U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2007
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______TO _________ ________
Commission file number 000-52361
BLUEFIRE ETHANOL FUELS, INC.
(Name of small business issuer in its charter)
NEVADA 20-4590982
(State or other jurisdiction of
incorporation or organization) (I.R.S. Employer Identification No.)
31 MUSICK, IRVINE, CALIFORNIA 92618
(Address of principal executive offices) (Zip Code)
(Issuer's telephone number): (949) 588-3767
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X].
On June 30, 2007, 21,558,014 shares of the Company's common stock, par value
$.001 per share, were outstanding.
Transitional Small Business Disclosure Format (check one): YES [ ] NO [X]
TABLE OF CONTENTS
PAGE
PART I FINANCIAL STATEMENTS (UNAUDITED) 3
ITEM 1 CONSOLIDATED BALANCE SHEET 3
CONSOLIDATED STATEMENTS OF OPERATIONS 4
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT 5
CONSOLIDATED STATEMENTS OF CASH FLOWS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION 13
ITEM 3 CONTROLS AND PROCEDURES 16
PART II OTHER INFORMATION 16
ITEM 1 LEGAL PROCEEDINGS 16
ITEM 2 UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 16
ITEM 3 DEFAULTS UPON SENIOR SECURITIES 16
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 16
ITEM 5 OTHER INFORMATION 16
ITEM 6 EXHIBITS 16
2
BLUEFIRE ETHANOL FUELS, INC. AND SUBSIDIARY
(A DEVELOPMENT-STAGE COMPANY)
BALANCE SHEET
(UNAUDITED)
June 30,
2007
------------
ASSETS
Current assets:
Cash and cash equivalents $ 26,805
Prepaid expenses and other current assets 19,978
-----------
Total current assets 46,783
Prepaid fees to related party 30,000
Property and equipment, net 292,940
-----------
Total assets $ 369,723
===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 379,189
Accrued liabilities 37,873
Related party line of credit and accrued interest 602,600
-----------
Total current liabilities 1,019,662
-----------
Commitments and contingencies (Note 3)
Stockholders' deficit:
Preferred stock, no par value, 1,000,000
shares authorized; none issued and outstanding --
Common stock, $0.001 par value; 100,000,000
shares authorized; 21,558,014 shares
issued and outstanding 21,558
Additional paid-in capital 4,999,448
Deficit accumulated during the development stage (5,670,945)
-----------
Total stockholders' deficit (649,939)
-----------
Total liabilities and stockholders' deficit $ 369,723
===========
See accompanying notes to consolidated financial statements
3
BLUEFIRE ETHANOL FUELS, INC. AND SUBSIDIARY
(A DEVELOPMENT-STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
From March From March
28, 2006 28, 2006
For the Three For the Three For the Six (Inception) (Inception)
Months Ended Months Ended Months Ended Through Through
June 30, June 30, June 30 June 30, June 30,
2007 2006 2007 2006 2007
------------ ------------ ------------ ------------ ------------
Revenues $ -- $ -- $ -- $ -- $ --
Operating expenses:
Project development 628,052 27,796 1,095,207 27,796 1,561,209
General and administrative 1,126,493 31,758 2,796,581 48,758 3,879,776
------------ ------------ ------------ ------------ ------------
Total operating expenses 1,754,545 59,554 3,891,788 76,554 5,440,985
Operating loss (1,754,545) (59,554) (3,891,788) (76,554) (5,440,985)
Other income and (expense):
Other income -- -- -- -- 2,800
Financing related charges -- -- (211,660) -- (211,660)
Related party interest
expense (4,000) -- (12,000) -- (21,100)
------------ ------------ ------------ ------------ ------------
Net loss $ (1,758,545) $ (59,554) $ (4,115,448) $ (76,554) $ (5,670,945)
============ ============ ============ ============ ============
Basic and diluted loss per
common share $ (0.08) $ (0.00) $ (0.19) $ (0.00)
============ ============ ============ ============
Weighted average common
shares outstanding, basic
and diluted 21,511,998 17,132,800 21,474,388 17,128,562
============ ============ ============ ============
See accompanying notes to consolidated financial statements
4
BLUEFIRE ETHANOL FUELS, INC. AND SUBSIDIARY
(A DEVELOPMENT-STAGE COMPANY)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
FOR THE PERIOD FROM DECEMBER 31, 2006 THROUGH JUNE 30, 2007
Deficit
Accumulated
Additional During the
Common Stock Paid-in Development Stockholders'
Shares Amount Capital Stage Deficit
----------- ----------- ----------- ----------- -----------
Balances, December 31, 2006 21,125,764 $ 21,126 $ 1,382,390 $(1,555,497) $ (151,981)
January 2007, private offering at $2.00
per share to unrelated individuals,
including costs associated with private
placement of 6,250 shares and $12,500
cash paid 284,750 285 755,875 -- 756,160
Share based compensation related to
employment agreement in January 2007
$3.99 per share (Note 4) 10,000 10 39,890 -- 39,900
Common shares issued for services in
February 2007 at $5.92 per share (Note 4) 37,500 38 138,837 -- 138,875
Adjustment to record remaining value of
warrants at $4.70 per share issued for
services in February 2007 (Note 4) -- -- 158,118 -- 158,118
Common shares issued for services in
March 2007 at $7.18 per share (Note 4) 37,500 37 269,213 -- 269,250
Value of warrants at $6.11 for services
vested in March 2007 (Note 4) -- -- 305,307 -- 305,307
Value of warrants at $5.40 for services
vested in June 2007 (Note 4) -- -- 269,839 -- 269,839
Common shares issued for services in
June 2007 at $6.25 per share (Note 4) 37,500 37 234,338 -- 234,375
Share based compensation related to
employment agreement in February 2007
at $5.52 per share (Note 4) 25,000 25 159,146 -- 159,171
Share based compensation related to options
(Note 4) -- -- 1,286,495 -- 1,286,495
Net loss -- -- -- (4,115,448) (4,115,448)
----------- ----------- ----------- ----------- -----------
Balances at June 30, 2007 (unaudited) 21,558,014 $ 21,558 $ 4,999,448 $(5,670,945) $ (649,939)
=========== =========== =========== =========== ===========
See accompanying notes to consolidated financial statements
5
BLUEFIRE ETHANOL FUELS, INC. AND SUBSIDIARY
(A DEVELOPMENT-STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
From March 28, From March 28,
2006 2006
For the Six (Inception) (Inception)
Months Ended through through
June 30, June 30, June 30,
2007 2006 2007
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(4,115,448) $ (76,554) $(5,670,945)
Adjustments to reconcile net loss to net cash
used in operating activities:
Founders' shares -- 17,000 17,000
Costs associated with purchase
of Sucre Agricultural Corp -- (3,550) (3,550)
Discount on sale of stock associated with
private placement 211,660 -- 211,660
Share-based compensation 2,861,330 -- 3,561,396
Depreciation 146 -- 146
Changes in operating assets and liabilities:
Prepaid fees to related party -- -- (30,000)
Prepaid expenses and other current assets (19,978) -- (19,978)
Accounts payable 312,240 62,950 379,189
Accrued liabilities 20,181 -- 37,873
Accrued interest to related party 12,000 -- 21,100
----------- ----------- -----------
Net cash used in operating activities (717,869) (154) (1,496,109)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (293,086) -- (293,086)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES: -- -- --
Cash received in acquisition of Sucre Agricultural Corp. -- 690,000 690,000
Proceeds from sale of stock through private placement 544,500 -- 544,500
Proceeds from related party notes 25,000 -- 25,000
Proceeds from related party line of credit 592,000 1,000 683,000
Repayments of related party notes and line of credit (126,500) -- (126,500)
----------- ----------- -----------
Net cash provided by financing activities 1,035,000 691,000 1,816,000
Net increase in cash and cash equivalents 24,045 690,846 26,805
Cash and cash equivalents beginning of period 2,760 -- --
----------- ----------- -----------
Cash and cash equivalents end of period $ 26,805 $ 690,846 $ 26,805
=========== =========== ===========
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest $ 11,600 $ -- $ 11,600
=========== =========== ===========
See accompanying notes to consolidated financial statements
6
BLUEFIRE ETHANOL FUELS, INC. AND SUBSIDIARY
(A DEVELOPMENT-STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND BUSINESS
BlueFire Ethanol, Inc. ("BlueFire") was incorporated in the state of Nevada on
March 28, 2006 ("Inception"). BlueFire was established to deploy the
commercially ready and patented process for the conversion of cellulosic waste
materials to ethanol ("Arkenol Technology") under a technology license agreement
with Arkenol, Inc. ("Arkenol"). BlueFire's use of the Arkenol Technology
positions it as a cellulose-to-ethanol company with demonstrated production of
ethanol from urban trash (post-sorted "MSW"), rice and wheat straws, wood waste
and other agricultural residues. The Company's goal is to develop and operate
high-value carbohydrate-based transportation fuel production facilities in North
America, and to provide professional services to such facilities worldwide.
These "biorefineries" will convert widely available, inexpensive, organic
materials such as agricultural residues, high-content biomass crops, wood
residues, and cellulose from MSW into ethanol.
On June 27, 2006, BlueFire completed a reverse acquisition of Sucre Agricultural
Corp. ("Sucre"), a Delaware corporation. At the time of acquisition, Sucre had
no operations, revenues or liabilities. The only asset possessed by Sucre was
$690,000 in cash which was included in the acquisition. Sucre was considered a
blank-check company prior to the acquisition. In connection with the acquisition
Sucre issued BlueFire 17,000,000 shares of common stock, approximately 85% of
the outstanding common stock of Sucre, for all the issued and outstanding
BlueFire common stock. The Sucre stockholders retained 4,028,264 shares of Sucre
common stock.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
MANAGEMENTS' PLANS
The Company is a development-stage company which has incurred losses since
inception. Management has funded operations primarily through proceeds received
in connection with the reverse merger, loans from its majority shareholder, the
private placement of the Company's common stock in January 2007, and the
issuance of convertible promissory notes with warrants in July 2007. In order
for the Company's operations to continue, management will need to generate
revenues from their intended operations sufficient to meet the Company's
anticipated cost structure. The Company may encounter difficulties in
establishing these operations due to the time frame of developing, constructing
and ultimately operating the planned bio-refinery projects.
As of June 30, 2007, the Company has a working capital deficit of approximately
$972,879. In March 2007, the Company obtained a line of credit in the amount of
$1,500,000 from its Chairman/Chief Executive Officer and majority shareholder to
provide additional liquidity to the Company as needed. During the three months
ended June 30, 2007, the Company borrowed $497,000 from its Chairman/Chief
Executive Officer and majority shareholder. The funds were used to fund the
operations of the Company during the quarter. Management has estimated that
operating expenses for the period from July 2007 to December 2007 will
approximate roughly $800,000, excluding engineering costs related to the
development of our bio-refinery projects. In July 2007, the Company obtained
$500,000 through the issuance of convertible promissory notes with warrants. The
proceeds received are expected to be used in operations.
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 bio-refinery project at a landfill in Southern California. In
March 2007, the Company was selected to receive a grant of approximately
$1,000,000 in funding from the California Energy Commission ("CEC"). Under the
DOE and CEC programs, the Company may be reimbursed for project specific costs
including salaries, engineering, development, etc.
7
BLUEFIRE ETHANOL FUELS, INC. AND SUBSIDIARY
(A DEVELOPMENT-STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company is in the process of reviewing terms for proposed financings to
replace the line of credit provided by the CEO, repay the convertible promissory
notes, and to fund the construction of their first plant in Lancaster,
California. Management believes its plans will enable the Company to operate in
the normal course of business until December 31, 2007.
BASIS OF PRESENTATION
The accompanying unaudited interim financial statements have been prepared by
the Company pursuant to the rules and regulations of the United States Security
Exchange Commission. Certain information and disclosures normally included in
the annual financial statements prepared in accordance with the accounting
principles generally accepted in the Unites States of America have been
condensed or omitted pursuant to such rules and regulations. In the opinion of
management, all adjustments and disclosures necessary for a fair presentation of
these financial statements have been included. Such adjustments consist of
normal recurring adjustments. These interim financials statements should be read
in conjunction with the audited financial statements of the Company for the
period ended December 31, 2006.
The results of operations for the three and six-months ended June 30, 2007 are
not necessarily indicative of the results that may be expected for the full
year.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reported periods. Actual results could materially differ from those
estimates.
REVENUE RECOGNITION
The Company is currently a developmental-stage company. The Company will
recognize revenues from 1) consulting services rendered to potential sub
licensees for development and construction of cellulose to ethanol projects, 2)
sales of ethanol from its production facilities when (a) persuasive evidence
that an agreement exists; (b) the products have been delivered; (c) the prices
are fixed and determinable and not subject to refund or adjustment; and (d)
collection of the amounts due is reasonably assured.
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, capitalized project
development costs include the development, engineering, and marketing expenses
related to the Company's future cellulose-to-ethanol production facilities.
During the three months ended June 30, 2007, the Company commenced development
of its first cellulose-to-ethanol production facility. During the three and six
months ended June 30, 2007, the Company capitalized approximately $291,000
related to this facility.
8
BLUEFIRE ETHANOL FUELS, INC. AND SUBSIDIARY
(A DEVELOPMENT-STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INCOME TAXES
The Company accounts for income taxes in accordance with Financial Accounting
Standards Board ("FASB") Statement No. 109 "Accounting for Income Taxes." SFAS
No. 109 requires the Company to provide a net deferred tax asset/liability equal
to the expected future tax benefit/expense of temporary reporting differences
between book and tax accounting methods and any available operating loss or tax
credit carry forwards.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of financial instruments approximated their carrying values at
June 30, 2007. The financial instruments consist of cash and accounts payable.
The related party note and line of credit cannot be evaluated because this is
not an arms-length transaction.
LOSS PER COMMON SHARE
The Company presents basic loss per share ("EPS") and diluted EPS on the face of
the consolidated statement of operations. Basic loss per share is computed as
net loss divided by the weighted average number of common shares outstanding for
the period. Diluted EPS reflects the potential dilution that could occur from
common shares issuable through stock options, warrants, and other convertible
securities. As of June 30, 2007, the Company had options and warrants to
purchase an aggregate of 2,190,000 shares of common stock that were excluded
from the calculation of diluted loss per share as their effects would have been
anti-dilutive. There were no dilutive securities outstanding as of June 30,
2006.
CONCENTRATIONS OF CREDIT RISK
The Company, at times, maintains cash balances at certain financial institutions
in excess of amounts insured by federal agencies.
SHARE-BASED PAYMENTS
The Company accounts for stock options issued to employees and consultants under
SFAS No. 123(R), "Share-Based Payment". Under SFAS 123(R), share-based
compensation cost to employees is measured at the grant date, based on the
estimated fair value of the award, and is recognized as expense over the
employee's requisite service period. Share based compensation cost to
consultants is measured on a quarterly basis using the Black-Scholes option
model. The Company has no awards with market or performance conditions.
The Company measures compensation expense for its non-employee stock-based
compensation under the FASB Emerging Issues Task Force ("EITF") Issue No. 96-18
"Accounting for Equity Instruments that are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services" ("EITF 96-18").
The fair value of the option issued or committed to be issued is used to measure
the transaction, as this is more reliable than the fair value of the services
received. The fair value is measured at the value of the Company's common stock
on the date that the commitment for performance by the counterparty has been
reached or the counterparty's performance is complete. The fair value of the
equity instrument is charged directly to stock-based compensation expense and
credited to additional paid-in capital.
9
BLUEFIRE ETHANOL FUELS, INC. AND SUBSIDIARY
(A DEVELOPMENT-STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - COMMITMENTS AND CONTINGENCIES
OPTION TO PURCHASE LAND
On February 9, 2007, the Company paid a one time fee of $4,000 and signed a
six-month option agreement to purchase 95 acres of vacant land in Lancaster,
California for $95,000. The amount is currently showing on the balance sheet as
a current asset.
PROFESSIONAL SERVICES AGREEMENTS
On February 26, 2007, the Company entered into an agreement with an engineering
firm, whereby the engineering firm will prepare a design basis for a facility
comprising a capacity of 2.5 to 9 million gallons per year as specified by the
Company, incorporating cellulosic ethanol process technology and the Arkenol
Technology. As of June 30, 2007, the Company has incurred total costs of
$309,000 of which approximately $291,000 was capitalized. The capitalized costs
are included in property and equipment on the accompanying balance sheet.
DEPARTMENT OF ENERGY
In February 2007, the Company was awarded a grant for up to $40 million from the
DOE's cellulosic ethanol grant program to develop a solid waste bio-refinery
project at a landfill in Southern California. As of June 30, 2007, the details
for disbursement of this grant have not been finalized.
CALIFORNIA ENERGY COMMISSION
In March 2007, the Company was selected to receive approximately $1,000,000 in
funding from the CEC. Under the CEC program, the Company will be reimbursed for
project specific costs including salaries, engineering, development, etc. As of
June 30, 2007, the details for disbursement of this grant have not been
finalized.
NOTE 4 -STOCKHOLDERS' DEFICIT
STOCK OPTION PLAN
On December 14, 2006, the Company's board of directors and shareholders approved
the Company's 2006 Incentive and Non-statutory Stock Option Plan authorizing the
issuance of options to purchase 10,000,000 shares of the Company's common stock.
In addition on December 14, 2006, the Company granted options to purchase
1,990,000 shares of common stock to various employees and consultants having a
$2.00 exercise price. The Company accounts for the stock options to consultants
under the provisions of EITF 96-18. As of June 30, 2007, all of the options are
still outstanding.
During the three months ended June 30, 2007, the Company amortized stock based
compensation, including consultants, of approximately $411,000 to general and
administrative expenses and $229,000 to project development expenses. During the
six months ended June 30, 2007, the Company amortized stock based compensation,
including consultants, of approximately $814,000 to general and administrative
expenses and $472,000 to project development expenses. Related to these options,
the Company will record future employee compensation expense of approximately
$1,280,000 and $2,300,000 during the year ending December 31, 2007 and December
31, 2008, respectively.
In accordance with EITF 96-18, as of June 30, 2007, the options awarded to
consultants were re-valued using the Black-Scholes option pricing model with the
following assumptions: volatility of 122%, expected life of four years, risk
free interest rate of 4.87% and no dividends.
10
BLUEFIRE ETHANOL FUELS, INC. AND SUBSIDIARY
(A DEVELOPMENT-STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PRIVATE OFFERING
On January 5, 2007, the Company completed a private offering of its stock, and
entered into subscription agreements with four accredited investors. In this
offering, the Company sold an aggregate of 278,500 shares of the Company's
common stock at a price of $2.00 per share for total proceeds of $557,000. The
shares of common stock were offered and sold to the investors in private
placement transactions made in reliance upon exemptions from registration
pursuant to Section 4(2) under the Securities Act of 1933. Costs associated with
three of these offerings are included in the November 21, 2006 agreement
mentioned below. In addition, the Company paid $12,500 in cash and
issued 6,250 shares of their common stock as a finder's fee. The common stock
was sold at a significant discount to the quoted market price of the Company's
common stock. Thus, the Company calculated the excess discount associated with
the sale of their stock at approximate $0.76 per share. The Company expensed
approximately $211,000 to the accompanying statement of operations during the
six months ended June 30, 2007.
ISSUANCE OF COMMON STOCK RELATED TO EMPLOYMENT AGREEMENTS
In January 2007, the Company issued 10,000 shares of common stock to an employee
in connection with an employment agreement. The shares were valued on the
initial date of employment at $40,000 based on the closing market of the
Company's common stock on that date. The Company expensed the value of the
common stock within project development on the accompanying statement of
operations during the six months ended June 30, 2007.
On February 12, 2007, the Company entered into an employment agreement with a
key employee, and simultaneously entered into a consulting agreement with an
entity controlled by such employee; both agreements were effective March 16,
2007. Under the terms of the consulting agreement, the consulting entity
received 50,000 restricted shares of the Company's common stock. The common
stock was valued at approximately $276,000 based on the closing market price of
the Company's common stock on the date of the agreement. The shares vest in
equal quarterly installments on February 12, 2007, June 1, September 1, and
December 1, 2007. The Company is amortizing the fair value of the common stock
over the vesting period. During the three and six months ended June 30, 2007,
the Company recorded approximately $73,000 and $159,170, respectively, in
compensation expense within general and administrative expenses on the
accompanying statement of operations.
INVESTOR RELATIONS AGREEMENT
On November 21, 2006, the Company entered into an agreement with a consultant.
Under the terms of the agreement, the Company is to receive investor relations
and support services in exchange for a monthly fee of $7,500, 150,000 shares of
common stock, warrants to purchase 200,000 shares of common stock at $5.00 per
share, expiring in five years, and the reimbursement of certain travel expenses.
The common stock and warrants vested in equal amounts on November 21, 2006,
February 1, 2007, April 1, 2007 and June 1, 2007. The Company accounts for the
agreement under the provisions of EITF 96-18.
The Company revalued the shares on June 1, 2007, vesting date, and recorded an
additional adjustment of $234,375. On June 1, 2007 the warrants were also
revalued at $5.40 per share based on the Black-Scholes option pricing method
using the following assumptions: volatility of 129%, expected life of four and a
half years, risk free interest rate of 4.97% and no dividends. The Company
recorded an additional expense of $269,839 related to these vested warrants
during the three months ended June 30, 2007.
11
BLUEFIRE ETHANOL FUELS, INC. AND SUBSIDIARY
(A DEVELOPMENT-STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During the three and six months ended June 30, 2007, total compensation expense
related to the common stock and warrants was $504,214 and $1,375,957
respectively, which is recorded within operating expenses on the accompanying
consolidated statement of operations.
NOTE 5 -RELATED PARTY TRANSACTION
RELATED PARTY LINE OF CREDIT
In March 2007, the Company obtained a line of credit in the amount of $1,500,000
from its Chairman/Chief Executive Officer and majority shareholder to provide
additional liquidity to the Company as needed. Under the terms of the note, the
Company is to repay any principal balance and interest, at 10% per annum, within
30 days of receiving qualified investment financing of $5,000,000 or more. As of
June 30, 2007, the balance of the outstanding line of credit was $602,600 which
included accrued interest of $9,500.
NOTE 6 -SUBSEQUENT EVENTS
CONVERTIBLE PROMISSORY NOTES
On July 13, 2007, the Company issued several convertible promissory notes
aggregating a total of $500,000 with eight accredited investors including
$25,000 from the Company's Chief Financial Officer. Under the terms of the
notes, the Company is to repay any principal balance and interest, at 10% per
annum within 120 days of the note. The holder also receives warrants to purchase
common stock at $5.00 per share. The warrants vest immediately and expire in
five years. The total warrants issued pursuant to this transaction were 200,000
on a pro-rata basis to investors. The convertible promissory notes are only
convertible into shares of the Company's common stock in the event of a default.
The conversion price is determined based on one third of the average of the
last-trade prices of the Company's common stock for the ten trading days
preceding the default date.
The fair value of the warrants was $990,367 as determined by the Black-Scholes
option pricing model using the following weighted-average assumptions:
volatility of 113%, risk-free interest rate of 4.94%, dividend yield of 0% and a
term of five years.
The proceeds were allocated between the convertible promissory notes and the
warrants issued to the convertible promissory note holders based on their
relative fair values and resulted in $167,744 being allocated to the convertible
promissory notes and $332,256 allocated to the warrants. The resulting discount
to the convertible notes payable of $332,256 is being amortized over the term of
the convertible promissory notes.
In accordance with EITF 98-05 "Accounting for Convertible Securities with
Beneficial Conversion Features or Contingently Adjustable Conversion Ratios",
the Company calculated the value of the beneficial conversion feature to be
$167,744. However, since the convertible promissory notes are only convertible
upon a contingent event, the value will not be recorded until such event is
triggered.
PRIVATE PLACEMENT AGREEMENTS
Subsequent to June 30, 2007, the Company has entered into various placement
agent agreements, whereby payments are only ultimately due if capital is raised.
As of June 30, 2007, no amounts are due under the agreements.
BOARD OF DIRECTOR ELECTIONS
Subsequent to June 30, 2007, the Company elected two new individuals to the
board of directors. In connection with the elections, the Company issued 5,000
shares of common stock to each of the individuals.
12
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Included in this prospectus are "forward-looking" statements, as well as
historical information. Although we believe that the expectations reflected in
these forward-looking statements are reasonable, we cannot assure you that the
expectations reflected in these forward-looking statements will prove to be
correct. Forward-looking statements include those that use forward-looking
terminology, such as the words "anticipate," "believe," "estimate," "expect,"
"intend," "may," "project," "plan," "will," "shall," "should," and similar
expressions, including when used in the negative. Although we believe that the
expectations reflected in these forward-looking statements are reasonable and
achievable, these statements involve risks and uncertainties and we cannot
assure you that actual results will be consistent with these forward-looking
statements. Important factors that could cause our actual results, performance
or achievements to differ from these forward-looking statements include the
following:
o the availability and adequacy of our cash flow to meet our
requirements,
o failure to finance the construction of our planned ethanol
production plants,
o economic, competitive, demographic, business and other
conditions in our local and regional markets,
o changes or developments in laws, regulations or taxes in the
ethanol or energy industries, actions taken or not taken by
third-parties, including our suppliers and competitors, as
well as legislative,
o regulatory, judicial and other governmental authorities,
o competition in the ethanol industry,
o the failure to obtain or loss of any license or permit,
changes in our business and growth strategy (including our
plant building strategy and co-location strategy),
o capital improvements or development plans,
o adverse publicity, including but not limited to, the recent
adjustments in calculating mileage per gallon, and
o the availability of additional capital to support capital
improvements and development.
All forward-looking statements attributable to us are expressly qualified in
their entirety by these and other factors. We undertake no obligation to update
or revise these forward-looking statements, whether to reflect events or
circumstances after the date initially filed or published, to reflect the
occurrence of unanticipated events or otherwise.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
THE FOLLOWING DISCUSSION OF OUR PLAN OF OPERATION SHOULD BE READ IN CONJUNCTION
WITH THE FINANCIAL STATEMENTS AND RELATED NOTES TO THE FINANCIAL STATEMENTS
INCLUDED ELSEWHERE IN THIS QUARTERLY REPORT.
PLAN OF OPERATION
Management plans to raise additional funds through joint venture partnerships,
project debt financings or through future sales of the Company's common stock,
until such time as the Company's revenues are sufficient to meet its cost
structure, and ultimately achieve profitable operations. There is no assurance
that the Company will be successful in raising additional capital or achieving
profitable operations. The consolidated financial statements do not include any
adjustments that might result from the outcome of these uncertainties. The
Company will need financing within 12 months to continue its operations.
The Company has not developed its own proprietary technology but rather is a
licensee of the Arkenol Technology and therefore has benefited from Arkenol's
research and development efforts and cost expenditures.
The Company's business will encompass development activities culminating in the
construction and long-term operation of ethanol production biorefineries, as
such, BlueFire is 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.
For the next 12 months, the Company's Plan of Operations is as follows:
o Obtain additional operating capital from joint venture
partnerships, debt financing or equity financing to fund
ongoing Company operations and the development of initial
biorefineries in North America.
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o The Energy Policy Act provides for grants and loan guarantee
programs to incentivize the growth of the cellulosic ethanol
market. These programs include a Cellulosic Biomass Ethanol
and Municipal Solid Waste Guarantee Program under which the
U.S. Department of Energy could provide loan guarantees up to
$250,000,000 per qualified project. The Company has filed a
pre- application for loan guarantees to support the
development of a 55 million gallon per year project in
California to be located adjacent to an existing biomass power
plant.
o The 2005 Energy Act created a Biorefinery Demonstration
Project Program under which $100,000,000 or another amount
appropriated by Congress is available to fund up to three (3)
biorefinery demonstration projects. The Company submitted a
proposal for funding under this solicitation for its projected
El Sobrante, California biorefinery. In February 2007, the
Company was awarded a grant of up to $40 million from the U.S.
Department of Energy under this biorefinery grant program. The
specifics of this award are to be determined during the third
quarter of 2007.
o The California Energy Commission has provided a competitive
grant solicitation with the intent of accelerating research,
development and demonstration of biofuel energy conversion
technologies and refineries using lignocellulosic biomass
(such as agricultural and forest residues, and urban waste),
food waste, beverages, waste grease, purpose-grown or energy
crops. This solicitation will help advance science,
technology, and market acceptance of ethanol in California
that will help reduce petroleum consumption and help meet the
Governor's Executive Order S-06-06, the Bioenergy Action Plan,
and AB 32 (Nunez & Pavley 2006). In March 2007, the Company
received notice that it has been accepted as a recipient of up
to $1 million under this program for equipment testing and
preliminary engineering for use in its proposed project under
this solicitation. The specifics of this award are to be
determined, but Bluefire is planning on finalizing study
procedures and contract terms during the third or fourth
quarter of 2007.
o As available and as applicable to the business plans of the
Company, applications for public funding will be submitted to
leverage private capital raised by the Company.
BlueFire's initial planned projects in North America are projected as
follows:
o A facility that will process approximately 100 tons of green
waste material to produce between 2.5 and 3 million gallons of
ethanol annually. The Company has entered into an Option and
Purchase Agreement on a parcel located in Lancaster,
California. Permits applications were filed on June 24th to
allow for construction of the Lancaster facility. BlueFire is
currently in preliminary engineering. Although the cost of
construction is not readily determinable, the Company
estimates the cost to be approximately $20 - $30 million for
this first plant. The Company is currently in discussions with
potential sources of financing for this facility but no
definitive agreements are in place.
o A facility proposed for development and construction at the El
Sobrante Landfill located in Corona, California. This facility
will use approximately 700 metric dry tons of green waste and
wood waste currently disposed in the landfill to produce about
16.6 to 18 million gallons of ethanol annually. Preliminary
engineering design is in progress and permitting for this
facility will commence once all required preliminary
engineering design is completed. A definitive agreement is
being finalized with Petro-Diamond for the purchase and sale
of the ethanol produced from the facility. BlueFire has
received an Award from the Department of Energy of up to $40
million for the El Sobrante Facility, although the specifics
of the award are yet to be determined. BlueFire is currently
finalizing contract terms for the Award. The remainder of
financing for this project is yet to be determined.
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o Several other opportunities are being evaluated by BlueFire in
North America but no definitive plans have been made. However,
the project proposed at the El Sobrante Landfill provides a
model that can be replicated at over 3,000 landfills located
in North America (U.S. EPA website). Discussions with various
landfill owners are underway to duplicate the proposed
development at the El Sobrante landfill although no definitive
agreements have been reached.
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 requires 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 are described below under the heading "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 1, "Summary of Organization and
Significant Accounting Policies" in the notes to our audited 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.
REVENUE RECOGNITION
The Company is currently a developmental-stage company and has recognized
minimal revenues to date. 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.
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 development, engineering, and marketing expenses related to
the Company's cellulose fractions of municipal solid waste into ethanol fuels.
OFF-BALANCE SHEET ARRANGEMENTS
There are no off-balance sheet arrangements.
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ITEM 3. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
As required by Rule 13a-15(e) under the Exchange Act, as of June 30, 2007, the
end of the period to which this quarterly report relates, we have carried out an
evaluation of the effectiveness of the design and operation of the Company's
disclosure controls and procedures. This evaluation was carried out under the
supervision and with the participation of our management, including our Chief
Executive Officer and our Chief Financial Officer.
Disclosure controls and procedures are controls and other procedures that are
designed to ensure that information required to be disclosed in our reports
filed or submitted under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the Securities and Exchange
Commission's rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed in our reports filed under the Exchange Act is
accumulated and communicated to management, including the Chief Executive
Officer and Chief Financial Officer as appropriate, to allow timely decisions
regarding required disclosure. Management recognizes that any controls and
procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving their objectives, and management necessarily
applies its judgment in evaluating the cost-benefit relationship of possible
controls and procedures. Based on the evaluation of our disclosure controls and
procedures as of June 30, 2007, our Chief Executive Officer and Chief Financial
Officer concluded that, as of such date, our disclosure controls and procedures
were effective and the Company's management has concluded that the consolidated
financial statements included in this quarterly report on Form 10-QSB fairly
present in all material respects the Company's financial condition, results of
operations and cash flows for the periods presented in conformity with
accounting principles generally accepted in the United States of America.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
(a) The following documents are filed as a part of this Report.
EXHIBIT NO. DESCRIPTION
----------- -----------
31.1 Rule 13a-14(a)/ 15d-14(a) Certification of Arnold Klann.
31.2 Rule 13a-14(a)/ 15d-14(a) Certification of Christopher Scott.
32.1 Certification Pursuant to 18 U.S.C. section 1350 of Arnold Klann.
32.2 Certification Pursuant to 18 U.S.C. section 1350 of Christopher Scott.
16
SIGNATURES
In accordance with the requirements of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
DATED: August 14, 2007 BLUEFIRE ETHANOL FUELS, INC.
/s/ ARNOLD KLANN
----------------
ARNOLD KLANN
Chief Executive Officer
/s/ CHRISTOPHER SCOTT
---------------------
CHRISTOPHER SCOTT
Chief Financial Officer and
Principal Accounting Officer
17