Item 1. Business.
As used in this annual report, “we”, “us”, “our”, “BlueFire”, “Company” or “our company” refers to BlueFire Renewables, Inc.
COMPANY HISTORY
Our Company
We are BlueFire Renewables, Inc., a Nevada corporation (the “Company”). Our goal is to develop, own and operate high-value carbohydrate-based transportation fuel plants, or bio-refineries, to produce ethanol, a viable alternative to fossil fuels, and to provide professional services to bio-refineries worldwide. Our bio-refineries 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 to produce ethanol and will evaluate purchasing a broader license for other products as opportunities arise. We may also utilize certain bio-refinery 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 (“Ark Energy”), 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., 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 as opportunities arise.
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. Our shares of common stock are currently quoted on the OTCBB and the OTC Markets under the symbol “BFRE”. On April 3, 2017, the closing price of our Common Stock was $0.0016 per share.
Our executive offices are located at 25108 Marguerite Parkway Suite A-321, Mission Viejo, CA 92692 and our telephone number at such office is (949) 588-3767.
Principal Products or Services and Their Markets
Our goal is to develop, own and operate high-value carbohydrate-based transportation fuel plants, or bio-refineries, to produce ethanol and other biofuels that are viable alternatives to fossil fuels, and to provide professional services to bio-refineries worldwide. Our bio-refineries 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 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 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 limited 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 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 break down 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 to be reused. 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, are returned to the process for economic water use and for further conversion of the sugars.
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 bio-refinery related rights, assets, work-product, intellectual property and other know-how related to nineteen (19) ethanol project opportunities originally developed by ARK Energy to accelerate BlueFire’s deployment of the Arkenol Technology. These 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 their actual costs of development. In the event that 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 which are based on the actual costs it incurred in developing the project opportunities, and (ii) the anticipated financial benefits to us. The Company has not developed, paid for, or utilized any of these assets to date.
Pilot Plants
From 1994 through 2000, a test pilot bio-refinery 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 used in the process was also tested and process conditions were verified leading to the issuance of 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 bio-refinery 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. Subsequent pilot facilities have been built by other third parties, including GS Caltex, a South Korean petroleum company, but Arkenol retains ownership of all the intellectual property.
Bio-Refinery Projects
We are currently in the development stage of building bio-refineries 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 Brinderson Engineering, Inc. (“Brinderson”) provided the preliminary design package, while Brinderson completed the detailed engineering design for our originally planned Lancaster Bio-refinery. We feel this completed design should provide the blueprint for subsequent plant constructions. In 2010, MasTec in conjunction with Zachary Engineering completed the detailed engineering design for our planned Fulton Mississippi plant, also known as the Fulton Project (defined below).
We originally intended 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 (Lancaster Bio-refinery) and to build a facility that will process approximately 700 tons of green waste material per day to produce roughly 19 million gallons per year annually (Fulton). The Company has abandoned the Lancaster Project, and has sold the land originally intended for the Lancaster Project. The design can be used on future projects as capital and opportunities become available.
In 2009, BlueFire completed the engineering package for the Lancaster Bio-refinery, and finalized the Front-End Loading (“FEL”) 3 stage of engineering for the Lancaster Bio-refinery. In 2010, BlueFire continued to develop the engineering package for the Fulton Project, and completed FEL stages 2 and 3 of engineering for the Fulton Project readying the facility for construction. 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
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
We estimated the total cost, including contingencies, to be in the range of approximately $100 million to $125 million for the Lancaster Bio-refinery. The cost approximations above do not reflect any fluctuations in raw materials or construction costs since the original pricing estimates, and will need to be “rebid” once a suitable opportunity is identified.
Since 2007, the Company has been developing a facility for construction, which had the United States Department of Energy's (“DOE”) financial support. 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 (the “Fulton Project”). In 2007, we received an award from the DOE of up to $40 million for the Fulton Project. On or around October 4, 2007, we finalized our first award for a total approved budget of just under $10,000,000 with the DOE (“Award 1”). Award 1 was a 60%/40% cost share, whereby 40% of approved costs may be reimbursed by the DOE pursuant to the total $40 million award announced in February 2007. Award 1 was closed out on September 12, 2012. In 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. On December 23, 2013, the Company received notice from the DOE indicating that the DOE would no longer provide funding under its second award due to the Company’s inability to provide agreements related to the balance of plant financing arrangements for the Fulton Project. On March 17, 2015, the Company received a letter from the DOE stating that because of the upcoming September 2015 expiration date for expending ARRA funding, it cannot reconsider its decision and the Company considers such decision to be final. The Company considers the DOE grant closed as of September 30, 2015. As of December 31, 2016, BlueFire has been reimbursed approximately $14,164,964 from the DOE under this award.
In 2010, BlueFire signed definitive agreements for the following three crucial contracts related to the Fulton Project: (a) feedstock supply with Cooper Marine and Timberlands Corporation (“Cooper Marine”), (b) off-take for the ethanol of the facility with Tenaska Biofuels LLC, now Tenaska Commodities LLC (“Tenaska”), and (c) the construction of the facility with MasTec North America Inc. (“MasTec”). Also in 2010, BlueFire continued to develop the engineering package for the Fulton Project, and had completed both the FEL-2 and FEL-3 stages of engineering readying the facility for construction. As of November 2010, the Fulton Project had all necessary permits for construction, and in that same month we began site clearing and preparation work, signaling the beginning of construction. In June 2011, BlueFire completed initial site preparation and the site was ready for facility construction. In February 2010, we announced that we applied for a $250 million dollar loan guarantee for the Fulton Project, under the DOE LGPO, mentioned above. In February 2011, BlueFire received notice from the DOE LGPO staff that the Fulton Project’s application will not move forward until the project raises the remaining equity necessary for the completion of funding. In August 2010, BlueFire applied for a $250 million loan guarantee with the U.S. Department of Agriculture (“USDA”) under Section 9003 of the 2008 Farm Bill, as defined below (“USDA LG”). Ultimately the USDA rejected the Company’s lender, BNP Paribas, for not meeting certain capital ratios. The Company has since abandoned pursuit of both loan guarantee opportunities but may reapply at a later date as funding opportunities arise.
In 2014, BlueFire signed an Engineering Procurement and Construction (“EPC”) contract with China Three Gorges Corporation, and its subsidiary China International Water & Electric, a large Chinese Engineering Procurement and Construction company. In tandem with the new EPC contractor, the company is engaging Chinese banks to provide the debt financing for the Fulton Project. BlueFire has received a letter of intent from the Export Import Bank of China to provide up to $270 million in debt financing for the Fulton Project. The letter of intent has since expired and BlueFire is actively seeking the remaining equity in order to reestablish the letter of intent or to find other banking entities capable of financing the Fulton Project. A commitment for the equity portion of the financing has been the major delay in the financing and the Company is focusing most of its efforts on finding suitable partners. No definitive agreements have been executed in regards to the Letter of Intent for financing.
In mid-2013, the Company began developing a new integration concept in regards to the Fulton project where a wood pellet facility would be integrated into the ethanol facility to provide a stronger financing package. A preliminary design package and due diligence have been completed. Since world pellet prices have fallen drastically the Company has stopped pursuing this option but can refocus on it if wood pellet prices become feasible again.
The Company has received notice from Tenaska Commodities, LLC, the off-take agreement provider for the Fulton Project, that due to the Company’s inability to construct the facility and provide first delivery of ethanol before December 31, 2016, Tenaska Commodities, LLC will terminate the market price contract on December 31, 2016. The Company has identified and received interest from other potential ethanol marketers and off-take companies and is actively seeking a replacement for this contract, but no definitive agreements have been made.
The Company is also researching and considering other suitable locations for other similar bio-refineries.
Status of Publicly Announced Products or Services
In February of 2012, SucreSource announced its first client, GS Caltex, a South Korean petroleum company. In the same month, it received the first payment under the Professional Services Agreement (“PSA”) for work on a facility in South Korea. As of December 31, 2014, SucreSource has completed and fulfilled all initial work and obligations under the fixed portion of the PSA. Anticipated future work product and additional services will be billed on an hourly basis when services are performed, as GS Caltex continues to develop additional facilities in South Korea.
Distribution Methods of 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% nationwide which represents an approximately 26+ 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 3,400 E85 fueling stations in the United States. As of the date of this filing, no ethanol is currently being produced or distributed.
Competition
According to the Renewable Fuels Association (“RFA”), most of the approximately 15.9 billion gallons of ethanol supply in the United States is derived from corn and, as of March 2017, is produced at approximately 215 facilities, ranging in size from 300 thousand to 300 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 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 business of biomass-to-ethanol production, there are few companies, and very little to no commercial production infrastructure. 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 America 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 may be a less expensive alternative to domestically produced ethanol and may affect our ability to sell our ethanol profitably.
There are various biorefineries that have been supported by the DOE in different stages of development throughout the United States.
Industry Overview
On December 19, 2007, President Bush signed into law the Energy Independence and Security Act of 2007 the (“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 gallons 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 (the “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.
On February 13, 2009, Congress passed the American Recovery and Reinvestment Act of 2009 (the “Recovery Act”) at the urging of President Obama, who signed it into law four days later, however, as of December 31, 2016, ARRA has expired.
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 22 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 2015, according to the Alternative Fuels Data Center, 95% of all United States gasoline was blended with 10% ethanol. There is also growing federal government support for E85, which is a blend of 85% ethanol and 15% gasoline.
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 13.8 billion gallons of ethanol were consumed in 2012 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 minimal amounts to an estimated 15.5 billion gallons per year in 2016. 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 million per year, offering further potential for significant growth in ethanol demand.
Cellulose to Ethanol Production
In a 2002 report titled “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. There has been no known update to this report.
Sources and Availability of Raw Materials
The DOE and USDA in its April 2005 report titled “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. There has been no known update to this report.
Dependence on One or a Few Major Customers
We have signed a definitive agreement with Tenaska for the off-take of our Fulton Project, which allows Tenaska to market all ethanol produced at this facility. This agreement has expired as of December 31, 2016. The Company is searching for a suitable replacement but no definitive agreements have been reached. 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 or term of a licensee or sublicense project, and for each plant to 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. Per the terms of the agreement, we made a onetime exclusivity fee prepayment of $30,000 during the period ended December 31, 2006. On March 9, 2009, we had 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.
Governmental Approval
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.
Governmental Regulation
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.
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. Beginning 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 mandated 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, the 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. Among other provisions, the RFS sets mandatory blend levels for renewable fuels while also establishing greenhouse gas (“GHG”) reduction criteria and a methodology for calculating lifecycle GHG emissions. 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 Farm Bill and subsequent legislation provides for, among other things, grants for demonstration scale bio-refineries, and loan guarantees for commercial scale bio-refineries 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 to fund development, construction, and retrofitting of commercial-scale refineries.
Research and Development Activities
Research and development costs for the years ended December 31, 2016 and 2015, were approximately $288,000 and $609,000, 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.
Compliance with Environmental Laws
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 countermeasure 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.
Employees
We have 2 full-time employees as of December 31, 2016, and 2 part-time employees.
On December 31, 2016, Ms. Necitas Sumait, a senior vice-president and Board member, resigned as an executive of the Company and as a member of the Board of Directors of the Company. The resignation is not the result of any disagreement with the Company on any matter relating to the Company’s operations, policies or practices.
None of our employees are subject to a collective bargaining agreement, and we believe that our relationship with our employees is good.
Where You Can Find More Information
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-K, 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.
Item 1A.
Item 1A. Risk Factors.
RISKS RELATED TO OUR BUSINESS AND INDUSTRY
WE HAVE HAD LIMITED OPERATIONS, HAVE INCURRED NET LOSSES OF APPROXIMATELY $2,478,000 over the last two years AND WE NEED ADDITIONAL CAPITAL TO EXECUTE OUR BUSINESS PLAN.
We have had limited operations and have incurred net losses from controlling interest of approximately $1,195,000 for the year ended December 31, 2016, and $1,283,000 for the same period in 2015. For the same periods, we have generated $0 and approximately $911,000 in grant revenue from the DOE, and no revenues from ethanol fuel production, respectively. We have yet to begin ethanol production or construction of ethanol producing plants, other than the site preparation at the Fulton Project, as discussed herein. 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 start of construction of a plant given the availability of capital. We estimate the engineering, procurement, and construction (“EPC”) costs including contingencies, to be approximately $300 million for our Fulton Project. 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 achieve profitable operations. Wherever possible, the Company’s Board of Directors (the “Board”) 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.
Due to the Company’s struggles in securing sufficient financing necessary to enact its business plan, the Board is currently evaluating strategic alternatives which include, among other things, merging or selling the Company in order to obtain additional capital sufficient to continue operating and meet both our operating and financial obligations. This evaluation is still under way, there is no formal plan is in place, and there can be no assurance that we will be successful in any of these efforts or that we will have sufficient funds to cover our operational and financial obligations over the next twelve months.
WE HAVE 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 the last two years, we have incurred annual operating losses. Operating losses were $1,244,255 and $947,229 for fiscal years ended 2016 and 2015, respectively. In 2016, we had a net loss of $1,199,315, which was mainly due to the general operating expenses of the Company and partially a result of non-cash charges, namely the amortization of debt discount and a change in the fair value of a derivative liability. 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.
AS OF DECEMBER 31, 2016, THE COMPANY HAS A NEGATIVE WORKING CAPITAL OF APPROXIMATELY $(3,458,200)
Management has estimated that operating expenses for the next 12 months will be approximately $750,000, excluding engineering costs related to the development of bio-refinery projects. These matters raise substantial doubt about the Company’s ability to continue as a going concern. Throughout 2017, the Company intends to fund its operations by seeking additional funding in the form of equity or debt. As of December 31, 2016, the Company expects the current resources available to them will only be sufficient for a period of approximately one month, unless significant additional financing is received. Management has determined that the general expenditures must be reduced and additional capital will be required in the form of equity or debt securities. In addition, if we cannot raise additional short term capital, we may consume all of our cash reserved for operations. There are no assurances that management will be able to raise capital on terms acceptable to the Company or at all. 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.
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 we are utilizing 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 guarantee that these technologies will perform successfully on a large-scale commercial basis or at all.
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, the patents remaining active and in effect, 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.
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 former Senior VP 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.
Due to the continuing capital constraints at the Company, John Cuzens, our Chief Technology Officer and former Senior VP, has sought employment as an engineer in an industry that we feel does not compete with the Company. Mr. Cuzens remains the Chief Technology Officer of the Company; however, his time spent working on BlueFire projects is severely limited and is on a consulting basis.
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 prospects.
IF ETHANOL AND GASOLINE PRICES DROP SIGNIFICANTLY, WE WILL ALSO BE FORCED TO REDUCE OUR PRICES, WHICH POTENTIALLY MAY LEAD TO FURTHER LOSSES IF, AND WHEN, WE COMMENCE ETHANOL PRODUCTION.
Prices for ethanol products can vary significantly over time and decreases in price levels could adversely affect our profitability and viability as well as ability to get funded. 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 IF, AND WHEN, WE COMMENCE ETHANOL PRODUCTION.
Ethanol production requires a constant and consistent supply of energy. If there is any interruption in our supply of energy for any 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 bio-refinery projects. Although each facility will have specific funding requirements, our proposed Fulton Project will require approximately $300 million in EPC costs. We will be relying on additional financing, and funding from such sources as Federal and State grants and loan guarantee programs as may be required by lending institutions if such institution is available to finance our projects. 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.
On December 23, 2013, the Company received notice from the DOE indicating that the DOE would no longer provide funding under Award 2 (defined below) due to the Company’s inability to provide agreements related to the balance of plant financing arrangements for the Fulton Project. On March 17, 2015, the Company received a letter from the DOE stating that because of the upcoming September 2015 expiration date for expending American Recovery and Reinvestment Act (ARRA) funding, it cannot reconsider its decision and the Company considers such decision to be final. The Company considers the DOE Grant closed as of September 30, 2015. In June of 2015, the DOE obligated additional funds totaling $873,332 for costs incurred but not reimbursed prior to September 30, 2014 as well as for program required compliance audits for years 2011-2014 (See Note 3).
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.
WE RELIED 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 DOE. We have relied 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 DOE. As our Fulton Project developed further, the Company began drawing down on the second phase of DOE monies (“Award 2”). 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. Upon notice of the discontinuation of Award 2, the company had a total reimbursable amount of $7,231,696 and through December 31, 2016, we have an unreimbursed amount of $0 available to us under Award 1, and $0 under Award 2, as the reinstatement of the grant was not successful and the grant was closed out as of September 30, 2015. Due to the DOE’s discontinuance of Award 2 as stated below, we cannot guarantee that we will receive any future grants, loan guarantees, or other funding for our projects from the DOE.
On December 23, 2013, the Company received notice from the DOE indicating that the DOE would no longer provide funding under Award 2 due to the Company’s inability to comply with certain deadlines related to providing certain information to the DOE with respect to the Company’s future financing arrangements for the Fulton Project. On March 17, 2015, the Company received a letter from the DOE stating that because of the upcoming September 2015 expiration date for expending American Recovery and Reinvestment Act (ARRA) funding, it cannot reconsider its decision, and the Company considers such decision to be final. In June of 2015, the DOE obligated additional funds totaling $873,332 for costs incurred but not reimbursed prior to September 30, 2014 as well as for program required compliance audits for years 2011-2014.
The Company estimates the amounts to be reimbursed by the DOE by applying a portion of approved indirect costs (overhead) to the direct project costs in a calculation which derives what is known as our indirect rate. This indirect rate is used to reimburse the Company for the costs incurred that are not directly related to the project. This rate calculation is estimated by the Company, and is subject to change periodically. In the event that the Company over estimates this rate or under estimates this rate, it may have an impact to our financial statements and future ability to be reimbursed under the awards.
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
THERE IS NO LIQUID MARKET FOR OUR COMMON STOCK.
Our shares are traded on the OTCQB and the OTC Markets 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.
THE MARKET PRICE OF OUR COMMON STOCK IS HIGHLY VOLATILE 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, and on December 31, 2016, traded as BFRE, the high and low price for our common stock has been $7.90 and $0.0001 per share, respectively. Our share price has fluctuated in response to various factors, including needing additional time to organize engineering resources, issues relating to feedstock sources, trying to locate suitable plant locations, locating distributors, Department of Energy and Department of Agriculture funding decommittments, issuing additional shares for operations, and finding funding sources.
WE MAY ENGAGE IN ADDITIONAL FINANCINGS THAT COULD LEAD TO DILUTION OF OUR EXISTING STOCKHOLDERS.
To date, we have financed our activities through the proceeds from debt and equity financings. Any future financings by us may result in substantial dilution of the holdings of existing stockholders and could have a negative impact on the market price of our common stock. Furthermore, we cannot assure you that such future financings will be available on terms favorable to the Company or at all.
THE APPLICATION OF THE “PENNY STOCK” RULES COULD ADVERSELY AFFECT THE MARKET PRICE OF OUR COMMON SHARES AND INCREASE YOUR TRANSACTION COSTS TO SELL THOSE SHARES.
The U.S. Securities and Exchange Commission (the “SEC”) has adopted rule 3a51-1 which establishes the definition of a “penny stock,” for the purposes relevant to us, as any equity security that has a market price of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to certain exceptions. For any transaction involving a penny stock, unless exempt, Rule 15g-9 requires:
● that a broker or dealer approve a person’s account for transactions in penny stocks; and
● the broker or dealer receive from the investor a written agreement to the transaction, setting forth the identity and quantity of the penny stock to be purchased.
In order to approve a person’s account for transactions in penny stocks, the broker or dealer must:
● obtain financial information and investment experience objectives of the person; and
● make a reasonable determination that the transactions in penny stocks are suitable for that person and the person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks.
The broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prescribed by the SEC relating to the penny stock market, which, in highlight form:
● sets forth the basis on which the broker or dealer made the suitability determination; and
● that the broker or dealer received a signed, written agreement from the investor prior to the transaction.
Generally, brokers may be less willing to execute transactions in securities subject to the “penny stock” rules. This may make it more difficult for investors to dispose of our common stock and cause a decline in the market value of our stock.
AS AN ISSUER OF “PENNY STOCK,” THE PROTECTION PROVIDED BY THE FEDERAL SECURITIES LAWS RELATING TO FORWARD LOOKING STATEMENTS DOES NOT APPLY TO US.
Although federal securities laws provide a safe harbor for forward-looking statements made by a public company that files reports under the federal securities laws, this safe harbor is not available to issuers of penny stocks. As a result, the Company will not have the benefit of this safe harbor protection in the event of any legal action based upon a claim that the material provided by the Company contained a material misstatement of fact or was misleading in any material respect because of the Company’s failure to include any statements necessary to make the statements not misleading. Such an action could hurt our financial condition.
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.
YOU COULD BE DILUTED FROM THE ISSUANCE OF ADDITIONAL COMMON STOCK.
As of April 5, 2017, we had 408,203,492 shares of common stock outstanding and 51 shares of Series A Preferred Stock outstanding. We are authorized to issue up to 500,000,000 shares of common stock and 1,000,000 shares of preferred stock. To the extent of such authorization, or increased 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.
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, and subsequent sales of common stock by the holders of warrants and options could have an adverse effect on the market price of our shares.
Item 1B.
Item 1B. Unresolved Staff Comments.
Not applicable.
Item 2.
Item 2. Description of Property.
On November 9, 2007, we purchased land for the Lancaster Bio-refinery with a purchase price of $109,108. The approximately 10-acre site is presently vacant and undisturbed except for a water well on the site and to occasional use by off road vehicles. The site is flat and has no distinguishing characteristics and is adjacent to a solid waste landfill at a site that minimizes visual access from outside the immediate area. On December 29, 2016, the Company sold the land for a total sale price of $195,000 with net proceeds of $175,328 to the Company.
On June 14, 2010, we entered in to a lease with Itawamba County, Mississippi. The lease is for 38 acres located in the Port of Itawamba where our Fulton Project will be located. The lease is a 30-year term and currently is $10,292 per month but will be reduced, following a formula tied to job creation in the State of Mississippi. The Company is currently in default of the lease due to nonpayment of rents.
Item 3.
Item 3. Legal Proceedings.
On May 6, 2016, the Company reached a settlement with James G. Speirs and James N. Speirs in regard to the lawsuit filed in Orange County Superior Court and subsequently appealed by the Company. Under the settlement agreement, James G. Speirs and James N. Speirs have returned 5,740,741 shares to the Company and they have been subsequently retired to treasury. The case was dismissed with prejudice on May 12, 2016 and the matter closed.
On May 2, 2016, the Company received a written “Wells Notice” from the staff of the SEC indicating that the staff made a preliminary determination to recommend that the SEC bring an administrative proceeding against the Company.
On August 1, 2016, in connection with the Wells Notice, the Company entered into an offer of settlement (the “Wells Settlement”) with the SEC. Pursuant to the Wells Settlement, the Company agreed to pay a twenty-five thousand dollar ($25,000) civil penalty to the SEC.
On October 11, 2016, pursuant to the terms and conditions of the Wells Settlement, the Company made an initial payment of five thousand dollars ($5,000) to the SEC. The remaining balance of the penalty will be paid to the SEC over a nine-month period ending on or about June 30, 2017.
Other than as disclosed above, we are currently not involved in any litigation that we believe could have a material 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 companies or our subsidiaries’ officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect.
Item 4.
Item 4. Mine Safety Disclosures.
Not applicable.
PART II
Item 5.
Item 5. Market for Common Equity and Related Stockholder Matters.
(a) 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 is now currently quoted on the OTCBB and the OTC Markets under the symbol “BFRE” on June 19, 2007.
The following table sets forth the high and low trade information for our common stock for each quarter during the past three fiscal years. The prices reflect inter-dealer quotations, do not include retail mark-ups, markdowns or commissions and do not necessarily reflect actual transactions.
(b) Holders
As of April 5, 2017, a total of 408,203,492 shares of the Company’s common stock are currently outstanding held by approximately 850 shareholders of record.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is VStock Transfer, with a business address at 18 Lafayette Pl, Woodmere, NY 11598.
(c) 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.
(d) Securities Authorized for Issuance under Equity Compensation Plans
Incentive and Non-Statutory Stock Option Plan, as Amended
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, the Board 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, 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 December 31, 2016, we have issued the following stock options and grants under the Amended and Restated Plan:
Equity Compensation Plan Information
(1) Excludes shares of restricted stock issued under the Plan
Rule 10B-18 Transactions
During the years ended December 31, 2016 and 2015, there were no repurchases of the Company’s common stock by the Company.
Item 6.
Item 6. Selected Financial Data.
Not applicable.
Item 7.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
THE FOLLOWING DISCUSSION OF OUR PLAN OF OPERATION AND RESULTS OF OPERATIONS SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL STATEMENTS AND RELATED NOTES TO THE FINANCIAL STATEMENTS INCLUDED ELSEWHERE IN THIS ANNUAL REPORT. 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 ANNUAL REPORT.
PLAN OF OPERATION
Our primary business encompasses development activities culminating in the design, construction, ownership and long-term operation of cellulosic ethanol production bio-refineries utilizing the licensed Arkenol Technology in North America. Our secondary business is providing support and operational services to Arkenol Technology based bio-refineries 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.
Our initial planned bio-refinery in North America are projected as follows:
● A bio-refinery proposed for development and construction previously in conjunction with the DOE, located in Fulton, Mississippi, which will process approximately 700 metric dry tons of woody biomass, mill residue, and other cellulosic waste to produce approximately 19 million gallons of ethanol annually. We estimate the total construction cost of the Fulton Project to be in the range of approximately $300 million. In 2007, we received an Award from the DOE of up to $40 million for the Fulton Project. 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 approved costs may be reimbursed by the DOE pursuant to the total $40 million award announced in February 2007. In 2008, the Company began to draw down on the Award 1 monies that were finalized with the DOE. As our Fulton Project developed further, the Company began drawing down on Award 2, the second phase of DOE monies. On December 4, 2009, the DOE announced that the total award for this project has been increased to a maximum of $88 million ARRA and the Energy Policy Act of 2005. As of September 12, 2012, Award 1 was officially closed. On December 23, 2013, the Company received notice from the DOE indicating that the DOE would no longer provide funding under the DOE Grant for the development of the Fulton Project due to the Company’s inability to comply with certain deadlines related to providing certain information to the DOE with respect to the Company’s future financing arrangements for the Fulton Project. On March 17, 2015, the Company received a letter from the DOE stating that because of the upcoming September 2015 expiration date for expending ARRA funding, it cannot reconsider its decision and the Company considers such decision to be final. In 2010, BlueFire signed definitive agreements for the following three crucial contracts related to the Fulton Project: (a) feedstock supply with Cooper Marine, (b) off-take for the ethanol of the facility with Tenaska, and (c) the construction of the facility with MasTec. Also in 2010, BlueFire continued to develop the engineering package for the Fulton Project, and completed both the FEL-2 and FEL-3 stages of engineering readying the facility for construction. As of November 2010, the Fulton Project had all necessary permits for construction, and in that same month we began site clearing and preparation work, signaling the beginning of construction. The Company has received notice from Tenaska Commodities, LLC, the off-take agreement provider for the Fulton Project, that due to the Company’s inability to construct the facility and provide first delivery of ethanol before December 31, 2016 that Tenaska Commodities, LLC will terminate the market price contract on December 31, 2016. The Company has identified and received interest from other potential ethanol marketers and off-take companies and is actively seeking a replacement for this contract, but no definitive agreements have been made.
In 2014, BlueFire signed an Engineering Procurement and Construction (EPC) contract with China Three Gorges Corporation and its subsidiary China International Water & Electric, a large Chinese Engineering Procurement and Construction company. In tandem with the new EPC contractor, the company is engaging Chinese banks to provide the debt financing for the Fulton Project. BlueFire has received a letter of intent from the Export Import Bank of China to provide up to $270 million in debt financing for the Fulton project. The letter of intent has since expired and BlueFire is actively seeking the remaining equity in order to reestablish the letter of intent or to find other banking entities capable of financing the Fulton Project. A commitment for the equity portion of the financing has been the major delay in the financing and the Company is focusing most of its efforts on finding suitable partners. No definitive agreements have been executed in regards to the Letter of Intent for financing.
In mid-2013, the Company began developing a new integration concept in regards to the Fulton project where a wood pellet facility would be integrated into the ethanol facility to provide a stronger financing package. A preliminary design package and due diligence has been completed. However, since world pellet prices have fallen drastically, the Company has stopped pursuing this option. If wood pellet prices increase and make this type of integration feasible again, the Company can further its work on this concept.
Several other opportunities are being evaluated by us in North America, although no definitive agreements have been reached.
● In February of 2012, SucreSource announced its first client GS Caltex, a South Korean petroleum company. In the same month, it received the first payment under the Professional Services Agreement (PSA) for work on a facility in South Korea. As of March 31, 2015, SucreSource has completed and fulfilled all initial work and obligations under the fixed portion of the agreement. Any future work product and additional services will be billed on an hourly basis when services are performed as GS Caltex continues to develop facilities in South Korea.
BlueFire’s capital requirement strategies for its planned bio-refineries and general company operations 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 bio-refineries in North America. Although the Company is in discussions with potential financial and strategic sources of financing for their planned bio-refineries, no definitive agreements are in place and no assurances can be made that the Company will be able to procure financing on terms acceptable to the Company or at all.
● The 2014 Farm Bill made amendments to Title IX of the Food, Conservation, and Energy Act of 2008 (“2014 Farm Bill”) including changes to Section 9003 Biorefinery Assistance Program of Title IX (“9003 Biorefinery Assistance Program” or the “Program”) to expand the Program to enable loan guarantees for renewable chemical and biobased product manufacturing facilities. The 2014 Farm Bill provides mandatory budget authority of $100 million for the fiscal year ending September 2014 and $50 million for each of fiscal years 2015 and 2016. Carryover funding from the 2008 Farm Bill may still be made available. While BlueFire will continue to explore potential opportunities under the 2014 Farm Bill, initial attempts under the 9003 Program have been unsuccessful and unless a qualified lender is identified to participate, an application filing by BlueFire is not imminent.
● Sale of Company engineering services and design packages to technology licensees.
● Apply for public funding to leverage private capital raised by us, as applicable.
● Sale of consulting services to project developers and technology companies
● The issuance of debt and/or equity to fund operations.
● Leverage existing relationships with Chinese or South Korean strategic partners for investment.
● The sale of Company assets or entertaining suitors for acquisition of part or all of Company’s ongoing projects.
Due to the Company’s struggles in securing sufficient financing necessary to enact its business plan, the Board is currently evaluating strategic alternatives which include, among other things, merging or selling the Company, in order to obtain additional capital sufficient to continue operating and meet both our operating and financial obligations. This evaluation is still under way, there is no formal plan is in place, and there can be no assurance that we will be successful in any of these efforts or that we will have sufficient funds to cover our operational and financial obligations over the next twelve months.
DEVELOPMENTS IN BLUEFIRE’S BIO-REFINERY ENGINEERING AND DEVELOPMENT
In 2010, BlueFire continued to develop the engineering package for the Fulton Project, and completed the Front-End Loading (FEL) stages 2 and FEL-3 of engineering for the Fulton Project readying the facility for construction. 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).
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
As of November 2010, the Fulton Project had all necessary permits for construction, and in that same month we began site clearing and preparation work, signaling the beginning of construction. In June 2011, BlueFire completed initial site preparation and the site is now ready for facility construction. In February 2010, we announced that we submitted an application for a $250 million dollar loan guarantee for the Fulton Project, under the DOE LGPO, mentioned above. In August 2010, BlueFire submitted an application for a $250 million loan guarantee with the U.S. Department of Agriculture (“USDA”) under Section 9003 of the 2008 Farm Bill, as defined below (“USDA LG”). Ultimately the USDA rejected the Company’s lender, BNP Paribas, for not meeting certain capital ratios. The Company has since abandoned pursuit of both loan guarantee opportunities but may reapply at a later date as funding opportunities arise.
In 2014, BlueFire signed an Engineering Procurement and Construction (EPC) contract with China Three Gorges Corporation and its subsidiary China International Water & Electric, a large Chinese Engineering Procurement and Construction company. In tandem with the new EPC contractor, the company is engaging Chinese banks to provide the debt financing for the Fulton Project. BlueFire has received a letter of intent from the Export Import Bank of China to provide up to $270 million in debt financing for the Fulton project. The letter of intent has since expired and BlueFire is actively seeking the remaining equity in order to reestablish the letter of intent or to find other banking entities capable of financing the Fulton Project. A commitment for the equity portion of the financing has been the major delay in the financing and the Company is focusing most of its efforts on finding suitable partners. No definitive agreements have been executed in regards to the Letter of Intent for financing.
In mid 2013, the Company began developing a new integration concept in regards to the Fulton project where a wood pellet facility would be integrated into the ethanol facility to provide a stronger financing package. A preliminary design package and due diligence has been completed. Since world pellet prices have fallen drastically the Company has stopped pursuing this option, but can refocus on it if wood pellet prices become feasible again.
The Company has received notice from Tenaska Commodities, LLC, the off-take agreement provider for the Fulton Project, that due to the Company’s inability to construct the facility and provide first delivery of ethanol before December 31, 2016 that Tenaska Commodities, LLC will terminate the market price contract on December 31, 2016. The Company has identified and received interest from other potential ethanol marketers and off-take companies and is actively seeking a replacement for this contract, but no definitive agreements have been made
Results of Operations
Year Ended December 31, 2016 Compared to the Year Ended December 31, 2015
Revenue
Revenue for the years ended December 31, 2016 and December 31, 2015, was $0 and approximately $911,500, respectively, and was primarily related to a federal grant from the DOE. The grant generally provided for reimbursement in connection with related development and construction costs involving commercialization of our technologies. The decrease in revenue was due to the close-out of the DOE Award in fiscal 2016 versus the same period in fiscal 2015.
Project Development
For the year ended December 31, 2016, our project development costs were approximately $288,000 compared to $609,000 for the same period during 2015. The decrease in project development costs is due to the closing out of the Department of Energy grant, the reduction in number of employees, and reduced activities on the Fulton project.
General and Administrative Expenses
General and Administrative Expenses were approximately $956,000 for the year ended December 31, 2016, compared to $1,250,000 for the same period in 2015. The decrease in general and administrative costs is due a reduction in number of employees and associated overhead costs caused by the Company’s capital constraints.
Liquidity and Capital Resources
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. In addition, in the past we have received funds under the grant received from the DOE. Our principal use of funds has been for the further development of our bio-refinery projects, for capital expenditures and general corporate expenses. As our projects are developed to the point of construction, we anticipate significant purchases of long lead time item equipment for construction if the requisite capital can be obtained. As of December 31, 2016, we had cash and cash equivalents of approximately $162,000. As of April 3, 2016, we had cash and cash equivalents of approximately $6,400. Historically, we have funded our operations though the following transactions:
Management has estimated that operating expenses for the next twelve months will be approximately $750,000, excluding engineering costs related to the development of bio-refinery projects. These matters raise substantial doubt about the Company’s ability to continue as a going concern. For 2017, the Company intends to fund its operations from the sale of the Lancaster land, the potential sale of Fulton Project equity ownership, potential consulting opportunities, from the sale of debt or equity instruments, and from a potential merger or sale of the Company. As of April 5, 2017, the Company expects the current resources, as well as the resources available in the short term under various financing mechanisms, will only be sufficient for a period of approximately one month, depending upon certain funding conditions contained herein, unless significant additional financing is received. Management has determined that general expenditures have been reduced as much as is possible without affecting operations and that additional capital will be required in the form of equity or debt securities. In addition, if we cannot raise additional short term capital we will be forced to continue to further accrue liabilities due to our limited cash reserves. 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.
Changes in Cash Flows
During the years ended December 31, 2016 and 2015, the Company used cash in operating activities of $235,953 and $277,212, respectively. In 2016, our net loss of $1,199,315 was offset by non-cash adjustments of ($146,080) $29,249 and operating assets and liabilities of $1,109,442. In 2015, our net loss of $1,281,907 was offset by non-cash adjustments of $285,350 and operating assets and liabilities of $719,345.
We received no convertible note proceeds in 2016, verses receiving proceeds of $155,000 for the year ended December 31, 2015. In 2016, we received net advances on a related party line of credit of $195,694 and sold no common stock for cash versus in 2015, we sold common stock for gross proceeds of $147,000.
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, impairment of long-lived assets, commitments and contingencies, and revenue recognition. 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 consolidated financial statements appearing elsewhere in this report. 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.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
We do not hold any derivative instruments and do not engage in any hedging activities.
Item 8.
Item 8. Financial Statements.
Our consolidated financial statements are contained in pages through which appear at the end of this annual report.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Controls and Procedures.
(a) Evaluation of Disclosure Controls and Procedures
Our management team, under the supervision and with the participation of our principal executive officer and our principal financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the last day of the fiscal period covered by this report, December 31, 2016. The term disclosure controls and procedures means our controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to management, including our principal executive and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective as of December 31, 2016.
(b) Management’s Assessment of Internal Control over Financial Reporting
Our principal executive officer and our principal financial officer, are responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f). Management is required to base its assessment of the effectiveness of our internal control over financial reporting on a suitable, recognized control framework, such as the framework developed by the Committee of Sponsoring Organizations (COSO). The COSO framework, published in Internal Control-Integrated Framework, is known as the COSO Report. Our principal executive officer and our principal financial officer have chosen the COSO framework on which to base their assessment. Based on this evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, 2016.
It should be noted that any system of controls, however well designed and operated, can provide only reasonable and not absolute assurance that the objectives of the system are met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of certain events. Because of these and other inherent limitations of control systems, there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.
(c) Changes in Internal Controls Over Financial Reporting
During the most recently completed year, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B.
Item 9B. Other Information.
None.
PART III
Item 10.
Item 10. Directors, Executive Officers, and Corporate Governance.
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 December 31, 2016. 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
President, CEO and Director
June
John Cuzens
Chief Technology Officer
June
Chris Nichols
Director
June
Joseph Sparano
Director
March
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 the Chairman of the Board and Chief Executive Officer since our inception in March 2006. Mr. Klann has been the President of Arkenol, Inc. from January 1989 to present. Previously, he was President of ARK Energy, Inc. As co-founder of both companies, he has been responsible for the successful development and acquisition of over 610 megawatts of natural gas-fired cogeneration facilities, and has been the driving force behind the research and development effort leading to the commercialization of the Arkenol technology. Prior to ARK Energy, he was a Vice President of Engineering and Product Development for GWF Power Systems Company, where he successfully launched three businesses and managed complex teams for project development and operation. Mr. Klann’s areas of technical expertise include cogeneration development using natural gas-fired and solid fuels technologies, ocean thermal energy conversion, and offshore oil exploration design and operations. During his tenure at GWF Power Systems, Mr. Klann led technical commercialization, development and permitting activities for eight petroleum coke and coal-fired power plants. Mr. Klann has an AA from Lakeland College in Electrical Engineering. Mr. Klann has over 30 years experience in developing and commercializing new technologies in the energy industry. BlueFire believes that Mr. Klann’s contacts in the ethanol and cellulose industries and his overall insight into our business are a valuable asset to the Company.
John Cuzens - Chief Technology Officer
Mr. Cuzens has been the Chief Technology Officer and Senior Vice President since our inception in March 2006 until March 31, 2016, and now only the Chief Technology Officer from April 1, 2016 to Present. 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 and Audit Committee)
Mr. Nichols has been the Director since our inception in March 2006. Mr. Nichols is currently the CEO for NFI Empire Custom Built Jeeps. Previously, Mr. Nichols was the Chief Sales Officer for Field Nation LLC from 2010 to August 2016. Mr. Nichols was also the Chairman of the Board and Chief Executive Officer of Advanced Growing Systems, Inc. From 2003 to 2006, 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. The Company believes that Mr. Nichols’ experience in public company financing will assist us with the formation of new capital into the Company.
Joseph Sparano - Director (Chairman Nominating Committee)
Mr. Sparano served as President of the Western States Petroleum Association’s (“WSPA”) from March 2003 until January 2010, leading the trade association. From January 2010 until his retirement in April 2011, Mr. Sparano served as Executive Advisor to WSPA’s board of directors, advising WSPA’s President and the Chairman of the Board on matters related to the trade organization’s operations and advocacy. WSPA is a non-profit trade association that represents companies that account for the bulk of petroleum exploration, production, refining, transportation and marketing in the six western states of Arizona, California, Hawaii, Nevada, Oregon and Washington. Prior to joining WSPA, from March 2000 to March 2003, Mr. Sparano served as the President of Tesoro Petroleum Corporation’s (“Tesoro”) West Coast Regional Business Unit and as Vice President of the company’s Heavy Fuels Marketing segment. Tesoro is an independent marketer and refiner of petroleum products. Prior to joining Tesoro, Mr. Sparano led his own consulting firm, Sparano Consulting, from 1995 until 2000. From September 1990 to August 1995, Mr. Sparano served as the Chairman and Chief Executive Officer of Pacific Refining Company, a California based petroleum refining operation. Mr. Sparano graduated cum laude from the Stevens Institute of Technology, receiving a B.S. in chemical engineering. The Company believes that Mr. Sparano’s experience in both mergers and acquisitions and in representing the oil and gas industry for 42 years will assist us with the formation of new strategic partnerships.
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.
Executive Legal Proceedings
Except as set forth below, 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.
Committees of the Board of Directors
Each of our Audit Committee, Compensation Committee and Nomination Committee is composed of a majority of independent board members and are also chaired by an independent board member.
Audit Committee
Christopher Nichols, Chairman; Joseph Sparano
Compensation Committee
Christopher Nichols, Chairman; Joseph Sparano
Nomination Committee
Joseph Sparano, Chairman; Arnold Klann;
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). To the best of the Company’s knowledge, any reports required to be filed were timely filed as of April 5, 2016.
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 has been no material change 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 Schedule 14A, as amended, filed on May 19, 2010, with the SEC.
Item 11.
Item 11. Executive Compensation.
The following table sets forth information with respect to compensation paid by us to our executive officers during the three 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.
Summary Compensation Table
(1) Reflects the value of shares of restricted common stock issued as compensation for serving on the Company’s board of directors. See notes to the consolidated financial statements for valuation.
(2) All dollar amounts in the above chart for Year 2016 and approximately half of Year 2015 have been accrued and not paid as of December 31, 2016.
Outstanding Equity Awards at Fiscal Year
Director Compensation Table
(1) Reflects cash amount accrued but not paid as of December 31, 2016
Employment Contracts
On June 27, 2006, the Company entered into employment agreements with three key employees. The employment agreements were each for a period of three years, which expired in 2010, with prescribed percentage increases beginning in 2007 and could have been 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 under the same terms.
Due to the continuing capital constraints at the Company, Mr. Cuzens, our Chief Technology Officer and Senior VP, has begun employment as an engineer in an industry that we feel does not compete with the Company. Mr. Cuzens remains the Chief Technology Officer of the Company, however, his time spent working on BlueFire projects is severely limited and is on a consulting basis.
On December 31, 2016, Ms. Necitas Sumait resigned as Executive Vice President and a member of the Board of Directors of the Company effective immediately. The resignation was not the result of any disagreement with the Company on any matter relating to the Company’s operations, policies or practices.
The new aggregate amount of the employment contracts is $226,000 per year.
On November 12, 2015, the Board of Directors approved the re-election of Joseph Sparano, Christopher Nichols, Arnold Klann and Necitas Sumait. As of December 31, 2016, the Company has granted to each member the stock to be issued for this reelection.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
As of April 5, 2017, our authorized capitalization was 501,000,000 shares of capital stock, consisting of 500,000,000 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 December 31, 2016, there were 408,203,492 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 April 3, 2017, 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.
The address of each owner who is an officer or director is c/o the Company at 25108 Marguerite Parkway Suite A-321, Mission Viejo, CA 92692
* denotes less than 1%
(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.
Share Issuances/Consulting Agreements
On November 12, 2015, the Company renewed all of its existing Directors’ appointments. The $5,000 to the two outside members, plus $1,000 for Chairing committees, was accrued, and as yet remains unpaid as of December 31, 2016. 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.
Stock Option Issuances Under Amended 2006 Plan
No stock options have been granted by the Company’s Board of Directors in 2015 or 2016.
Description of Securities
The Company is authorized to issue 500,000,000 shares of $0.001 par value common stock, and 1,000,000 shares of no par value preferred stock. As of April 5, 2017, the Company had 408,203,492 shares of common stock outstanding, and 51 shares of Series A Preferred Stock outstanding.
Common Stock
As of April 5, 2017, we had 408,203,492 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.
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 April 5, 2017, we had 51 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 other than that discussed below.
Series A Preferred Stock
On September 30, 2015, the Company filed an amendment to the Company’s articles of incorporation with the Secretary of State of the State of Nevada, which, among other things, established the designation, powers, rights, privileges, preferences and restrictions of the Series A Preferred Stock, no par value per share (the “Series A Preferred Stock”). Among other things, each one (1) share of the Series A Preferred Stock shall have voting rights equal to(x) 0.019607 multiplied by the total issued and outstanding shares of common stock of the Company eligible to vote at the time of the respective vote (the “Numerator”), divided by (y) 0.49, minus (z) the Numerator. For purposes of illustration only, if the total issued and outstanding shares of common stock of the Company eligible to vote at the time of the respective vote is 5,000,000, the voting rights of one share of the Series A Preferred Stock shall be equal to 102,036 (0.019607 x 5,000,000) / 0.49) - (0.019607 x 5,000,000) = 102,036).
The Series A Preferred Stock has no dividend rights, no liquidation rights and no redemption rights, and was created primarily to be able to obtain a quorum and conduct business at shareholder meetings. All shares of the Series A Preferred Stock shall rank (i) senior to the Company’s common stock and any other class or series of capital stock of the Company hereafter created, (ii) pari passu with any class or series of capital stock of the Company hereafter created and specifically ranking, by its terms, on par with the Series A Preferred Stock and (iii) junior to any class or series of capital stock of the Company hereafter created specifically ranking, by its terms, senior to the Series A Preferred Stock, in each case as to distribution of assets upon liquidation, dissolution or winding up of the Company, whether voluntary or involuntary.
Warrants
As of April 3, 2017, we had no warrants outstanding.
Options
As of April 3, 2017, we had no options outstanding.
Item 13.
Item 13. Certain Relationships and Related Transactions.
Technology Agreement with Arkenol, Inc.
On March 1, 2006, the Company entered into a Technology License agreement with Arkenol, which the Company’s Chairman/Chief Executive Officer 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 or term of a Licensee or sublicense project, and for each plant make the following payments: (1) royalty payment of 3% 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 as well as the term of a sublicense agreement to the Fulton project, 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 paid the $970,000 to the related party on March 9, 2009.
Asset Transfer Agreement with ARK Energy, Inc.
On March 1, 2006, the Company entered into an Asset Transfer and Acquisition Agreement with 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. The company has not paid for, developed, or utilized any of these assets to date.
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, at the time, the majority shareholder of the Company, as lender (the “Lender”), and the Company, as borrower. Pursuant to the Loan Agreement, the Lender agreed to advance to the Company a principal amount of $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 expired December 15, 2013. The Company has promised to pay in full the outstanding principal balance of 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 $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 warrants are now expired.
Related Party Lines of Credit
On November 10, 2011, the Company obtained a line of credit in the amount of $40,000 from its Chairman/Chief Executive Officer and, at the time, the majority shareholder to provide additional liquidity to the Company as needed, at his sole discretion. Under the terms of the note, the Company is to repay any principal balance and interest, at 12% per annum, within 30 days of receiving qualified investment financing of $100,000 or more. On April 10, 2014, the line of credit was increased to $55,000. On March 13, 2016, the line of credit was increased to $125,000, and then incrementally increased to $250,000 on October 5, 2016. As of December 31, 2016, the outstanding balance on the line of credit was approximately $240,924 with $9,076 remaining under the line. Although the Company has received over $100,000 in financing since this agreement was put into place, Mr. Klann does not hold the Company in default.
As of December 31, 2016, $31,709 in accrued interest is owed under this line of credit and included with accrued liabilities.
Item 14.
Item 14. Principal Accountant Fees and Services.
a. Audit Fees: Aggregate fees billed by dbbmckennon for professional services rendered for the audit of our annual financial statements included in Form 10-K and review of our financial statements included in Form 10-Q for the years ended December 31, 2016 and 2015, were approximately $34,200 and $44,430 respectively.
b. Audit-Related Fees: No fees were billed for assurance and related services reasonably related to the performance of the audit or review of our financial statements and not reported under “Audit Fees” above in the years ended December 31, 2016 and 2015.
c. Tax Fees: Aggregate fees billed by dbbmckennon for tax services for the years ended December 31, 2016 and 2015, were approximately $0 and $0.
d. All Other Fees: Aggregate fees billed for professional services provided by dbbmckennon other than those described above were approximately $0 for the year ended December 31, 2016 and $175,000 for the year ended December 31, 2015. The fees in 2015 were incurred for the Company’s DOE compliance audits that were required by the DOE as part of the close out of Award 2. The Company was required to obtain a compliance audit for the years ended December 31, 2014, 2013, 2012, and 2011.
dbbmckennon was at the 2016 stockholders’ meeting and is expected to be present at the 2017 meeting.
Audit Committee Pre-Approval Policies and Procedures
The Company’s Audit Committee has policies and procedures that require the pre-approval by the Audit Committee of all fees paid to, and all services performed by, the Company’s independent accounting firms. At the beginning of each year, the Audit Committee approves the proposed services, including the nature, type and scope of services contemplated and the related fees, to be rendered by these firms during the year. In addition, Audit Committee pre-approval is also required for those engagements that may arise during the course of the year that are outside the scope of the initial services and fees pre-approved by the Audit Committee.
Pursuant to the Sarbanes-Oxley Act of 2002, 100% of the fees and services provided as noted above were authorized and approved by the Audit Committee in compliance with the pre-approval policies and procedures described herein.
PART IV
Item 15.
Item 15. Exhibits, Financial Statement Schedules.
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).
3.4
Amended and Restated Articles of Incorporation, dated July 20, 2010 (Incorporated by reference to the Company’s Form 8-K, as filed with the SEC on July 26, 2010).
3.5
Amendment to the Articles of Incorporation, dated November 25, 2013 (Incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on December 4, 2013)
3.6
Amendment to the Articles of Incorporation, Series A Preferred Certificate of Designation, dated September 30, 2015 (Incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on October 6, 2015)
10.1
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).
10.2
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).
10.3
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).
10.4
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).
10.5
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).
31.1
Certification by the Principal Executive Officer of Registrant pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rule 13a-14(a) or Rule 15d-14(a)).*
31.2
Certification by the Principal Financial Officer of Registrant pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rule 13a-14(a) or Rule 15d-14(a)).*
32.1
Certification by the Principal Executive Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
32.2
Certification by the Principal Financial Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
101.INS
XBRL Instance Document *
101.SCH
XBRL Taxonomy Extension Schema *
101.CAL
XBRL Taxonomy Extension Calculation Linkbase *
101.DEF
XBRL Taxonomy Extension Definition Linkbase *
101.LAB
XBRL Taxonomy Extension Label Linkbase *
101.PRE
XBRL Taxonomy Extension Presentation Linkbase *
* filed herewith
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
BLUEFIRE RENEWABLES, INC.
Date: April 5, 2017 By: /s/ Arnold R. Klann
Name: Arnold R. Klann
Title: Chief Executive Officer
(Principal Executive Officer)
(Principal Financial Officer)
(Principal Accounting Officer)
In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ Arnold R. Klann
Chairman, Chief Executive Officer, President, Principal
April 5, 2017
Arnold R. Klann
Executive Officer, Principal Financial Officer and Principal Accounting Officer
/s/ John Cuzens
Chief Technology Officer and Senior Vice President
April 5, 2017
John Cuzens
/s/ Chris Nichols
Director
April 5, 2017
Chris Nichols
/s/ Joseph Sparano
Director
April 5, 2017
Joseph Sparano
FINANCIAL STATEMENTS
Index to Consolidated Financial Statements
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
BlueFire Renewables, Inc. and subsidiaries
We have audited the accompanying consolidated balance sheets of BlueFire Renewables, Inc. and subsidiaries (collectively the “Company”), as of December 31, 2016 and 2015, and the related consolidated statements of operations, stockholders’ deficit, and cash flows for the years 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 audits.
We conducted our audits 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 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 audits 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 also includes examining, on a test basis, evidence supporting the amounts and disclosure in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide 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, 2016 and 2015, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 2 of the consolidated financial statements, the Company has limited working capital, incurred losses, and has significant operating costs expected to be incurred in the next twelve months. These factors raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans with respect to these matters are discussed in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
dbbmckennon
Newport Beach, California
April 5,
BLUEFIRE RENEWABLES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
See accompanying notes to consolidated financial statements
BLUEFIRE RENEWABLES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
See accompanying notes to consolidated financial statements
BLUEFIRE RENEWABLES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIT
See accompanying notes to consolidated financial statements
BLUEFIRE RENEWABLES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIT
See accompanying notes to consolidated financial statements
BLUEFIRE RENEWABLES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
See accompanying notes to consolidated financial statements
BLUEFIRE RENEWABLES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND BUSINESS
BlueFire Ethanol, Inc. (“BlueFire” or the “Company”) was incorporated in the state of Nevada on March 28, 2006. BlueFire was established to deploy the commercially ready and patented process for the conversion of cellulosic waste materials to ethanol (“Arkenol Technology”) under a technology license agreement with Arkenol, Inc. (“Arkenol”). BlueFire’s use of the Arkenol Technology positions it as a cellulose-to-ethanol company with demonstrated production of ethanol from urban trash (post-sorted “MSW”), rice and wheat straws, wood waste and other agricultural residues. The Company’s goal is to develop and operate high-value carbohydrate-based transportation fuel production facilities in North America, and to provide professional services to such facilities worldwide. These “biorefineries” will convert widely available, inexpensive, organic materials such as agricultural residues, high-content biomass crops, wood residues, and cellulose from MSW into ethanol.
On September 30, 2015, the Company filed an amendment to the Company’s articles of incorporation with the Secretary of State of the State of Nevada, which, among other things, established the designation, powers, rights, privileges, preferences and restrictions of the Series A Preferred Stock, no par value per share (the “Series A Preferred Stock”). Among other things, each one (1) share of the Series A Preferred Stock shall have voting rights equal to(x) 0.019607 multiplied by the total issued and outstanding shares of common stock of the Company eligible to vote at the time of the respective vote (the “Numerator”), divided by (y) 0.49, minus (z) the Numerator. For purposes of illustration only, if the total issued and outstanding shares of common stock of the Company eligible to vote at the time of the respective vote is 5,000,000, the voting rights of one share of the Series A Preferred Stock shall be equal to 102,036 (0.019607 x 5,000,000) / 0.49) - (0.019607 x 5,000,000) = 102,036).
The Series A Preferred Stock has no dividend rights, no liquidation rights and no redemption rights, and was created primarily to be able to obtain a quorum and conduct business at shareholder meetings. All shares of the Series A Preferred Stock shall rank (i) senior to the Company’s common stock and any other class or series of capital stock of the Company hereafter created, (ii) pari passu with any class or series of capital stock of the Company hereafter created and specifically ranking, by its terms, on par with the Series A Preferred Stock and (iii) junior to any class or series of capital stock of the Company hereafter created specifically ranking, by its terms, senior to the Series A Preferred Stock, in each case as to distribution of assets upon liquidation, dissolution or winding up of the Company, whether voluntary or involuntary.
The Board is currently evaluating strategic alternatives which include, among other things, merging or selling the Company, if needed, in order to obtain additional capital sufficient to continue operating and meet both our operating and financial obligations.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Going Concern
The Company has historically incurred recurring losses. Management has funded operations primarily through loans from its Chairman/Chief Executive Officer, the private placement of the Company’s common stock in December 2007 for net proceeds of approximately $14,500,000, the issuance of convertible notes with warrants in July and in August 2007, various convertible notes, and Department of Energy reimbursements from 2009 to 2015. The Company may encounter further difficulties in establishing operations due to the time frame of developing, constructing and ultimately operating the planned bio-refinery projects.
As of December 31, 2016, the Company has negative working capital of approximately $3,458,200. Management has estimated that operating expenses for the next 12 months will be approximately $750,000, excluding engineering costs related to the development of bio-refinery projects. These matters raise substantial doubt about the Company’s ability to continue as a going concern. Throughout 2017, the Company intends to fund its operations with any additional funding that can be secured in the form of equity or debt. As of April 3, 2017, the Company expects the current resources available to them will only be sufficient for a period of less than one month unless significant additional financing is received. Management has determined that the general expenditures must be reduced and additional capital will be required in the form of equity or debt securities. In addition, if we cannot raise additional short term capital we may consume all of our cash reserved for operations. There are no assurances that management will be able to raise capital on terms acceptable to the Company or at all. If we are unable to obtain sufficient amounts of additional capital, we may be required to reduce the scope of our planned development, which could harm our business, financial condition and operating results. The financial statements do not include any adjustments that might result from these uncertainties.
As of December 31, 2010, the Company completed the detailed engineering on our proposed Fulton Project (Note 3), procured all necessary permits for construction of the plant, and began site clearing and preparation work, signaling the beginning of construction. All site preparation activities have been completed, including clearing and grating of the site, building access roads, completing railroad tie-ins to connect the site to the rail system, and finalizing the layout plan to prepare for the site foundation. As of December 31, 2013, the construction-in-progress through such date was deemed impaired due to the discontinuance of future funding from the DOE further described in Note 3.
We estimate the total construction cost of the bio-refineries to be in the range of approximately $300 million for the Fulton Project. These cost approximations do not reflect any increase/decrease in raw materials or any fluctuation in construction cost that would be realized by the dynamic world metals markets or inflation of general costs of construction. The Company is currently in discussions with potential sources of financing for these facilities but no definitive agreements are in place. The Company cannot continue significant development or furtherance of the Fulton project until financing for the construction of the Fulton plant is obtained.
Principles of Consolidation
The consolidated financial statements include the accounts of BlueFire Renewables, Inc., and its wholly-owned subsidiary, BlueFire Ethanol, Inc. BlueFire Ethanol Lancaster, LLC, BlueFire Fulton Renewable Energy LLC (excluding 1% interest sold), and SucreSource LLC are wholly-owned subsidiaries of BlueFire Ethanol, Inc. All intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reported periods. Actual results could materially differ from those estimates. Significant estimates include, but are not limited to, DOE Grant reimbursements, valuation of warrants and derivative liabilities, and impairment of long-lived assets.
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.
Debt Issuance Costs
Debt issuance costs are capitalized and amortized over the term of the debt using the effective interest method, or expensed upon conversion or extinguishment when applicable. Costs are capitalized for amounts incurred in connection with proposed financings. In the event the financing related to the capitalized cost is not successful, the costs are immediately expensed (see Note 5).
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, 2016 and 2015, the Company has no reserve allowance.
Intangible Assets
License fees acquired are either expensed or recognized as intangible assets. The Company recognizes intangible assets when the following criteria are 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.
Property and Equipment
Property and equipment are stated at cost. The Company’s fixed assets are depreciated using the straight-line method over a period ranging from three to five years, except land which is not depreciated. Maintenance and repairs are charged to operations as incurred. Significant renewals and betterments are capitalized. At the time of retirement or other disposition of property and equipment, the cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is reflected in operations. During the year ended December 31, 2010, the Company began to capitalize costs in connection with the construction of its Fulton plant, and continued to do so in 2013 until it was determined that the project should be impaired. A portion of these costs were reimbursed under the Department of Energy grant discussed in Note 3. The reimbursable portion was treated as a reduction of those costs.
Impairment of Long-Lived Assets
The Company regularly evaluates whether events and circumstances have occurred that indicate the carrying amount of property and equipment may not be recoverable. When factors indicate that these long-lived assets should be evaluated for possible impairment, the Company assesses the potential impairment by determining whether the carrying value of such long-lived assets will be recovered through the future undiscounted cash flows expected from use of the asset and its eventual disposition. If the carrying amount of the asset is determined not to be recoverable, a write-down to fair value is recorded. Fair values are determined based on quoted market values, discounted cash flows, or external appraisals, as applicable. The Company regularly evaluates whether events and circumstances have occurred that indicate the useful lives of property and equipment may warrant revision. There was no impairment as of December 31, 2016 or 2015.
Revenue Recognition
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, (“DOE”). The grant generally provided for payment in connection with related development and construction costs involving commercialization of our technologies. Grant award reimbursements were recorded as either contra assets or as revenues depending upon whether the reimbursement is for capitalized construction costs or expenses paid by the Company. Contra capitalized cost and revenues from the grant were recognized in the period during which the conditions under the grant had been met and the Company had made payment for the related asset or expense. The Company recognized DOE unbilled grant receivables for those costs that had been incurred during a period but not yet paid at period end, were otherwise reimbursable under the terms of the grant, and were expected to be paid in the normal course of business. Realization of unbilled receivables is dependent on the Company’s ability to meet their obligation for reimbursable costs.
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, 2016 and 2015, research and development costs included in project development were approximately $288,000 and $609,000, respectively.
Convertible Debt
Convertible debt is accounted for under the guidelines established by Accounting Standards Codification (“ASC”) 470-20 “Debt with Conversion and Other Options”. ASC 470-20 governs the calculation of an embedded beneficial conversion, which is treated as an additional discount to the instruments where derivative accounting (explained below) does not apply. The amount of the value of warrants and beneficial conversion feature may reduce the carrying value of the instrument to zero, but no further. The discounts relating to the initial recording of the derivatives or beneficial conversion features are accreted over the term of the debt.
The Company calculates the fair value of warrants and conversion features issued with the convertible instruments using the Black-Scholes valuation method, using the same assumptions used for valuing employee options for purposes of ASC 718 “Compensation - Stock Compensation”, except that the contractual life of the warrant or conversion feature is used. Under these guidelines, the Company allocates the value of the proceeds received from a convertible debt transaction between the conversion feature and any other detachable instruments (such as warrants) on a relative fair value basis. The allocated fair value is recorded as a debt discount or premium and is amortized over the expected term of the convertible debt to interest expense.
The Company accounts for modifications of its BCF’s in accordance with ASC 470-50 “Modifications and Extinguishments”. ASC 470-50 requires the modification of a convertible debt instrument that changes the fair value of an embedded conversion feature and the subsequent recognition of interest expense or the associated debt instrument when the modification does not result in a debt extinguishment.
Income Taxes
The Company accounts for income taxes in accordance with ASC 740 “Income Taxes” requires the Company to provide a net deferred tax asset/liability equal to the expected future tax benefit/expense of temporary reporting differences between book and tax accounting methods and any available operating loss or tax credit carry forwards.
This Interpretation sets forth a recognition threshold and valuation method to recognize and measure an income tax position taken, or expected to be taken, in a tax return. The evaluation is based on a two-step approach. The first step requires an entity to evaluate whether the tax position would “more likely than not,” based upon its technical merits, be sustained upon examination by the appropriate taxing authority. The second step requires the tax position to be measured at the largest amount of tax benefit that is greater than 50 percent likely of being realized upon ultimate settlement. The Company does not have any uncertain positions which require such analysis.
Fair Value of Financial Instruments
Fair value is defined as the exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. The guidance also establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs market participants would use in valuing the asset or liability and are developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the factors market participants would use in valuing the asset or liability. The guidance establishes three levels of inputs that may be used to measure fair value:
Level 1. Observable inputs such as quoted prices in active markets;
Level 2. Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and
Level 3. Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
The Company did not have any Level 1 financial instruments at December 31, 2016 and 2015.
As of December 31, 2016 and 2015, the warrant liability and derivative liability are considered Level 2 items, see Notes 5, 6, and 9.
As of December 31, 2016 and 2015, the Company’s redeemable noncontrolling interest is considered a Level 3 item and changed during 2015 and 2016 due to the following:
See Note 8 for details of valuation and changes during the years 2016 and 2015.
The carrying amounts reported in the accompanying consolidated financial statements for current assets and current liabilities approximate the fair value because of the immediate or short term maturities of the financial instruments.
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 non-compliance with such laws and does not believe that regulations will have a material impact on the Company’s financial position, results of operations, or liquidity. The Company believes that its operations comply, in all material respects, with applicable federal, state, and local environmental laws and regulations.
Concentrations of Credit Risk
The Company maintains its cash accounts in a commercial bank and in an institutional money-market fund account. The total cash balances held in a commercial bank are secured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000, per insured bank. At times, the Company has cash deposits in excess of federally insured limits. In addition, the Institutional Funds Account is insured through the Securities Investor Protection Corporation (“SIPC”) up to $500,000 per customer, including up to $250,000 for cash. At times, the Company has cash deposits in excess of federally and institutional insured limits.
As of December 31, 2015, the Department of Energy made up 100% of Grant Revenues. We had no such concentration in 2016. The Company is currently investigating alternative sources of funding.
As of December 31, 2016 and 2015, four vendors made up approximately 82% and 78% of accounts payable, respectively.
Loss per Common Share
The Company presents basic loss per share (“EPS”) and diluted EPS on the face of the consolidated statements of operations. Basic loss per share is computed as net loss divided by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur from common shares issuable through stock options, warrants, and other convertible securities. For the years ended December 31, 2016 and 2015, the Company had no options and 0 and 23,528,571 warrants outstanding, respectively, for which all exercise prices were in excess of the trading price of the Company’s common stock during the respective periods. Due to the net loss in the periods presented, the effects of the warrants would be antidilutive and are, therefore, excluded from diluted EPS calculations.
Share-Based Payments
The Company accounts for stock options issued to employees and consultants under ASC 718 “Share-Based Payment”. 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.
Derivative Financial Instruments
We do not use derivative financial instruments to hedge exposures to cash-flow risks or market-risks that may affect the fair values of our financial instruments. However, under the provisions ASC 815 - “Derivatives and Hedging” certain financial instruments that have characteristics of a derivative, as defined by ASC 815, such as embedded conversion features on our convertible notes, that are potentially settled in the Company’s own common stock, are classified as liabilities when either (a) the holder possesses rights to net-cash settlement or (b) physical or net-share settlement is not within our control. In such instances, net-cash settlement is assumed for financial accounting and reporting purposes, even when the terms of the underlying contracts do not provide for net-cash settlement. Derivative financial instruments are initially recorded, and continuously carried, at fair value each reporting period.
The value of the embedded conversion feature is determined using the Black-Scholes option pricing model. All future changes in the fair value of the embedded conversion feature will be recognized currently in earnings until the note is converted or redeemed. Determining the fair value of derivative financial instruments involves judgment and the use of certain relevant assumptions including, but not limited to, interest rate risk, credit risk, volatility and other factors. The use of different assumptions could have a material effect on the estimated fair value amounts.
Lines of Credit with Share Issuance
Shares issued to obtain a line of credit are recorded at fair value at contract inception. When shares are issued to obtain a line of credit rather than in connection with the issuance, the shares are accounted for as equity, at the measurement date in accordance with ASC 505-50 “Equity-Based Payments to Non-Employees.” The issuance of these shares is equivalent to the payment of a loan commitment or access fee, and, therefore, the offset is recorded akin to debt issuance costs. The deferred fee is amortized using the effective interest method, or a method that approximates such over the stated term of the line of credit, or other period as deemed appropriate.
Redeemable - Noncontrolling Interest
Redeemable interest held by third parties in subsidiaries owned or controlled by the Company is reported on the consolidated balance sheets outside permanent equity. As these redeemable noncontrolling interests provide for redemption features not solely within the control of the issuer, we classify such interests outside of permanent equity in accordance with ASC 480-10, “Distinguishing Liabilities from Equity”. All redeemable noncontrolling interest reported in the consolidated statements of operations reflects the respective interests in the income or loss after income taxes of the subsidiaries attributable to the other parties, the effect of which is removed from the net loss available to the Company. The Company accretes the redemption value of the redeemable noncontrolling interest over the redemption period using the straight-line method.
New Accounting Pronouncements
The Financial Accounting Standards Board (“FASB”) issues Accounting Standard Updates (“ASU”) to amend the authoritative literature in ASC. There have been a number of ASUs to date that amend the original text of ASC. The Company believes those issued to date either (i) provide supplemental guidance, (ii) are technical corrections, (iii) are not applicable to the Company or (iv) are not expected to have a significant impact on the Company.
On February 25, 2016, the Financial Accounting Standards Board (FASB) issued authoritative guidance intended to improve financial reporting about leasing transactions. The new guidance requires entities to recognize assets and liabilities for leases with lease terms of more than 12 months. The new guidance also requires qualitative and quantitative disclosures regarding the amount, timing, and uncertainty of cash flows arising from leases. The new guidance is effective for the Company beginning January 1, 2019. The Company is evaluating the impact of the standard on its consolidated financial statements.
In November 2015, the FASB issued authoritative guidance related to balance sheet classification of deferred taxes. The new guidance requires entities to present deferred tax assets (DTAs) and deferred tax liabilities (DTLs) as noncurrent in a classified balance sheet. It thus simplifies the current guidance, which requires entities to separately present DTAs and DTLs as current or noncurrent in a classified balance sheet. Netting of DTAs and DTLs by tax jurisdiction is still required under the new guidance. The new authoritative guidance is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2016. Early adoption is permitted. The guidance is not expected to have a material impact on the consolidated financial statements.
In May 2014, FASB issued authoritative guidance that provides principles for recognizing revenue for the transfer of promised goods or services to customers with the consideration to which the entity expects to be entitled in exchange for those goods or services. This ASU also requires that reporting companies disclose the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. On July 9, 2015, FASB agreed to delay the effective date by one year and, accordingly, the new standard is effective for the Company beginning in the first quarter of fiscal 2018. Early adoption is permitted, but not before the original effective date of the standard. The new standard is required to be applied retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying it recognized at the date of initial application. The Company has not yet selected a transition method nor has it determined the impact of the new standard on its consolidated financial statements.
Management does not believe that any recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the accompanying consolidated financial statements.
NOTE 3 - DEVELOPMENT CONTRACT
Department of Energy Awards 1 and 2
In February 2007, the Company was awarded a grant for up to $40 million from the U.S. Department of Energy’s (“DOE”) cellulosic ethanol grant program to develop a solid waste biorefinery project at a landfill in Southern California. During October 2007, the Company finalized Award 1 for a total approved budget of just under $10,000,000 with the DOE. This award was a 60%/40% cost share, whereby 40% of approved costs may be reimbursed by the DOE pursuant to the total $40 million award announced in February 2007.
In December 2009, as a result of the American Recovery and Reinvestment Act, the DOE increased the Award 2 to a total of $81 million for Phase II of its Fulton Project. This is in addition to a renegotiated Phase I funding for development of the biorefinery of approximately $7 million out of the previously announced $10 million total. This brought the DOE’s total award to the Fulton project to approximately $88 million. In September 2012, Award 1 was officially closed.
Since 2009, our operations had been financed to a large degree through funding provided by the DOE. We rely on access to this funding as a source of liquidity for capital requirements not satisfied by the cash flow from our operations. If we are unable to access government funding our ability to finance our projects and/or operations and implement our strategy and business plan will be severely hampered.
On December 23, 2013, the Company received notice from the DOE indicating that the DOE would no longer provide funding under Award 2 due to the Company’s inability to comply with certain deadlines related to providing certain information to the DOE with respect to the Company’s future financing arrangements for the Fulton Project. On March 17, 2015, the Company received a letter from the DOE stating that because of the upcoming September 2015 expiration date for expending American Recovery and Reinvestment Act (ARRA) funding, it cannot reconsider its decision, and the Company considers such decision to be final. In June of 2015, the DOE obligated additional funds totaling $873,332 for costs incurred but not reimbursed prior to September 30, 2014 as well as for program required compliance audits for years 2011-2014.
As of September 30, 2015, the Company submitted all final invoices and final documents related to the termination of the grant by the Department of Energy. The Company considers the grant closed out and completed.
As of December 31, 2016, the Company has received reimbursements of approximately $14,164,964 under these awards.
NOTE 4 - COMPOSITION OF CERTAIN BALANCE SHEET ACCOUNTS
Property and Equipment
Property and equipment consist of the following:
On December 29, 2016, the Company sold the land for a total sale price of $195,000 and net proceeds of $175,328 to the Company.
Depreciation expense for the years ended December 31, 2016 and 2015 was $275 and $894, respectively.
During the years ended December 31, 2016 and 2015, the Company invested $0 in construction activities at our Fulton Project and the construction costs through 2013 were deemed impaired due to the discontinuance of the DOE Grant described in Note 3.
Accrued liabilities
NOTE 5 - NOTES PAYABLE
Convertible Notes Payable
From time-to-time, the Company enters into convertible notes with Vis Vires Group, Inc. and Asher Enterprises, Inc. Under the terms of these notes, the Company is to repay any principal balance and interest, at 8% per annum at a given maturity date which is generally less than one year. The Company has the option to prepay the convertible promissory notes prior to maturity at varying prepayment penalty rates specified under the agreement. The convertible promissory notes are convertible into shares of the Company’s common stock after six months as calculated by multiplying 58% (42% discount to market) by the average of the lowest three closing bid prices during the 10 days prior to the conversion date.
For the below convertible notes to Vis Vires Group, the Company determined that since the conversion prices are variable and do not contain a floor, the conversion feature represents a derivative liability upon the ability to convert the loan after the six month period specified above. Since the conversion feature is only convertible after six months, there is no derivative liability upon issuance. However, the Company accounts for the derivative liability upon the passage of time and the note becoming convertible if not extinguished.
On May 12, 2015, the Company issued a convertible note in favor of Vis Vires Group, Inc. in the principal amount of $59,000 with a $4,000 on-issuance discount pursuant to the terms identified above, with a maturity date of February 14, 2016. In accordance with the terms of the note, the note became convertible on November 8, 2015.
The Company calculated the derivative liability using the Black-Scholes pricing model for the note upon the initial date the note became convertible and recorded the fair market value of the derivative liability of approximately $53,195, resulting in a discount to the note. The discount was being amortized over the term of the note and accelerated as the note was converted. As of December 31, 2015, the entire discount was amortized to interest expense, with no remaining unamortized discount and the note was fully converted into 26,072,727 shares of common stock.
Using the Black-Scholes pricing model, with the range of inputs listed below, we calculated the fair market value of the conversion feature upon it being effective (as applicable), at each conversion event, and at each reporting period. The Company recognized a loss of $0 and $12,911 during the years ended December 31, 2016 and 2015 based on these valuations which is included in the accompanying consolidated statements of operations.
On-issuance discounts applicable to the above notes are amortized over the term of such notes.
JMJ Convertible Note
On April 2, 2015, the Company issued a convertible note in favor of JMJ Financial in the principal amount of $100,000 out of a total of a possible $250,000, with a maturity date of April 1, 2017 (the “JMJ Note”). The JMJ Note was issued with a 10% original issue discount, and is convertible at any time. The $10,000 on-issuance discount will be amortized over the life of the note. The Company was to repay any principal balance due under the note including a one-time charge of 12% interest on the principal balance outstanding if not repaid within 90 days. The Company had the option to prepay the JMJ Note prior to maturity. The JMJ Note was convertible into shares of the Company’s common stock as calculated by multiplying 60% of the lowest trade price in the 25 trading days prior to the conversion date.
Due to the variable conversion feature of the note, derivative accounting is required. The Company valued the derivative upon issuance, at each reporting period, and at the conversion date as indicated below. The initial value of the derivative liability was $412,212, resulting in a day one loss $312,212. The discount on the convertible note was being amortized over the life of the note and accelerated as the note was converted. For the years ended December 31, 2016 and 2015, amortization of the discount was $32,886 and $77,114, respectively, with $0 remaining as of December 31, 2016.
During the year ended December 31, 2016, the Company issued 105,741,400 shares of common stock for the conversion of $52,950 of principal and $12,550 of interest. The note was fully converted on April 5, 2016.
AKR Promissory Note
On April 8, 2014, the Company issued a promissory note in favor of AKR Inc, (“AKR”) in the principal aggregate amount of $350,000 (the “AKR Note”). The AKR Note was originally due on April 8, 2015; however, the Company received an extension through December 31, 2017. The AKR Note requires the Company to (i) incur interest at five percent (5%) per annum; (ii) issue on April 8, 2014 to AKR warrants allowing them to buy 7,350,000 common shares of the Company at an exercise price of $0.007 per common share, such warrants to expire on April 8, 2016 (“AKR Warrant A”); (iii) issue on August 8, 2014 to AKR warrants allowing them to buy 7,350,000 common shares of the Company at an exercise price of $0.007 per common share, such warrants to expire on April 8, 2016 (“AKR Warrant B”); and (iv) issue on November 8, 2014 to AKR warrants allowing them to buy 8,400,000 common shares of the Company at an exercise price of $0.007 per common share, such warrants to expire on April 8, 2016 (“AKR Warrant C”, together with AKR Warrant A and AKR Warrant B the “AKR Warrants”). The Company may prepay the debt, prior to maturity with no prepayment penalty.
The Company valued the AKR Warrants as of the date of the note and recorded a discount of $42,323 based the relative fair value of the AKR Warrants compared to the debt. For the years ended December 31, 2016 and 2015, the Company amortized $0 and $11,335 respectively of the discount to interest expense. As of December 31, 2016, unamortized discount of $0 remains. The Company assessed the fair value of the AKR Warrants based on the Black-Scholes pricing model. See below for variables used in assessing the fair value.
On April 24, 2014, the Company issued a promissory note in favor of AKR in the principal aggregate amount of $30,000 (“2nd AKR Note”). The 2nd AKR Note was due on July 24, 2014, however, the Company received an extension through December 31, 2017. Pursuant to the terms of the 2nd AKR Note, the Company is to repay any principal balance and interest, at 5% per annum at maturity. Company may prepay the debt, prior to maturity with no prepayment penalty.
For the year ended December 31, 2016, the Company amortized on-issuance discounts totaling $0 with $0 remaining, and costs of financing of $0 with $0 remaining related to these notes.
Tarpon Bay Convertible Notes
Pursuant to a contemplated 3(a)10 transaction with Tarpon Bay Partners LLC (“Tarpon”), on August 31, 2016, the Company issued to Tarpon a convertible promissory note in the principal amount of $25,000 (the “Tarpon Initial Note”). Under the terms of the Tarpon Initial Note, the Company shall pay Tarpon $25,000 on the date of maturity which was February 28, 2017. This note is convertible by Tarpon into the Company’s common shares at a 50% discount to the lowest closing bid price for the common stock for the twenty (20) trading days ending on the trading day immediately before the conversion date.
The above note was issued without funds being received. Accordingly, the note was issued with a full on-issuance discount that was amortized over the term of the note. During the year ended December 31, 2016, amortization of $21,111, was recognized to interest expense related to the discount on the note. As of December 31, 2016, a discount of $3,889 remained which is being amortized through the maturity date.
Because the conversion price was variable and did not contain a floor, the conversion feature represented a derivative liability upon issuance. Accordingly, the Company calculated the derivative liability using the Black-Sholes pricing model for the notes upon inception, resulting in a day one loss of approximately $36,000. The derivative liability was marked to market each quarter and as of December 31, 2016 which resulted in a gain of approximately $9,200. The Company used the following range of assumptions for the year ended December 31, 2016:
Kodiak Promissory Note
On December 17, 2014, the Company entered into the equity Purchase Agreement with Kodiak. Pursuant to the terms of the Purchase Agreement, for a period of twenty-four (24) months commencing on the date of effectiveness of the registration statement, Kodiak shall commit to purchase up to $1,500,000 of Put Shares, pursuant to Puts (as defined in the Purchase Agreement), covering the Registered Securities (as defined in the Purchase Agreement). See Note 9 for more information.
As further consideration for Kodiak entering into and structuring the Purchase Agreement, the Company issued Kodiak a promissory note in the principal aggregate amount of $60,000 (the “Kodiak Note”) that bears no interest and had maturity date of July 17, 2015. The Company is currently in default of the Kodiak Note.
As of December 31, 2016, the balance outstanding on the Kodiak Note was $40,000. No funds were received from the Kodiak Note. Because the Kodiak Note was issued for no cash consideration, there was a full on-issuance discount, of which $60,000 was amortized as of December 31, 2016, and $0 remains to be amortized.
NOTE 6 - OUTSTANDING WARRANT LIABILITY
The Company assesses the fair value of the warrants quarterly based on the Black-Scholes pricing model. See below for variables used in assessing the fair value.
The Company issued 428,571 warrants to purchase common stock in connection with a Stock Purchase Agreement entered into in 2011 with Lincoln Park Capital, LLC. These warrants are accounted for as a liability under ASC 815. The Company assesses the fair value of the warrants quarterly based on the Black-Scholes pricing model. See below for variables used in assessing the fair value. These warrants expired on January 19, 2016.
In connection with these warrants, the Company recognized a gain on the change in fair value of warrant liability of $199 and $16,368 during the years ended December 31, 2016 and 2015, respectively.
Expected volatility is based primarily on historical volatility. Historical volatility was computed using weekly pricing observations for recent periods that correspond to the expected life of the warrants. The Company believes this method produces an estimate that is representative of our expectations of future volatility over the expected term of these warrants. The Company currently has no reason to believe future volatility over the expected remaining life of these warrants is likely to differ materially from historical volatility. The expected life is based on the remaining term of the warrants. The risk-free interest rate is based on U.S. Treasury securities rates.
The warrants expired on January 19, 2016.
NOTE 7 - COMMITMENTS AND CONTINGENCIES
Board of Director Arrangements
On November 12, 2015, the Company renewed all of its existing Directors’ appointment, and accrued $5,000 to both of the two outside members. Pursuant to the Board of Director agreements, the Company’s “in-house” board members (CEO and Vice-President) waived their annual cash compensation of $5,000.
Fulton Project Lease
On July 20, 2010, the Company entered into a 30 year lease agreement with Itawamba County, Mississippi for the purpose of the development, construction, and operation of the Fulton Project. At the end of the primary 30 year lease term, the Company shall have the right for two additional 30 year terms. The current lease rate is computed based on a per acre rate per month that is approximately $10,300 per month. The lease stipulates the lease rate is to be reduced at the time of the construction start by a Property Cost Reduction Formula which can substantially reduce the monthly lease costs. The lease rate shall be adjusted every five years to the Consumer Price Index. The below payout schedule does not contemplate reductions available upon the commencement of construction and commercial operations.
Future annual minimum lease payments under the above lease agreements, at December 31, 2016 are as follows:
Rent expense under non-cancellable leases was approximately $123,000 and $123,000 during the years ended December 31, 2016 and 2015, respectively. As of December 31, 2016 and 2015, $298,468 and $174,964 of the monthly lease payments were included in accounts payable on the accompanying consolidated balance sheets.
The Company has received notice from the County of Itawamba that it is currently in default of the lease due to non payment and could be subject to lease cancellation if it cannot make payments or other arrangements. As of December 31, 2016, the Company has accrued $34,903 of default interest, at a rate of 10% per annum, due to the nonpayment of the lease. The Company is working with the County of Itawamaba to resolve this issue and hopefully ensure continued access to the potential project site.
SEC Notice and Settlement
On May 2, 2016, the Company received a written notice from the SEC, as further described elsewhere in this annual report. In connection with such notice, on August 1, 2016, the Company entered into a settlement with the SEC. Pursuant to the settlement, the Company agreed to pay a civil penalty of $25,000 to the SEC. On July 29, 2016, the Company made an initial payment of $5,000 to the SEC. The remaining $20,000 balance will be paid to the SEC over a nine-month period ending on or about June 30, 2017. The Company has accrued the balance on the accompanying consolidated financial statements for such settlement.
Legal Proceedings
We are currently not involved in litigation that we believe will have a materially adverse effect on our financial condition or results of operations. There is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of our company or any of our subsidiaries, threatened against or affecting our company, our common stock, any of our subsidiaries or of our company’s or our company’s subsidiaries’ officers or directors in their capacities as such, in which an adverse decision is expected to have a material adverse effect.
NOTE 8 - REDEEMABLE NONCONTROLLING INTEREST
On December 23, 2010, the Company sold a one percent (1%) membership interest in its operating subsidiary, BlueFire Fulton Renewable Energy, LLC (“BlueFire Fulton” or the “Fulton Project”), to an accredited investor for a purchase price of $750,000 (“Purchase Price”). The Company maintains a 99% ownership interest in the Fulton Project. In addition, the investor received a right to require the Company to redeem the 1% interest for $862,500, or any pro-rata amount thereon. The redemption is based upon future contingent events based upon obtaining financing for the construction of the Fulton Project. The third party equity interests is reflected as redeemable noncontrolling interests in the Company’s consolidated financial statements outside of equity. The Company accreted the redeemable noncontrolling interest for the total redemption price of $862,500 through the forecasted financial close, estimated to be the end of the third quarter of 2011.
Net income (loss) attributable to the redeemable noncontrolling interest during the year ended December 31, 2016 and 2015 was $(4,634) and $747, respectively, which netted against the value of the redeemable non-controlling interest in temporary equity. The allocation of net income was presented in the consolidated statements of operations.
NOTE 9 - STOCKHOLDERS’ DEFICIT
Series A Preferred Stock
We have authorized the issuance of a total of 1,000,000 shares of our Series A Preferred Stock. See Note 1 for rights and preferences.
Stock Options
As of December 31, 2016, and 2015 there were no options that remained outstanding.
Shares Issued for Services
During the year ended December 31, 2016, the Company issued a total of 72,000 shares to the Board of Directors, pursuant to stock compensation due to them under their Director Agreements. The Company issued no shares of stock for services provided in 2015.
Warrants
See Notes 5, 6, 9 and 10 for warrants issued with debt and equity financings.
There were no warrant issuances for the years ended December 31, 2016 and 2015.
There were no warrant exercises for the years ending December 31, 2016 and 2015.
A summary of the status of the warrants for the years ended December 31, 2016 and 2015 changes during the periods are presented as follows:
Kodiak Purchase Agreement and Registration Rights Agreement
On December 17, 2014, the Company entered into the equity Purchase Agreement with Kodiak. Pursuant to the terms of the Purchase Agreement, for a period of twenty-four (24) months commencing on the date of effectiveness of the registration statement, Kodiak shall commit to purchase up to $1,500,000 of Put Shares, pursuant to Puts (as defined in the Purchase Agreement), covering the Registered Securities (as defined below).
The “Registered Securities” means the (a) Put Shares, and (b) any securities issued or issuable with respect to any of the foregoing by way of exchange, stock dividend or stock split or in connection with a combination of shares, recapitalization, merger, consolidation or other reorganization or otherwise. As to any particular Registered Securities, once issued such securities shall cease to be Registered Securities when (i) a Registration Statement has been declared effective by the SEC and such Registered Securities have been disposed of pursuant to a Registration Statement, (ii) such Registered Securities have been sold under circumstances under which all of the applicable conditions of Rule 144 are met, (iii) such time as such Registered Securities have been otherwise transferred to holders who may trade such shares without restriction under the Securities Act or (iv) in the opinion of counsel to the Company, which counsel shall be reasonably acceptable to Investor, such Registered Securities may be sold without registration under the Securities Act or the need for an exemption from any such registration requirements and without any time, volume or manner limitations pursuant to Rule 144(b)(i) (or any similar provision then in effect) under the Securities Act.
As further consideration for Kodiak entering into and structuring the Purchase Agreement, the Company issued Kodiak a promissory note in the principal aggregate amount of $60,000 (the “Kodiak Note”) that bears no interest and had maturity date of July 17, 2015. As of December 31, 2016, the balance outstanding on the Kodiak Note was $40,000. The Company is currently in default of the Kodiak Note. Because the note was issued for no cash consideration, there was a full on-issuance discount, of which $0 and $55,714 was amortized during the years ended December 31, 2016 and 2015, and $0 and $0 remains to be amortized, respectively.
Concurrently with the Purchase Agreement, on December 17, 2014, the Company also entered into a registration rights agreement (the “Registration Rights Agreement”) with Kodiak. Pursuant to the terms of the Registration Rights Agreement, the Company was obligated to file a registration statement (the “Registration Statement”) with the SEC to cover the Registered Securities, within thirty (30) days of closing, and must use its commercially reasonable efforts to cause the Registration Statement to be declared effective by the SEC. The Registration was filed, on January 2, 2015, and declared effective on February 11, 2015. As of December 31, 2016, the Purchase Agreement with Kodiak has been terminated.
Return of Shares and Settlement
On May 6, 2016, the Company reached a settlement with James G. Speirs and James N. Speirs in regards to the lawsuit filed in Orange County Superior Court and subsequently appealed by the Company. Under the settlement agreement, James G. Speirs and James N. Speirs have returned the 5,740,741 shares to the Company and they have been subsequently retired to treasury. The case was dismissed with prejudice on May 12, 2016 and the matter closed.
Board of Directors Common Stock Issuance
The Company issued 18,000 shares of common stock to each of its Board Members, which the Company valued at $144 based on the closing market price of the Company’s common stock on the date of grant. See Note 7 for additional information.
NOTE 10 - RELATED PARTY TRANSACTIONS
Technology Agreement with Arkenol, Inc.
On March 1, 2006, the Company entered into a Technology License agreement with Arkenol, Inc. (“Arkenol”), in which the Company’s Chairman/Chief Executive Officer and other family members hold an interest. 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 onetime 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 per 1,000 gallons of production capacity per plant. There are no amounts currently due under this agreement.
Asset Transfer Agreement with ARK Energy, 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. As of December 31, 2016 and 2015, the Company had not incurred any liabilities related to the agreement.
Related Party Lines of Credit
On November 10, 2011, the Company obtained a line of credit in the amount of $40,000 from its Chairman/Chief Executive Officer and, at the time, the majority shareholder to provide additional liquidity to the Company as needed, at his sole discretion. Under the terms of the note, the Company is to repay any principal balance and interest, at 12% per annum, within 30 days of receiving qualified investment financing of $100,000 or more. On April 10, 2014, the line of credit was increased to $55,000. On March 13, 2016, the line of credit was increased to $125,000, and then incrementally increased to $250,000 on October 5, 2016. As of December 31, 2016, the outstanding balance on the line of credit was approximately $240,924 with $9,076 remaining under the line. Although the Company has received over $100,000 in financing since this agreement was put into place, Mr. Klann does not hold the Company in default.
As of December 31, 2016 and 2015, $31,709 and $15,268 respectively, in accrued interest is owed under this line of credit and included with accrued liabilities.
Loan Agreement
On December 15, 2010, the Company entered into a loan agreement (the “Loan Agreement”) by and between Arnold Klann, the Chief Executive Officer, Chairman of the board of directors and, at the time, the majority shareholder of the Company, as lender (the “Lender”), and the Company, as borrower. Pursuant to the Loan Agreement, the Lender agreed to advance to the Company a principal amount of Two Hundred Thousand United States Dollars ($200,000) (the “Loan”). The Loan Agreement requires the Company to (i) pay to the Lender a one-time amount equal to fifteen percent (15%) of the Loan (the “Fee Amount”) in cash or shares of the Company’s common stock at a value of $0.50 per share, at the Lender’s option; and (ii) issue the Lender warrants allowing the Lender to buy 500,000 common shares of the Company at an exercise price of $0.50 per common share, such warrants expired on December 15, 2013. The Company has promised to pay in full the outstanding principal balance of any and all amounts due under the Loan Agreement within thirty (30) days of the Company’s receipt of investment financing or a commitment from a third party to provide One Million United States Dollars ($1,000,000) to the Company or one of its subsidiaries (the “Due Date”), to be paid in cash or shares of the Company’s common stock, at the Lender’s option. As of December 31, 2016 and 2015, $200,000 remained outstanding on this loan.
Accrued Salaries of Company Officers
As of December 31, 2016 and 2015, $792,833 and $341,833, respectively, in accrued and unpaid salaries for Company officers Arnold Klann, John Cuzens, and Necitas Sumait accrued within accrued liabilities in the consolidated financial statements.
NOTE 11 - INCOME TAXES
The following table presents the current and deferred tax provision for federal and state income taxes for the years ended December 31, 2016 and 2015.
Current taxes in 2016 and 2015 consist primarily of minimum state taxes.
Reconciliations of the U.S. federal statutory rate to the actual tax rate for the years ended December 31, 2016 and 2015 are as follows:
The components of the Company’s deferred tax assets for federal and state income taxes as of December 31, 2016 and 2015 consisted of the following:
The Company’s deferred tax assets consist primarily of net operating loss (“NOL”) carry forwards of approximately $7,927,000 and $7,593,000 at December 31, 2016 and 2015, respectively. At December 31, 2016, the Company had NOL carry forwards for Federal and California income tax purposes totaling approximately $23.4 million and $22.2 million, respectively. At December 31, 2015, the Company had NOL carry forwards for Federal and California income tax purposes totaling approximately $22.3 million and $22.3 million, respectively. The Company’s valuation allowance increased by approximately $459,000 for the year ended December 31, 2016, and increased by approximately $260,000 for the year ended December 31, 2015. Federal and California NOL’s have begun to expire and fully expire in 2036. For federal tax purposes these carry forwards expire in twenty years beginning in 2026.
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 has identified the United States Federal tax returns as its “major” tax jurisdiction. The United States Federal return years 2014 through 2016 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 2013 through 2016 and currently does not have any ongoing tax examinations.
In addition, the Company is not current in their federal and state income tax filings 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.