use of the Arkenol Technology (2) and a one time license fee of $40.00 per 1,000
gallons of production capacity per plant. According to the terms of the
agreement, the Company made a one-time exclusivity fee prepayment of $30,000
during the period ended December 31, 2006. The agreement term is for 30 years
from the effective date.
During
2008, due to the receipt of proceeds from the Department of Energy, the Board of
Directors determined that the Company had triggered its obligation to incur the
full $1,000,000 Arkenol License fee. The Board of Directors determined that the
receipt of these proceeds constituted “First Project Construction Funding” as
established under the Arkenol technology agreement. As such, the statement of
operation reflects the one-time license fee of $1,000,000 and the unpaid balance
of $970,000 was included in license fee payable to related party on the
accompanying consolidated balance sheet as of December 31, 2008. The prepaid fee
to related party of $30,000 was eliminated as of December 31, 2008. The Company
repaid the $970,000 to the related party on March 9, 2009.
F-25
Asset
Transfer Agreement with Ark Entergy, Inc.
On March
1, 2006, the Company entered into an Asset Transfer and Acquisition Agreement
with ARK Energy, Inc. (“ARK Energy”), which is owned (50%) by the Company’s CEO.
ARK Energy has its own management and board separate and apart from the Company.
Based upon the terms of the agreement, ARK Energy transferred certain rights,
assets, work-product, intellectual property and other know-how on project
opportunities that may be used to deploy the Arkenol technology (as described in
the above paragraph). In consideration, the Company has agreed to pay a
performance bonus of up to $16,000,000 when certain milestones are met. These
milestones include transferee’s project implementation which would be
demonstrated by start of the construction of a facility or completion of
financial closing whichever is earlier. The paym ent is based on ARK Energy’s
cost to acquire and develop 19 sites which are currently at different stages of
development. As of December 31, 2008, the Company had not incurred any
liabilities related to the agreement.
Related
Party Line of Credit
In March
2007, the Company obtained a line of credit in the amount of $1,500,000 from its
Chairman/Chief Executive Officer and majority shareholder to provide additional
liquidity to the Company as needed. Under the terms of the note, the Company is
to repay any principal balance and interest, at 10% per annum, within 30 days of
receiving qualified investment financing of $5,000,000 or more. As of December
31, 2007, the Company repaid its outstanding balance on line of credit of
approximately $631,000 which included interest of $37,800. This line of credit
was terminated with the closing of the private placement in December 2007 and
the subsequent line of credit balance repayment.
In
February 2009, the Company obtained a line of credit in the amount of $570,000
from Arkenol Inc, its technology licensor, to provide additional liquidity to
the Company as needed. In October 2009 $175,000 was utilized from the line of
credit and in November 2009 the balance was paid in full along with
approximately $500 interest. As of December 31, 2009, there were no amount
outstanding and the line of credit was deemed cancelled as the Company did not
anticipate utilizing funds from the line of credit.
Purchase
of Property and Equipment
During
the year ended December 31, 2007, the Company purchased various office furniture
and equipment from ARK Energy costing approximately $39,000 (see Note 4). In
2008 and 2009, the Company did not purchase any items from ARK
Energy.
Notes
Payable
As
mentioned in Note 3, on July 13, 2007, the Company issued several convertible
notes aggregating a total of $500,000 with eight accredited investors including
$25,000 invested by the Company’s Chief Financial Officer. In 2009 and 2008 no
additional notes were issued.
NOTE
10 – INCOME TAXES
Income
tax reporting primarily relates to the business of the parent company Blue Fire
Ethanol Fuels, Inc. which experienced a change in ownership on June 27, 2006. A
change in ownership requires management to compute the annual limitation under
Section 382 of the Internal Revenue Code. The amount of benefits the Company may
receive from the operating loss carry forwards for income tax purposes is
further dependent, in part, upon the tax laws in effect, the future earnings of
the Company, and other future events, the effects of which cannot be
determined.
The
Company had an estimated state tax liability at December 31, 2009 of
approximately $83,000. The prior net operating losses could not be applied due
to the state of California’s suspension of net operating loss (NOL) deductions
with net business income of $500,000 or more in 2009. There is no current
provision or liability for federal reporting purposes, and no deferred income
tax expense is recorded since the deferred tax assets have been recorded as
discussed below.
F-26
The
Company's deferred tax assets consist solely of net operating loss carry
forwards of approximately $8,563,000 and $8,824,000 at December 31, 2009 and
2008, respectively. For federal tax purposes these carry forwards expire in
twenty years beginning in 2026 and for the State of California purposes they
expire in five years beginning in 2011. A full valuation allowance has been
placed on 100% of the Company's deferred tax assets as it cannot be determined
if the assets will be ultimately used to offset future income, if any. During
the years ended December 31, 2009 and 2008, and for the period from March 28,
2006 (Inception) to December 31, 2009, the valuation decreased by approximately
$261,000, and increase by approximately $5,477,000, and $8,563,000,
respectively.
The
difference between the California statutory rate of approximately 8.83% and the
actual provision rate is due to permanent difference required to get to taxable
income. These permanent differences relate primarily to the gain on derivative
liability and the loss on repurchase of warrants. The Company has not provided a
reconciliation to the provision for income taxes for the year ended December 31,
2008 as the difference between the statutory rates and the actual provision rate
relate to changes in the NOLs and the corresponding valuation
allowance.
In
addition, the Company is not current in their federal and state income tax
filings due to previous delinquencies by Sucre prior to the reverse acquisition.
The Company has assessed and determined that the effect of non filing is not
expected to be significant, as Sucre has not had active operations for a
significant period of time.
The
Company has filed all other United States Federal and State tax returns. The
Company has identified the United States Federal tax returns as its “major” tax
jurisdiction. The United States Federal return years 2006 through 2008 are still
subject to tax examination by the United States Internal Revenue Service,
however, we do not currently have any ongoing tax examinations. The Company is
subject to examination by the California Franchise Tax Board for the years ended
2005 through 2008 and currently does not have any ongoing tax
examinations.
F-27
3,900,000 Shares
PROSPECTUS
, 2011
PART II
INFORMATION
NOT REQUIRED IN PROSPECTUS
Indemnification
of Directors and Officers.
The
Company’s Amended and Restated Bylaws provide for indemnification of directors
and officers against certain liabilities. Officers and directors of the Company
are indemnified generally for any threatened, pending or completed action, suit
or proceeding, whether civil, criminal, administrative or investigative, except
an action by or in the right of the corporation, against expenses, including
attorneys’ fees, judgments, fines and amounts paid in settlement actually and
reasonably incurred by him in connection with the action, suit or proceeding if
he acted in good faith and in a manner which he reasonably believed to be in or
not opposed to the best interests of the corporation, and, with respect to any
criminal action or proceeding, has no reasonable cause to believe his conduct
was unlawful.
The
Company’s Amended and Restated Articles of Incorporation further provides the
following indemnifications:
(a) a
director of the Corporation shall not be personally liable to the Corporation or
to its shareholders for damages for breach of fiduciary duty as a director of
the Corporation or to its shareholders for damages otherwise existing for (i)
any breach of the director’s duty of loyalty to the Corporation or to its
shareholders; (ii) acts or omission not in good faith or which involve
intentional misconduct or a knowing violation of the law; (iii) acts revolving
around any unlawful distribution or contribution; or (iv) any transaction from
which the director directly or indirectly derived any improper personal benefit.
If Nevada Law is hereafter amended to eliminate or limit further liability of a
director, then, in addition to the elimination and limitation of liability
provided by the foregoing, the liability of each director shall be eliminated or
limited to the fullest extent permitted under the provisions of Nevada Law as so
amended. Any repeal or modification of the indemnification provided in these
Articles shall not adversely affect any right or protection of a director of the
Corporation under these Articles, as in effect immediately prior to such repeal
or modification, with respect to any liability that would have accrued, but for
this limitation of liability, prior to such repeal or modification.
(b) the
Corporation shall indemnify, to the fullest extent permitted by applicable law
in effect from time to time, any person, and the estate and personal
representative of any such person, against all liability and expense (including,
but not limited to attorney’s fees) incurred by reason of the fact that he is or
was a director or officer of the Corporation, he is or was serving at the
request of the Corporation as a director, officer, partner, trustee, employee,
fiduciary, or agent of, or in any similar managerial or fiduciary position of,
another domestic or foreign corporation or other individual or entity of an
employee benefit plan. The Corporation shall also indemnify any person who is
serving or has served the Corporation as a director, officer, employee,
fiduciary, or agent and that person’s estate and personal representative to the
extent and in the manner provided in any bylaw, resolution of the shareholders
or directors, contract, or otherwise, so long as such provision is legally
permissible.
Insofar
as indemnification for liabilities arising under the Securities Act, as amended,
may be permitted to our directors, officers, and controlling persons pursuant to
the foregoing provisions, or otherwise, we have been advised that in the opinion
of the SEC such indemnification is against public policy as expressed in the
Securities Act and is therefore unenforceable.
Other
Expenses of Issuance and Distribution.
The
estimated expenses payable by us in connection with the registration of the
shares is as follows:
SEC
Registration
|
$
|
208.29
|
||
Accounting
Fees and Expenses
|
$
|
5,000
|
*
|
|
Legal
Fees and Expenses
|
$
|
20,000
|
*
|
|
Printing
Costs
|
$
|
2,500
|
*
|
|
Miscellaneous
Expenses
|
$
|
10,000
|
*
|
|
Total
|
$
|
37,708.29
|
*
|
*
Estimate
57
Recent
Sales of Unregistered Securities.
Convertible
Notes Payable
On July
13, 2007, we issued several convertible notes aggregating a total of $500,000
with seven accredited investors, including $25,000 from our Chief Financial
Officer. Under the terms of the notes, we are required to repay any principal
balance and interest, at 10% per annum within 120 days of the note. The
convertible promissory note is convertible only upon default. The holders also
received warrants to purchase common stock at $5.00 per share. The warrants vest
immediately and expire in five years. The total warrants issued pursuant to this
transaction were 200,000 on a pro-rata basis to investors. The convertible
promissory notes are only convertible into shares of our common stock in the
event of a default. The conversion price is determined based on one third of the
average of the last-trade prices of our common stock for the ten trading days
preceding the default date. On November 7, 2007, we re-paid all of our 10%
convertible promissory notes dated July 13, 2007, to all our private investors,
totaling approximately $516,000, including interest of approximately $16,000.
This private offering was completed as an offering exempt from registration
pursuant to Section 4(2) of the Securities Act of 1933.
Senior
Secured Convertible Notes Payable
On August
21, 2007, we issued senior secured convertible notes (the “Convertible Notes”)
aggregating a total of $2,000,000 with two institutional accredited investors.
Under the terms of the Convertible Notes, we are required to repay any principal
balance and interest, at 8% per annum, due August 21, 2009. On a quarterly
basis, we have the option to pay interest due in cash or in stock. The
Convertible Notes are secured by substantially all of our assets. The total
warrants issued pursuant to this transaction were 1,000,000 on a pro-rata basis
to investors. These include class A warrants to purchase 500,000 common stock at
$5.48 per share and class B warrants to purchase an additional 500,000 shares of
common stock at $6.32 per share. The warrants vest immediately and expire in
three years. The holders of the Convertible Notes have the option to convert the
Convertible Notes into shares of our common stock at $4.21 per share at any time
prior to maturity. If, before maturity, we consummate a financing of at least
$10,000,000, then the principal and accrued unpaid interest of the Convertible
Notes shall be automatically converted into shares of our common stock at $4.21
per share. In addition, we entered into a registration rights agreement with the
holders of the Convertible Notes whereby we are required to file an initial
registration statement on Form SB-2 or Form S-3 with the SEC in order to
register the resale of the maximum amount of common stock underlying the
Convertible Notes within 120 days of the agreement (December 19, 2007). The
registration statement must then be declared effective no later than 90 calendar
days (March 18, 2008), in the event of a full or no review by the SEC, days from
the initial filing date.
In the
event that we fail to file a registration statement within the 120 day period,
we must pay the holder 3% of the face amount as liquidated damages. In the event
that we fail to have the registration statement declared effective by the SEC by
the dates described above, or fail to maintain on the registration statement the
effectiveness of the registration statement thereafter, then we must pay the
holders an amount equal to 2% of the aggregate purchase price paid by each
holder, for each month the registration statement remains uncured. In addition,
if we do not complete a qualified financing within 120 days of the a (December
19, 2007), we must pay the holder an additional 1% of the face amount as
liquidated damages. Liquidated damages cannot exceed 15% of the face amount of
the Convertible Notes. No accrual has been made to the accompanying financial
statements as management does not believe that such damages are probable of
being incurred.
On
December 3, 2007 and December 14, 2007, we consummated an agreement to issue up
to 5,740,741 shares of common stock and warrants to purchase 5,740,741 shares of
common stock for net proceeds of $14,360,000 (the “December Private Placement”).
The warrants have an exercise price of $2.90 per share and expire five years
from the date of issuance.
In
connection with the December Private Placement, we modified the conversion price
of our previously issued 8% Senior Secured Convertible Promissory Notes
(“Convertible Notes”) from $4.21 to $2.90 per share. We also modified the
exercise price of the class “A” and class “B” warrants issued with the
Convertible Notes from $5.48 and $6.32, respectively to $2.90 per
share.
58
On
December 14, 2007, the holders of the Convertible Notes converted their
outstanding principal balance of $2,000,000 and accrued interest of
$33,333 into 700,922 shares of common stock.
Equity
Offering
On
December 3, 2007 and December 14, 2007, the Company consummated an agreement to
issue up to 5,740,741 shares of common stock and warrants to purchase 5,740,741
shares of common stock for aggregate proceeds of $14,360,000. The warrants have
an exercise price of $2.90 per share and expire five years from the date of
issuance.
In
addition, the Company entered into a registration rights agreement with the
investors whereby the Company is required to file an initial registration
statement on Form SB-2 (or another applicable registration form) with the SEC in
order to register the resale of the above common stock and warrants to purchase
common stock. The registration statement is required to be filed within 45 days
from December 14, 2007. The registration statement must then be declared
effective no later than 150 calendar days (May 12, 2008) from the initial filing
date.
The
Company also agreed to register the conversion shares and shares underlying the
warrants issued in connection with its previously Convertible Notes. The details
of the registration rights of the Convertible Notes can be found in the
Company’s August 28, 2007 8-K.
In the
event the Company fails to file its initial registration statement within the 45
day period or, in the event that the Company fails to have the registration
statement declared effective by the SEC by the dates described above, then the
Company must pay the investors certain liquidated damages.
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 (US$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 (US$1,000,000) to the Company or one of its subsidiaries (the
“Due Date”), to be paid in cash or shares of the Company’s common stock, at the
Lender’s option.
Equity
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. 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. We 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. After the SEC has
declared effective the registration statement related to the transaction, we
have the right, in our sole discretion, over a 30-month period to sell our
shares of common stock to LPC in amounts up to $500,000 per sale, depending on
certain conditions 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
$9.85 million of future additional 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. 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. 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. The
Company accounts for these penalties as contingent liabilities.
Accordingly, the Company recognizes damages when it becomes probable that they
will be incurred and amounts are reasonably estimable. The proceeds
received by the Company under the purchase agreement are expected to be used for
general working capital purposes.
59
Exhibits.
Exhibit No.
|
Description
|
|
2.1
|
Stock
Purchase Agreement and Plan of Reorganization, dated May 31, 2006
(Incorporated by reference to the Company’s Form 10-SB, as filed with
the SEC on December 13, 2006).
|
|
3.1
|
Amended
and Restated Articles of Incorporation, dated July 2, 2006
(Incorporated by reference to the Company’s Form 10-SB, as filed with
the SEC on December 13, 2006).
|
|
3.2
|
Amended
and Restated Bylaws, dated May 27, 2006 (Incorporated by reference to
the Company’s Form 10-SB, as filed with the SEC on December 13,
2006).
|
|
3.3
|
Second
Amended and Restated Bylaws, dated April 24, 2008 (Incorporated by
reference to the Company’s Form 8-K, as filed with the SEC on April 29,
2008).
|
|
4.1
|
Form
of Promissory Note (Incorporated by reference to the Company’s Form
10-SB/A, as filed with the SEC on February 28, 2007).
|
|
4.2
|
Description
of Promissory Note, dated July 13, 2007 (Incorporated by reference to the
Company’s Form 8-K, as filed with the SEC on July 16,
2007).
|
|
4.3
|
Form
of Convertible Promissory Note, dated August 22, 2007 (Incorporated by
reference to the Company’s Form 8-K, as filed with the SEC on August 28,
2007).
|
|
4.4
|
Form
of Warrant Agreement, dated August 22, 2007 (Incorporated by reference to
the Company’s Form 8-K, as filed with the SEC on August 28,
2007).
|
|
4.5
|
Form
of Warrant, dated December 14, 2007 (Incorporated by reference to the
Company’s Form 8-K, as filed with the SEC on December 18,
2007).
|
|
4.6
|
Form
of Warrant, dated December 14, 2007 (Incorporated by reference to the
Company’s Form 8-K, as filed with the SEC on December 18,
2007).
|
|
5.1
|
Opinion
of Lucosky Brookman LLP*
|
|
10.1
|
Form
Directors Agreement (Incorporated by reference to the Company’s Form
10-SB, as filed with the SEC on December 13, 2006).
|
|
10.2
|
Form
Executive Employment Agreement (Incorporated by reference to the
Company’s Form 10-SB, as filed with the SEC on December 13,
2006).
|
60
10.3
|
Arkenol
Technology License Agreement, dated March 1, 2006 (Incorporated by
reference to the Company’s Form 10-SB, as filed with the SEC on December
13, 2006).
|
|
10.4
|
ARK
Energy Asset Transfer and Acquisition Agreement, dated March 1, 2006
(Incorporated by reference to the Company’s Form 10-SB, as filed with
the SEC on December 13, 2006).
|
|
10.5
|
Form
of the Consulting Agreement (Incorporated by reference to the Company’s
Form 10-SB/A, as filed with the SEC on February 28,
2007).
|
|
10.6
|
Amended
and Restated 2006 Incentive and Non-Statutory Stock Option Plan, dated
December 13, 2006 (Incorporated by reference to the Company’s Form S-8, as
filed with the SEC on December 17, 2007).
|
|
10.7
|
Chief
Financial Officer Employment Agreement (Incorporated by reference to the
Company’s Form 10-SB/A, as filed with the SEC on March 26,
2007).
|
|
10.8
|
Employment
Agreement, dated March 31, 2008 (Incorporated by reference to the
Company’s Form 8-K, as filed with the SEC on April 7,
2008).
|
|
10.9
|
Revolving
Line of Credit Agreement, dated February 24, 2009 (Incorporated by
reference to the Company’s Form 8-K, as filed with the SEC on March 6,
2009).
|
|
10.10
|
Stock
Purchase Agreement, dated December 3, 2007 (Incorporated by reference to
the Company’s Form 8-K, as filed with the SEC on December 18,
2007).
|
|
10.11
|
Securities
Purchase Agreement, dated December 14, 2007 (Incorporated by reference to
the Company’s Form 8-K, as filed with the SEC on December 18,
2007).
|
|
10.12
|
Form
of Subscription Agreement (Incorporated by reference to the Company’s Form
10-SB/A, as filed with the SEC on February 28, 2007).
|
|
10.13
|
Purchase
Agreement, dated as of January 19, 2011, by and between the Company and
Lincoln Park Capital Fund, LLC (Incorporated by reference to the Company’s
Form 8-K, as filed with the SEC on January 24, 2011).
|
|
10.14
|
Registration
Rights Agreement, dated as of January 19, 2011, by and between the Company
and Lincoln Park Capital Fund, LLC (Incorporated by reference to the
Company’s Form 8-K, as filed with the SEC on January 24,
2011).
|
|
14.1
|
Code
of Ethics (Incorporated by reference to the Company’s Form 8-K, as filed
with the SEC on March 6, 2009).
|
|
21.1
|
List
of Subsidiaries (Incorporated by reference to the Company’s Form 10-SB/A,
as filed with the SEC on April 18, 2007).
|
|
23.1
|
Consent
of dbbmckennon*
|
|
23.2
|
Consent
of Wilson Morgan, LLP*
|
|
99.1
|
Audit
Committee Charter (Incorporated by reference to the Company’s Form
10-SB/A, as filed with the SEC on February 28, 2007).
|
|
99.2
|
Compensation
Committee Charter (Incorporated by reference to the Company’s Form
10-SB/A, as filed with the SEC on February 28,
2007).
|
61
Undertakings.
The
undersigned registrant hereby undertakes:
(1)
To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
i. To
include any prospectus required by section 10(a)(3) of the Securities Act of
1933;
ii. To
reflect in the prospectus any facts or events arising after the effective date
of the registration statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate, represent a fundamental change
in the information set forth in the registration statement. Notwithstanding the
foregoing, any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated maximum
offering range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume
and price represent no more than 20% change in the maximum aggregate offering
price set forth in the “Calculation of Registration Fee” table in the effective
registration statement.
iii. To
include any material information with respect to the plan of distribution not
previously disclosed in the registration statement or any material change to
such information in the registration statement;
(2) That,
for the purpose of determining any liability under the Securities Act of 1933,
each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(3) To
remove from registration by means of a post-effective amendment any of the
securities being registered which remain unsold at the termination of the
offering.
(4)
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
(5) Each
prospectus filed pursuant to Rule 424(b) as part of a registration statement
relating to an offering, other than registration statements relying on Rule 430B
or other than prospectuses filed in reliance on Rule 430A, shall be deemed to be
part of and included in the registration statement as of the date it is first
used after effectiveness. Provided, however, that no statement made in a
registration statement or prospectus that is part of the registration statement
or made in a document incorporated or deemed incorporated by reference into the
registration statement or prospectus that is part of the registration statement
will, as to a purchaser with a time of contract of sale prior to such first use,
supersede or modify any statement that was made in the registration statement or
prospectus that was part of the registration statement or made in any such
document immediately prior to such date of first use.
(6) That,
for the purpose of determining liability of the registrant under the Securities
Act of 1933 to any purchaser in the initial distribution of the securities: The
undersigned registrant undertakes that in a primary offering of securities of
the undersigned registrant pursuant to this registration statement, regardless
of the underwriting method used to sell the securities to the purchaser, if the
securities are offered or sold to such purchaser by means of any of the
following communications, the undersigned registrant will be a seller to the
purchaser and will be considered to offer or sell such securities to such
purchaser:
62
i. Any
preliminary prospectus or prospectus of the undersigned registrant relating to
the offering required to be filed pursuant to Rule 424;
ii. Any
free writing prospectus relating to the offering prepared by or on behalf of the
undersigned registrant or used or referred to by the undersigned
registrant;
iii. The
portion of any other free writing prospectus relating to the offering containing
material information about the undersigned registrant or its securities provided
by or on behalf of the undersigned registrant; and
iv. Any
other communication that is an offer in the offering made by the undersigned
registrant to the purchaser.
63
SIGNATURES
In
accordance with the requirements of the Securities Act, BlueFire Renewables,
Inc., the Registrant, certifies that it has reasonable grounds to believe that
it meets all of the requirements for filing on Form S-1 and authorized this
registration statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Irvine, California, on February 11,
2011.
BLUEFIRE
RENEWABLES, INC.
|
|||
By:
|
/s/
Arnold R. Klann
|
||
Arnold
R. Klann,
|
|||
President
and Chief Executive Officer (Principal
|
|||
Executive
Officer)
|
|||
By:
|
/s/Christopher
Scott
|
||
Christopher
Scott
|
|||
Chief
Financial Officer (Principal Financial Officer
|
|||
and
Principal Accounting Officer)
|
In
accordance with the requirements of the Securities Act of 1933, this
Registration Statement on Form S-1 has been signed by the following persons in
the capacities and on the dates indicated.
Signature
|
Title
|
Date
|
||
/s/
Arnold R. Klann
|
Director
and Chairman of the Board;
|
February
11, 2011
|
||
Arnold
R. Klann
|
President
and Chief Executive
Officer |
|||
/s/
Necitas Sumait
|
Director,
Secretary
|
February
11, 2011
|
||
Necitas
Sumait
|
and
Senior Vice President
|
|||
/s/
Christopher Scott
|
Chief
Financial Officer
|
February
11, 2011
|
||
Christopher
Scott
|
||||
/s/
John Cuzens
|
Chief
Technology Officer
|
February
11, 2011
|
||
John
Cuzens
|
and
Senior Vice President
|
|||
/s/
Chris Nichols
|
Director
|
February
11, 2011
|
||
Chris
Nichols
|
||||
/s/
Roger L. Petersen
|
Director
|
February
11, 2011
|
||
Roger
L. Petersen
|
||||
64