d860458_s-1.htm
Washington,
D.C. 20549
AMENDMENT
NO. 3 TO FORM S-1
REGISTRATION
STATEMENT
under
the
SECURITIES
ACT OF 1933
BLUEFIRE
ETHANOL FUELS, INC.
(Name of
small business issuer in its charter)
Nevada
|
2860
|
20-4590982
|
|
|
|
(State
or jurisdiction of incorporation or organization)
|
(Primary
Standard Industrial Classification Code
Number)
|
(I.R.S.
Employer Identification
umber)
|
BlueFire
Ethanol Fuels, Inc.
31
Musick
Irvine,
California 92618
(949)
588-3767 (telephone number)
(949)
588-3972 (facsimile number)
(Address
and telephone number of principal executive offices and principal place of
business)
X-Clearing
Corp.
535
16 th
Street, Suite 810
Denver,
CO 80202
(303)
573-1000 (telephone number)
(Name,
address and telephone number of agent for service)
Copies
to:
Robert
E. Lustrin, Esq.
Craig
A. Sklar, Esq.
Seward
& Kissel LLP
One
Battery Park Plaza
New
York, New York 10004
(212)
574-1200 (telephone number)
(212)
480-8421 (facsimile number)
Approximate
date of proposed sale to public:
From time
to time after the effective date of this Registration Statement.
If any securities being
registered on this Form are to be offered on a delayed or continuous basis
pursuant to Rule 415 under the Securities Act of 1933. x
If this Form is filed to
register additional securities for an offering pursuant to Rule 462(b) under the
Securities Act, please check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. o
If this Form is a
post-effective amendment filed pursuant to Rule 462(c) under the Securities Act,
check the following box and list the Securities Act registration statement
number of the earlier effective registration statement for the same
offering. o
If this Form is a post
effective amendment filed pursuant to Rule 462(d) under the Securities Act,
check the following box and list the Securities Act registration statement
number of the earlier effective registration statement for the same
offering. o
If delivery of the
prospectus is expected to be made pursuant to Rule 434, please check the
following box. o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
Large accelerated
filer o
Accelerated filer o
Non-accelerated
filer o (Do not
check if a smaller reporting
company) Smaller
reporting company x
CALCULATION
OF REGISTRATION FEE
Title
of Each Class of
Securities
to be Registered
|
|
Amount
to be
Registered
|
|
|
Proposed
Maximum
Offering
Price
Per
Share
(1)
|
|
|
Proposed
Maximum
Aggregate
Offering
Price
(1)
|
|
|
Amount
of
Registration
Fee
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock, $0.001 par value per share
|
|
|
6,724,039
|
|
|
$
|
3.225
|
|
|
$
|
21,850,026
|
|
|
$ |
852.22
|
|
Common
Stock, $0.001 par value per share, issuable upon exercise
of outstanding warrants
|
|
|
2,969,801
|
|
|
$
|
3.225
|
|
|
$
|
9,577,608
|
|
|
$ |
376.40
|
|
TOTAL
|
|
|
9,693,840
|
|
|
$
|
3.225
|
|
|
$
|
31,262,634
|
|
|
$ |
1,228.62
|
(2)
|
______________________
(1)
|
Estimated
solely for purposes of calculating the registration fee in accordance with
Rule 457(c) under the Securities Act of 1933 based on the average
of the high and low price of the common stock as reported on the
Over-the-Counter Bulletin Board on March 25, 2008.
|
THE
REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS
MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A
FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
THE
INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THE SELLING
STOCKHOLDERS MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS
IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO
BUY THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT
PERMITTED.
SUBJECT
TO COMPLETION, DATED MARCH 26, 2008
PRELIMINARY
PROSPECTUS
BlueFire
Ethanol Fuels, Inc.
9,693,840
Shares of Common Stock
This
Prospectus relates to the resale by selling stockholders (the “Selling
Stockholders”) of 9,693,840 shares of our common stock $0.001 par value (the
“Common Stock”), including (i) 6,724,039 shares of our issued and outstanding
Common Stock and (ii) 2,969,801 shares of Common Stock issuable upon exercise of
outstanding warrants.
We are
not selling any shares of Common Stock in this offering and, as a result, will
not receive any proceeds from this offering. All of the net proceeds from the
sale of our Common Stock will go to the Selling Stockholders. We may, however,
receive proceeds in the event that some or all of the warrants held by the
Selling Stockholders are exercised for cash.
The
Selling Stockholders may sell Common Stock from time to time at prices
established on the Over-the-Counter Bulletin Board (the “OTCBB”) or as
negotiated in private transactions, or as otherwise described under the heading
“Plan of Distribution.” The Common Stock may be sold directly or through agents
or broker-dealers acting as agents on behalf of the Selling Stockholders. The
Selling Stockholders may engage brokers, dealers or agents, who may receive
commissions or discounts from the Selling Stockholders. We will pay
substantially all the expenses incident to the registration of the shares;
however, we will not pay for sales commissions and other expenses applicable to
the sale of the shares.
Our
Common Stock is currently listed on the OTCBB under the symbol “BFRE.OB.” On
March 25, 2008, the closing price of our Common Stock was $3.10 per
share.
An
investment in our Common Stock involves significant risks. Investors should not
buy our Common Stock unless they can afford to lose their entire investment. See
“Risk Factors” beginning on page 4.
NEITHER
THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS
APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS
TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
The
date of this Prospectus
is ,
2008
FORWARD-LOOKING
STATEMENTS
|
10 |
DETERMINATION OF
OFFERING PRICE
|
10 |
MARKET FOR COMMON
EQUITY AND RELATED STOCKHOLDER MATTERS
|
11 |
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OR PLAN OF OPERATIONS
|
12 |
DESCRIPTION OF
BUSINESS
|
18 |
EXECUTIVE
COMPENSATION
|
29 |
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
|
35 |
SECURITY OWNERSHIP
OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
|
36 |
DESCRIPTION OF
SECURITIES
|
38 |
DISCLOSURE OF
COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT
LIABILITIES
|
40 |
CHANGES IN AND
DISAGREEMENTS WITH ACCOUNTANTS
|
45 |
ADDITIONAL
INFORMATION
|
46 |
This
summary provides an overview of certain information contained elsewhere in this
Prospectus and does not contain all of the information that you should consider
or that may be important to you. Before making an investment decision, you
should read the entire Prospectus carefully, including the “Risk Factors”
section, the financial statements and the notes to the financial statements. In
this Prospectus, the terms “BlueFire,” “Company,” “we,” “us” and “our” refer to
BlueFire Ethanol Fuels, Inc. and our operating subsidiary.
Our
Company
We are
BlueFire Ethanol Fuels, Inc., a Nevada corporation. Our goal is to develop, own
and operate high-value carbohydrate-based transportation fuel plants, or
biorefineries, to produce ethanol, a viable alternative to fossil fuels, and to
provide professional services to biorefineries worldwide. Our biorefineries will
convert widely available, inexpensive, organic materials such as agricultural
residues, high-content biomass crops, wood residues and cellulose from municipal
solid wastes into ethanol. This versatility enables us to consider a wide
variety of feedstocks and locations in which to develop facilities to become a
low cost producer of ethanol. We have licensed for use a patented process from
Arkenol, Inc., a Nevada corporation (“Arkenol”), to produce ethanol from
cellulose (the “Arkenol Technology”). We are the exclusive North America
licensee of the Arkenol Technology. We may also utilize certain biorefinery
related rights, assets, work-product, intellectual property and other know-how
related to 19 ethanol project opportunities originally developed by ARK Energy,
Inc, a Nevada corporation, to accelerate our deployment of the Arkenol
Technology.
Company
History
We are a
Nevada corporation that was initially organized as Atlanta Technology Group,
Inc., a Delaware corporation, on October 12, 1993. The Company was re-named
Docplus.net Corporation on December 31, 1998, and further re-named Sucre
Agricultural Corp. (“Sucre”) and re-domiciled as a Nevada corporation on March
6, 2006. Immediately prior to the Reverse Merger described below,
Sucre changed its name 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.
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 25, 2006 and later began
trading on the OTCBB under the symbol “BFRE.OB” on June 19, 2007. On March 25,
2008, the closing price of our Common Stock was $3.10 per share.
Our
executive offices are located at 31 Musick, Irvine, California 92618 and our
telephone number at such office is (949) 588-3767.
Recent
Developments
On
December 3, 2007 and December 14, 2007, we consummated an agreement to issue up
to 5,740,741 shares of common stock and warrants to purchase 5,740,741 shares of
common stock for net proceeds of $14,360,000 (the “December Private Placement”).
The warrants have an exercise price of $2.90 per share and expire five years
from the date of issuance.
In
connection with the December Private Placement, we modified the conversion price
of our previously issued 8% Senior Secured Convertible Promissory Notes
(“Convertible Notes”) from $4.21 to $2.90 per share. We also modified the
exercise price of the class “A” and class “B” warrants issued with the
Convertible Notes from $5.48 and $6.32, respectively to $2.90 per
share.
On
December 14, 2007, the holders of the Convertible Notes converted their
outstanding principal balance of $2,000,000 and accrued interest of $33,333
into 700,922 shares of common stock.
On
December 17, 2007, we filed an S-8 with the SEC to register 10,000,000 shares of
common stock under our Amended and Restated 2006 Incentive and Non-Statutory
Stock Option Plan.
The
Offering
Common
Stock Being Offered By Selling Stockholders
|
|
9,693,840
shares of Common Stock. This includes (i) 6,724,039 shares of
our issued and outstanding Common Stock and (ii) 2,969,801
shares of Common Stock issuable upon exercise of outstanding
warrants.
|
|
|
|
Initial
Offering Price
|
|
The
initial offering price for shares of our Common Stock will be determined
by prevailing prices established on the OTCBB or as negotiated in private
transactions, or as otherwise described in “Plan of
Distribution.”
|
|
|
|
Terms
of the Offering
|
|
The
Selling Stockholders will determine when and how they will sell the Common
Stock offered in this prospectus.
|
|
|
|
Termination
of the Offering
|
|
The
offering will conclude upon the earliest of(i) such time as all of
the Common Stock has been sold pursuant to the registration statement,
(ii) two years or (iii) such time as all of the Common Stock
become eligible for resale without volume limitations pursuant to Rule 144
under the Securities Act of 1933, as amended (the “Securities Act”), or
any other rule of similar effect.
|
|
|
|
Use
of Proceeds
|
|
We
are not selling any shares of Common Stock in this offering and, as a
result, will not receive any proceeds from this offering. We may, however,
receive proceeds in the event that some or all of the warrants held by the
Selling Stockholders are exercised for cash. The proceeds from the
exercise of such warrants, if any, will be used for working capital and
general corporate purposes.
|
|
|
|
OTCBB
Trading Symbol
|
|
“BFRE.OB”
|
|
|
|
Risk
Factors
|
|
The
Common Stock offered hereby involves a high degree of risk and should not
be purchased by investors who cannot afford the loss of their entire
investment. See “Risk Factors” beginning on page
4.
|
You
should read the summary financial data set forth below in conjunction with
“Management’s Discussion and Analysis of Financial Condition or Plan of
Operations” and our financial statements and the related notes included
elsewhere in this prospectus. We derived the financial data as of the fiscal
year ending December 31, 2007, and for the period from March 28, 2006
(Inception) to December 31, 2006 and 2007, from our financial statements
included in this report. The historical results are not necessarily indicative
of the results to be expected for any future period.
STATEMENT
OF OPERATIONS :
|
|
Year
Ended
December 31
|
|
|
Period
from
March
28, 2006
(Inception)
to
December
31
|
|
|
|
2007
|
|
|
2006(1)
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
49,000
|
|
|
$
|
-
|
|
|
$
|
49,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
|
10,525,864
|
|
|
|
1,549,197
|
|
|
|
12,075,061
|
|
Operating
loss
|
|
|
(10,476,864
|
)
|
|
|
(1,549,197
|
)
|
|
|
(12,026,061
|
)
|
Net
Loss
|
|
$
|
(14,276,418
|
)
|
|
$
|
(1,555,497
|
)
|
|
$
|
(15,831,915
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted loss per common share
|
|
|
(0.65
|
)
|
|
$
|
(0.08
|
)
|
|
|
|
|
Weighted
average common shares outstanding basic and
diluted
|
|
$
|
21,848,126
|
|
|
|
19,711,255
|
|
|
|
|
|
(1)
Period from March 28, 2006 (Inception) to December 31, 2006.
BALANCE
SHEET :
|
|
At
December 31,
2007
|
|
|
At
December 31,
2006
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
13,031,939
|
|
|
$
|
2,760
|
|
Current
assets
|
|
$
|
13,097,481
|
|
|
$
|
32,760
|
|
Total
assets
|
|
$
|
13,278,488
|
|
|
$
|
32,760
|
|
Current
liabilities
|
|
$
|
650,350
|
|
|
$
|
184,741
|
|
Total
liabilities
|
|
$
|
650,350
|
|
|
$
|
184,741
|
|
Total
stockholders’ equity (deficit)
|
|
$
|
12,628,138
|
|
|
$
|
(151,981
|
)
|
This
offering and an investment in our Common Stock involve a high degree of risk.
You should consider carefully the risks described below, which are the most
significant risks we face based on our business and the industry in which we
operate, before you decide to buy our Common Stock. If any of the following
risks were to occur, our business, financial condition or results of operations
would likely suffer. In that event, the trading price of our Common Stock could
decline, and you could lose all or part of your investment.
INDUSTRY
RISK FACTORS
COMPETITION
FROM LARGE PRODUCERS OF PETROLEUM-BASED GASOLINE ADDITIVES AND
OTHER COMPETITIVE PRODUCTS MAY IMPACT OUR PROFITABILITY.
If we
reach the production stage we will compete with producers of other gasoline
additives made from other raw materials having similar octane and oxygenate
values as ethanol. Most of our competitors, including oil and energy 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 (methyl tertiary butyl ether). 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.
IF
ETHANOL AND GASOLINE PRICES DROP SIGNIFICANTLY, WE WILL ALSO BE FORCED
TO REDUCE OUR PRICES, WHICH POTENTIALLY MAY LEAD TO FURTHER
LOSSES.
Prices
for ethanol products can vary significantly over time and decreases
in price levels could adversely affect our profitability and viability. The
price of ethanol has some relation to the price of gasoline. Ethanol is
sold into the gasoline blending market where it competes with other
oxygenates and octane components and with gasoline itself.
Therefore, ethanol's price is significantly affected by its value to
refiners in these markets. Ethanol prices are highly correlated with the
price of gasoline and gasoline blending components. 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 FOR FEEDSTOCKS, REDUCING OUR PROFITABILITY.
New
ethanol plants that utilize cellulose as their feedstock may be
under construction or in the planning stages throughout the United States.
This increased ethanol production could increase cellulose demand and
prices, resulting in higher production costs and lower
profits.
PRICE
INCREASES OR INTERRUPTIONS IN NEEDED ENERGY SUPPLIES COULD CAUSE LOSS
OF CUSTOMERS AND IMPAIR OUR PROFITABILITY.
Ethanol
production requires a constant and consistent supply of energy. If there is
any interruption in our supply of energy for whatever reason, such
as availability, delivery or mechanical problems, we may be required to
halt production. If we halt production for any extended period of time, it
will have a material adverse effect on our business. Natural gas and
electricity prices have historically fluctuated significantly. We purchase
significant amounts of these resources as part of our ethanol production.
Increases in the price of natural gas or electricity would harm our
business and financial results by increasing our energy costs.
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 continuation of these credits. The credits have supported a market for
ethanol that might disappear without the credits. The credits are scheduled
to expire December 31, 2010. These credits may not continue beyond their
scheduled expiration date or, if they continue, the incentives may not be
at the same level. The revocation or amendment of any one or more of these
tax incentives could adversely affect the future use of ethanol in a
material way, and we cannot assure investors that any of these tax
incentives will be continued. The elimination or reduction of federal tax
incentives to the ethanol industry could have a material adverse impact on
the industry as a whole.
LAX
ENFORCEMENT OF ENVIRONMENTAL AND ENERGY POLICY REGULATIONS MAY
ADVERSELY AFFECT DEMAND FOR ETHANOL.
Our
success will depend in part on effective enforcement of
existing environmental and energy policy regulations. Many of our potential
customers are unlikely to switch from the use of conventional fuels unless
compliance with applicable regulatory requirements leads, directly or
indirectly, to the use of ethanol. Both additional regulation and
enforcement of such regulatory provisions are likely to be vigorously
opposed by the entities affected by such requirements. If existing
emissions-reducing standards are weakened, or if governments are not active
and effective in enforcing such standards, our business and results of
operations could be adversely affected. Even if the current trend toward
more stringent emissions 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
EPA 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.
COMPANY
RISK FACTORS
SINCE
INCEPTION, WE HAVE HAD LIMITED OPERATIONS AND HAVE INCURRED NET LOSSES OF
$15,831,915 AND WE NEED ADDITIONAL CAPITAL TO EXECUTE OUR BUSINESS
PLAN.
We have
had limited operations and have incurred net losses of $15,831,915 for the
period from March 28, 2006 (Inception) through December 31, 2007 and have not
generated any significant revenues from operations. We have yet to begin ethanol
production or construction of ethanol producing plants. Since the
Reverse Merger, we have been engaged in organizational activities, including
developing a strategic operating plan, 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. Management anticipates beginning construction of a
plant within the next six months and expects to complete the project and to
begin production of ethanol within the next 24 months. Although the cost of
construction is not readily determinable, we estimate the cost to be
approximately $30 million for our first plant. We recently raised $14.4 million
of additional funds which are expected to be used for operations, additional
research and development activities and toward the construction of the Company’s
initial ethanol plant. We will require additional funds through project
financings 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. We expect our current cash on hand to be sufficient for
the next 12 month period. There is no assurance we will be successful
in raising additional capital or achieving profitable operations. Wherever
possible, our board of directors (the “Board of Directors”) will attempt to use
non-cash consideration to satisfy obligations. In many instances, we believe
that the non-cash consideration will consist of restricted shares of our common
stock. These actions will result in dilution of the ownership interests of
existing stockholders and may further dilute common stock book value, and that
dilution may be material.
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 completion of up to 19 numerous
biorefinery projects. Although each facility will have specific funding
requirements, a proposed facility in Los Angeles County will require
approximately $30 million to fund. We will be relying on additional
financing and funding from such sources as The Energy Policy Act grants and
loan guarantee programs, Biorefinery Demonstration Project Program or The
California Energy Commission. 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.
OUR
CELLULOSE-TO-ETHANOL TECHNOLOGIES ARE UNPROVEN ON A LARGE-SCALE
COMMERCIAL BASIS AND PERFORMANCE COULD FAIL TO MEET PROJECTIONS, WHICH
COULD RENDER US WORTHLESS.
While
production of ethanol from corn, sugars and starches is a mature technology,
newer technologies for production of ethanol from cellulose biomass have not
been built at large commercial scales. The technologies being pursued
by us for ethanol production from biomass have not been demonstrated on a
commercial scale. All of the tests conducted to date by us with respect to our
technologies 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, if that
is possible. Accordingly, we cannot assure you 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, 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.
WE DEPEND
ON ARKENOL TO PROVIDE OUR TECHNOLOGY LICENSE.
We
currently license our technology from Arkenol. The loss of this license or
Arkenol’s failure to perform its obligations to us under the license agreement
could have a material adverse effect on our financial condition and results of
our operations. Although we may have rights against Arkenol if it defaults on
its obligations to us, you will have no recourse against Arkenol.
BECAUSE
ARKENOL IS A PRIVATELY HELD COMPANY,
THERE IS LITTLE OR NO PUBLICLY AVAILABLE INFORMATION ABOUT IT AND WE MAY GET
VERY LITTLE ADVANCE WARNING OF OPERATIONAL OR FINANCIAL PROBLEMS EXPERIENCED BY
ARKENOL THAT MAY ADVERSELY AFFECT US.
The
ability of Arkenol to continue providing the technology license for our benefit
will depend in part on its own financial strength. Circumstances beyond our
control could impair Arkenol’s financial strength. Because Arkenol is privately
held it is unlikely that information about its financial strength would become
public unless Arkenol began to default on its obligations. As a result, there
may be little advance warning of problems affecting Arkenol, even though these
problems could have a material adverse effect on us.
OUR
SUCCESS DEPENDS UPON ARNOLD KLANN, OUR CHAIRMAN AND CHIEF EXECUTIVE OFFICER, AND
JOHN CUZENS, OUR CHIEF TECHNOLOGY OFFICER AND SENIOR VICE
PRESIDENT.
We
believe that our success will depend to a significant extent upon the
efforts and abilities of (i) Arnold Klann, our Chairman and Chief Executive
Officer, due to his contacts in the ethanol and cellulose industries and
his overall insight into our business, and (ii) John Cuzens, our Chief
Technology Officer and Senior Vice President for his technical and engineering
expertise, including his familiarity with the Arkenol Technology. Our failure to
retain Mr. Klann or Mr. Cuzens, or to attract and retain additional
qualified personnel, could adversely affect our operations. We do not
currently carry key-man life insurance on any of our officers.
OUR
CHAIRMAN AND CHIEF EXECUTIVE OFFICER HAS AFFILIATIONS WITH ARKENOL THAT COULD
CREATE CONFLICTS OF INTEREST DETRIMENTAL TO US.
We
currently license our technology from Arkenol. Our Chairman, Chief Executive
Officer and majority stockholder holds a 25.5% interest in Arkenol. These
relationships could create conflicts of interest between us and Arkenol. There
can be no assurance that any conflicts of interest will be resolved in a manner
beneficial to us.
FAILURE
TO ACHIEVE AND MAINTAIN EFFECTIVE INTERNAL CONTROLS IN ACCORDANCE
WITH SECTION 404 OF THE SARBANES-OXLEY ACT COULD HAVE A MATERIAL
ADVERSE EFFECT ON OUR BUSINESS AND OPERATING RESULTS.
It may be
time consuming, difficult and costly for us to develop and implement the
additional internal controls, processes and reporting procedures required by the
Sarbanes-Oxley Act. We may need to hire additional financial reporting, internal
auditing and other finance staff in order to develop and implement appropriate
additional internal controls, processes and reporting procedures. If we are
unable to comply with these requirements of the Sarbanes-Oxley Act, we may not
be able to obtain the independent accountant certifications that the
Sarbanes-Oxley Act requires of publicly traded companies.
If we
fail to comply in a timely manner with the requirements of Section 404 of the
Sarbanes-Oxley Act regarding internal control over financial reporting or to
remedy any material weaknesses in our internal controls that we may identify,
such failure could result in material misstatements in our financial statements,
cause investors to lose confidence in our reported financial information and
have a negative effect on the trading price of our common stock.
Pursuant
to Section 404 of the Sarbanes-Oxley Act and current SEC regulations, beginning
with our annual report on Form 10-KSB for our fiscal period ending December 31,
2007, we have prepared assessments regarding internal controls over financial
reporting and beginning with our annual report on Form 10-KSB for our fiscal
period ending December 31, 2008, we will furnish a report by our management on
our internal control over financial reporting. We have begun the process of
documenting and testing our internal control procedures in order to satisfy
these requirements, which is likely to result in increased general and
administrative expenses and may shift management time and attention from
revenue-generating activities to compliance activities. While our management is
expending significant resources in an effort to complete this important project,
there can be no assurance that we will be able to achieve our objective on a
timely basis. There also can be no assurance that our auditors will be able to
issue an unqualified opinion on management's assessment of the effectiveness of
our internal control over financial reporting. Failure to achieve and maintain
an effective internal control environment or complete our Section 404
certifications could have a material adverse effect on our stock
price.
In
addition, in connection with our on-going assessment of the effectiveness
of our internal control over financial reporting, we may discover
“material weaknesses” in our internal controls as defined in standards
established by the Public Company Accounting Oversight Board, or the PCAOB.
A material weakness is a significant deficiency, or combination of
significant deficiencies, that results in more than a remote likelihood
that a material misstatement of the annual or interim financial statements
will not be prevented or detected. The PCAOB defines “significant
deficiency” as a deficiency that results in more than a remote likelihood
that a misstatement of the financial statements that is more than
inconsequential will not be prevented or detected.
In the
event that a material weakness is identified, we will employ
qualified personnel and adopt and implement policies and procedures to
address any material weaknesses that we identify. However, the process of
designing and implementing effective internal controls is a continuous
effort that requires us to anticipate and react to changes in our business
and the economic and regulatory environments and to expend significant
resources to maintain a system of internal controls that is adequate to
satisfy our reporting obligations as a public company. We cannot assure you
that the measures we will take will remediate any material weaknesses that
we may identify or that we will implement and maintain adequate controls
over our financial process and reporting in the future.
Any
failure to complete our assessment of our internal control over
financial reporting, to remediate any material weaknesses that we may
identify or to implement new or improved controls, or difficulties
encountered in their implementation, could harm our operating results,
cause us to fail to meet our reporting obligations or result in material
misstatements in our financial statements. Any such failure could also
adversely affect the results of the periodic management evaluations of our
internal controls and, in the case of a failure to remediate any material
weaknesses that we may identify, would adversely affect the annual auditor
attestation reports regarding the effectiveness of our internal control
over financial reporting that are required under Section 404 of the
Sarbanes-Oxley Act. Inadequate internal controls could also cause investors
to lose confidence in our reported financial information, which could have
a negative effect on the trading price of our common stock.
RISK
FACTORS RELATING TO OUR COMMON STOCK AND THIS OFFERING
Our
shares are traded on the OTCBB and the trading volume has historically been very
low. An active trading market for our shares may not develop or be sustained. We
cannot predict at this time how actively our shares will trade in the public
market or whether the price of our shares in the public market will reflect our
actual financial performance.
OUR
COMMON STOCK PRICE HAS FLUCTUATED CONSIDERABLY AND STOCKHOLDERS MAY NOT BE ABLE
TO RESELL THEIR SHARES AT OR ABOVE THE PRICE AT WHICH SUCH SHARES WERE
PURCHASED.
The
market price of our common stock may fluctuate significantly. Between July
11, 2006, the day we began trading publicly as BFRE.PK, and March 25, 2008, the
high and low price for our common stock has been $7.90 and $1.30 per
share, respectively. Our share price has fluctuated in response to
various factors, including not yet beginning construction of our first plant,
needing additional time to organize engineering resources, issues relating to
feedstock sources, trying to locate suitable plant locations, locating
distributors and finding funding sources.
OUR
COMMON STOCK MAY BE CONSIDERED “A PENNY STOCK” AND MAY BE DIFFICULT FOR
YOU TO SELL.
The SEC
has adopted regulations which generally define “penny stock” to be
an equity security that has a market price of less than $5.00 per share or
an exercise price of less than $5.00 per share, subject to specific
exemptions. The market price of our common stock has been for much of its
trading history since July 11, 2006, and may continue to be less than $5.00
per share, and therefore may be designated as a “penny stock” according to
SEC rules. This designation requires any broker or dealer selling these
securities to disclose certain information concerning the transaction,
obtain a written agreement from the purchaser and determine that the
purchaser is reasonably suitable to purchase the securities. These rules
may restrict the ability of brokers or dealers to sell our common stock and
may affect the ability of investors to sell their shares.
Arnold
Klann, our Chairman and Chief Executive Officer, controls approximately
48.5% of our current outstanding shares of voting common stock. He may be
able to exert significant control over our management and affairs requiring
stockholder approval, including approval of significant corporate
transactions. This concentration of ownership may expedite approvals of
company decisions, or have the effect of delaying or preventing a change in
control, adversely affect the market price of our common stock, or may not
be in the best interests of all our stockholders.
YOU COULD
BE DILUTED FROM OUR FUTURE ISSUANCE OF CAPITAL STOCK AND DERIVATIVE
SECURITIES.
As of
March 25, 2008, we had 28,061,553 shares of common stock outstanding
and no shares of preferred stock outstanding. We are authorized to issue up to
100,000,000 shares of common stock and 1,000,000 shares of preferred stock.
To the extent of such authorization, our Board of Directors will have the
ability, without seeking stockholder approval, to issue additional shares
of common stock or preferred stock in the future for such consideration as the
Board of Directors may consider sufficient. The issuance of additional common
stock or preferred stock in the future may reduce your proportionate ownership
and voting power.
WE HAVE
NOT AND DO NOT INTEND TO PAY ANY DIVIDENDS. AS A RESULT, YOU MAY ONLY BE ABLE TO
OBTAIN A RETURN ON INVESTMENT IN OUR COMMON STOCK IF ITS VALUE
INCREASES.
We have
not paid dividends in the past and do not plan to pay dividends in the near
future. We expect to retain earnings to finance and develop our business. In
addition, the payment of future dividends will be directly dependent upon our
earnings, our financial needs and other similarly unpredictable factors. As a
result, the success of an investment in our common stock will depend upon future
appreciation in its value. The price of our common stock may not appreciate in
value or even maintain the price at which you purchased our shares.
Included
in this prospectus are “forward-looking” statements, as well as historical
information. Although we believe that the expectations reflected in these
forward-looking statements are reasonable, we cannot assure you that the
expectations reflected in these forward-looking statements will prove to be
correct. Our actual results could differ materially from those anticipated in
forward-looking statements as a result of certain factors, including matters
described in the section titled “Risk Factors.” Forward-looking statements
include those that use forward-looking terminology, such as the words
“anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “project,”
“plan,” “will,” “shall,” “should,” and similar expressions, including when used
in the negative. Although we believe that the expectations reflected in these
forward-looking statements are reasonable and achievable, these statements
involve risks and uncertainties and we cannot assure you that actual results
will be consistent with these forward-looking statements. Important factors that
could cause our actual results, performance or achievements to differ from these
forward-looking statements include the following:
●
|
the
availability and adequacy of our cash flow to meet our
requirements,
|
●
|
economic,
competitive, demographic, business and other conditions in our local and
regional markets,
|
●
|
changes
or developments in laws, regulations or taxes in the ethanol or energy
industries,
|
●
|
actions
taken or not taken by third-parties, including our suppliers and
competitors, as well as legislative, regulatory, judicial and other
governmental authorities,
|
●
|
competition
in the ethanol industry,
|
●
|
the
failure to obtain or loss of any license or
permit,
|
●
|
changes
in our business and growth strategy (including our plant building strategy
and co-location strategy), capital improvements or development
plans,
|
●
|
the
availability of additional capital to support capital improvements and
development, and
|
●
|
other
factors discussed under the section entitled “Risk Factors” or elsewhere
in this registration statement.
|
All
forward-looking statements attributable to us are expressly qualified in their
entirety by these and other factors. We undertake no obligation to update or
revise these forward-looking statements, whether to reflect events or
circumstances after the date initially filed or published, to reflect the
occurrence of unanticipated events or otherwise.
We will
not receive any proceeds from the sale of Common Stock by the Selling
Stockholders. All of the net proceeds from the sale of our Common Stock will go
to the Selling Stockholders as described below in the sections entitled “Selling
Stockholders” and “Plan of Distribution”.
A portion
of the shares of Common Stock covered by this prospectus are issuable upon
exercise of warrants. We may receive proceeds in the event some or
all of the warrants held by the Selling Stockholders are exercised for
cash. Any proceeds received from the exercise of the warrants will be
used for working capital and general corporate purposes. There can be
no assurance that any of the Selling Stockholders will exercise their
warrants or that we will receive any proceeds therefrom. Warrant holders often
choose not to exercise their warrants because the price of the Common Stock does
not justify the exercise or the warrant expires by its terms.
The
prices at which the shares of Common Stock covered by this prospectus may
actually be sold will be determined by the prevailing public market price for
shares of Common Stock, by negotiations between the Selling Shareholders and
buyers of our Common Stock in private transactions or as otherwise described in
“Plan of Distribution.”
RELATED
STOCKHOLDER MATTERS
Market
Information
Our
shares of common stock began trading under the symbol “BFRE.PK” on the Pink
Sheets of the National Quotation Bureau on July 11, 2006 and later began trading
on the OTCBB under the symbol “BFRE.OB” on June 19, 2007.
The
following table sets forth the high and low bid information for our common stock
for each quarter since we completed the Reverse Merger and began trading on July
11, 2006. The prices reflect inter-dealer quotations, do not include retail
mark-ups, markdowns or commissions and do not necessarily reflect actual
transactions.
QUARTERLY
COMMON STOCK PRICE RANGES
Quarter
ended
|
|
Low
Price
|
|
|
High
Price
|
|
|
|
|
|
|
|
|
September
30, 2006
|
|
$
|
1.35
|
|
|
$
|
6.80
|
|
December
31, 2006
|
|
$
|
1.47
|
|
|
$
|
4.00
|
|
March
31, 2007
|
|
$
|
3.99
|
|
|
$
|
7.70
|
|
June
30, 2007
|
|
$
|
5.40
|
|
|
$
|
7.15
|
|
September
30, 2007
|
|
$
|
3.30
|
|
|
$
|
6.40
|
|
December
31, 2007
|
|
$
|
3.15
|
|
|
$
|
5.01
|
|
Holders
There
were approximately 2,750 holders of our common stock as of March 25,
2008.
Transfer
Agent and Registrar
The
transfer agent and registrar for our common stock is X-Clearing
Corp.
Dividends
We have
not 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.
Equity
Compensation Plan
In order
to compensate our officers, directors, employees and/or consultants, our Board
of Directors and stockholders adopted the 2006 Incentive and Non-Statutory Stock
Option Plan (the “Plan”). The Plan has a total of 10,000,000 shares
reserved for issuance.
On
October 16, 2007, the Board of Directors reviewed the Plan. As such, it
determined that the Plan was to be used as a comprehensive equity incentive
program for which the Board of Directors serves as the plan administrator and,
therefore, amended the Plan (the “Amended and Restated Plan”) to add the ability
to grant restricted stock awards.
Under the
Amended and Restated Plan, an eligible person in the Company's service may
acquire a proprietary interest in the Company in the form of shares or an option
to purchase shares of the Company’s common stock. The amendment includes certain
previously granted restricted stock awards as having been issued under the
Amended and Restated Plan.
As of
March 25, 2008, we have issued the following stock options under the Amended and
Restated Plan:
Equity
Compensation Plan Information
Plan
category
|
Number
of securities to be issued upon exercise of outstanding options, warrants
and rights and number of shares of restricted stock
|
Weighted
average exercise price of outstanding options, warrants and rights
(2)
|
Number
of securities remaining available for future issuance
|
|
|
|
|
Equity
compensation plans approved by security holders under the Amended and
Restated Plan
|
3,440,159
(1)
|
$2.48
|
6,559,841
|
Equity
compensation not pursuant to a plan
|
602,203(3)
|
$3.88
|
|
Total
|
4,042,362
|
|
|
(1) Of
this amount, 20,000 options have been exercised.
(2)
Excludes shares of restricted stock issued under the Plan.
(3)
Includes a warrant to purchase 200,000 shares of common stock at an exercise
price $5.00 per share that was issued to a certain consultant by the Company on
November 9, 2006 for consulting services.
FINANCIAL
CONDITION OR PLAN OF OPERATIONS
You
should read the following discussion and analysis of our financial condition and
plan of operations together with our financial statements and related notes
appearing elsewhere in this prospectus. This discussion and analysis contains
forward-looking statements that involve risks, uncertainties, and assumptions.
The actual results may differ materially from those anticipated in these
forward-looking statements as a result of certain factors, including, but not
limited to, those presented under “Risk Factors” on page 4 and elsewhere in this
prospectus.
PLAN OF
OPERATION
We plan
to raise additional funds through joint venture partnerships, project debt
financings 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 that we will be successful in
raising additional capital or achieving profitable operations. Our consolidated
financial statements do not include any adjustments that might result from the
outcome of these uncertainties. We will need financing within 12 months to
execute our business plan.
We have
not developed our own proprietary technology but rather we are a licensee of the
Arkenol Technology and therefore have benefited from Arkenol's research and
development efforts and cost expenditures.
Our
business will encompass development activities culminating in the construction
and long-term operation of ethanol production biorefineries. 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.
For the
next 12 months, our Plan of Operations is as follows:
●
|
Obtain
additional operating capital from joint venture partnerships, debt
financing or equity financing to fund our ongoing operations and the
development of initial biorefineries in North
America.
|
●
|
The
Energy Policy Act of 2005 provides for grants and loan guarantee programs
to incentivize the growth of the cellulosic ethanol market. These programs
include a Cellulosic Biomass Ethanol and Municipal Solid Waste Guarantee
Program under which the U.S. Department of Energy (“DOE”) could provide
loan guarantees up to $250 million per qualified project. We have received
approval of its pre-application and must now submit a formal application
for a loan guarantee of up to $200 million to support the development of a
55 million gallon per year project in California to be located adjacent to
an existing biomass power plant.
|
●
|
The
Energy Policy Act of 2005 created a Biorefinery Demonstration Project
Program under which $384 million or another amount appropriated by
Congress is available to fund up to three biorefinery demonstration
projects. Ultimately the DOE was appropriated $385 million for the program
and granted awards of various size to six companies of which we are one.
In October, 2007, we signed the contract for the first phase of the grant
program referred to by the DOE as “Award 1” for pre-construction
activities on our El Sobrante
project.
|
●
|
As
available and as applicable to our business plans, applications for public
funding will be submitted to leverage private capital raised by
us.
|
Our
initial planned projects in North America are projected as follows:
●
|
A
facility that will process approximately 170 tons of green waste material
to produce roughly 3 million gallons of ethanol annually. On November 9,
2007, we purchased the facility site which is located in Lancaster,
California. Permit applications were filed on June 24, 2007 to
allow for construction of the Lancaster facility. We are currently in
preliminary engineering. Although the cost of construction is not readily
determinable, we estimate the cost to be approximately $30 million for
this first plant. We are currently in discussions with potential sources
of financing for this facility but no definitive agreements are in
place.
|
●
|
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. We have received an Award from the DOE of up to $40
million for the El Sobrante Facility. On or around October 4,
2007, we finalized Award 1 for a total approved budget of just under
$10,000,000 with the DOE. This award is a 60%/40% cost share,
whereby 40% of approved costs may be reimbursed by the DOE pursuant to the
total $40 million award amount in February 2007. The remainder
of financing for this project is yet to be
determined.
|
●
|
Several
other opportunities are being evaluated by us in North America but no
definitive plans have been made. Discussions with various
landfill owners are underway to duplicate the proposed development at the
El Sobrante landfill, although no definitive agreements have been
reached.
|
RECENT
DEVELOPMENTS
On
December 3, 2007 and December 14, 2007, we consummated an agreement to issue up
to 5,740,741 shares of common stock and warrants to purchase 5,740,741 shares of
common stock for net proceeds of $14,360,000 (the “December Private Placement”).
The warrants have an exercise price of $2.90 per share and expire five years
from the date of issuance. The Company is currently assessing the impact of
the transaction on their consolidated financial statements.
In
connection with the December Private Placement, we modified the conversion price
of our previously issued 8% Senior Secured Convertible Promissory Notes
(“Convertible Notes”) from $4.21 to $2.90 per share. We also modified the
exercise price of the class “A” and class “B” warrants issued with the
Convertible Notes from $5.48 and $6.32, respectively to $2.90 per
share. The Company is currently assessing the impact of the transaction on
their consolidated financial statements. The Company expects to record
additional interest expense related to the modifications.
On
December 14, 2007, the holders of the Convertible Notes converted their
outstanding principal balance of $2,000,000 and accrued interest of
$33,333 into 700,922 shares of common stock.
On
December 17, 2007, we filed an S-8 with the SEC to register 10,000,000 shares of
common stock under our Amended and Restated 2006 Incentive and Non-Statutory
Stock Option Plan.
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. Our principal use of funds has been for the further
development of our Biorefinery Projects, for capital expenditures and general
corporate expenses.
During
the twelve months ended December 31, 2007, proceeds of approximately $17,394,500
were received from the sale of securities in connection with various private
placements. Additional proceeds of $40,000 were received from the exercise of
stock options.
In
addition, as our Projects develop to the point of construction, we anticipate
significant purchases of long lead time item equipment for construction. As of
December 31, 2007, we had cash and cash equivalents of approximately $13.0
million after paying off a related party revolving line of credit of
approximately $631,000 including accrued interest of approximately
$37,800.
We expect
to rely upon funds raised from this recent private placement, as well as future
equity and debt offerings to implement our growth plan and meet our liquidity
needs going forward. Management believes that our Company’s cash will
be sufficient to meet our working capital requirements for the next twelve month
period, as well as be sufficient to prepare our first two Projects for
construction, at which point further funding will be necessary. However, we
cannot assure you that such financing will be available to us on favorable
terms, or at all. If, after utilizing the existing sources of capital available
to the Company, further capital needs are identified and the Company is not
successful in obtaining the financing, it may be forced to curtail its existing
or planned future operations.
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 prospectus. 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.
CASH
AND CASH EQUIVALENTS
For
purpose of the statement of cash flows, we consider all highly liquid debt
instruments purchased with a maturity of three months or less to be cash
equivalents.
REVENUE
RECOGNITION
We are
currently a developmental-stage company and have recognized minimal revenues to
date. We 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 research and development expenses related to our future cellulose-to-ethanol
production facilities. During the twelve months ended December 31, 2007, we
expensed all costs related to the facility development.
INCOME
TAXES
The
Company accounts for income taxes in accordance with 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. We provide a valuation allowance to net deferred tax assets
when it is deemed unlikely that we will recover such deferred tax
assets.
FAIR
VALUE OF FINANCIAL INSTRUMENTS
The fair
value of financial instruments approximated their carrying values at December
31, 2007. The financial instruments consist of cash and accounts
payable.
LOSS
PER COMMON SHARE
The
Company presents basic loss per common 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 December 31, 2007, the Company had outstanding
options and warrants to purchase an aggregate of 10,673,853 shares of common
stock that were excluded from the calculation of diluted loss per share as their
effects would have been anti-dilutive.
CONCENTRATIONS
OF CREDIT RISK
The
Company regularly maintains cash balances at certain financial institutions in
excess of amounts insured by federal agencies.
SHARE-BASED
PAYMENTS
In
December 2004, the FASB issued a revision of SFAS 123 (“SFAS 123(R)”) that
requires compensation costs related to share-based payment transactions to be
recognized in the statement of operations. With limited exceptions, the amount
of compensation cost will be measured based on the grant-date fair value of the
equity or liability instruments issued. In addition, liability awards will be
re-measured each reporting period. Compensation cost will be recognized over the
period that an employee provides service in exchange for the award. SFAS 123(R)
replaces SFAS 123 and was effective as of the first interim period beginning
after January 1, 2006. During the period ended December 31, 2006, the Company
adopted the provisions of SFAS 123(R). No options were outstanding
prior to adoption.
UNCERTAIN
TAX POSITIONS
In July
2006, the FASB issued FASB Interpretation No.48, “Accounting for Uncertainty in
Income Taxes” (“FIN 48”) which clarifies the accounting for uncertainty in
income taxes recognized in the financial statements in accordance with FASB
Statement No. 109, “Accounting for Income Taxes”. This pronouncement recommends
a recognition threshold and measurement process for recording in the financial
statements uncertain tax positions taken or expected to be taken in the
Company’s tax return. FIN 48 also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods and
disclosure requirements for uncertain tax positions. The accounting provisions
of FIN 48 will be effective for the Company beginning January 1, 2007. The
Company is in the process of evaluating the impact, if any, the adoption of FIN
48 will have on its financial statements.
CONVERTIBLE
DEBT
Convertible
debt is accounted for under the guidelines established by APB Opinion No. 14
Accounting for Convertible Debt and Debt issued with Stock Purchase Warrants
(APB14) under the direction of Emerging Issues Task Force (EITF) 98-5,
Accounting for Convertible Securities with Beneficial Conversion Features or
Contingently Adjustable Conversion Ratios, (EITF 98-5) EITF 00-27 Application of
Issue No 98-5 to Certain Convertible Instruments (EITF 00-27) , and EITF
05-8 Income Tax Consequences of Issuing Convertible Debt with Beneficial
Conversion Features. The Company records a beneficial conversion feature (“BCF”)
related to the issuance of convertible debt that have conversion features at
fixed or adjustable rates that are in-the-money when issued and records the
fair value of warrants issued with those instruments. The BCF for the
convertible instruments is recognized and measured by allocating a portion of
the proceeds to warrants and as a reduction to the carrying amount of the
convertible instrument equal to the intrinsic value of the conversion features,
both of which are credited to paid-in-capital. 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.
RECENT
ACCOUNTING PRONOUNCEMENTS
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”. SFAS
157 defines fair value, establishes a framework for measuring fair value, and
expands disclosures about fair value measurements. This statement clarifies fair
value as permitted under other accounting pronouncements but does not require
any new fair value measurements. However, for some entities, the application of
this statement will change current practice. The Company will be required to
adopt SFAS No. 157 as of January 1, 2008 and is currently in the process of
evaluating the impact, if any, the adoption of SFAS No. 157 will have on its
financial statements.
OFF-BALANCE
SHEET ARRANGEMENTS
There are
no off-balance sheet arrangements.
DESCRIPTION
OF PROPERTY
We lease
approximately 6,425 square feet of furnished office space at 31 Musick, Irvine,
California 92618 from Jeong Yun Kim for $11,565 per month until April 30, 2008,
and then thereafter on a month-to-month basis.
On
November 9, 2007, we issued a check in the amount of $96,851, towards the
purchase of the Lancaster land totaling a purchase price of $109,108. The
roughly 10 acre site is presently vacant and undisturbed except 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.
COMPANY
HISTORY
Our
Company
We are
BlueFire Ethanol Fuels, Inc., a Nevada corporation. Our goal is to develop, own
and operate high-value carbohydrate-based transportation fuel plants, or
biorefineries, to produce ethanol, a viable alternative to fossil fuels, and to
provide professional services to biorefineries worldwide. Our biorefineries will
convert widely available, inexpensive, organic materials such as agricultural
residues, high-content biomass crops, wood residues and cellulose from municipal
solid wastes into ethanol. This versatility enables us to consider a wide
variety of feedstocks and locations in which to develop facilities to become a
low cost producer of ethanol. We have licensed for use a patented process from
Arkenol, Inc., a Nevada corporation (“Arkenol”), to produce ethanol from
cellulose (the “Arkenol Technology”). We are the exclusive North America
licensee of the Arkenol Technology. We may also utilize certain biorefinery
related rights, assets, work-product, intellectual property and other know-how
related to 19 ethanol project opportunities originally developed by ARK Energy,
Inc, a Nevada corporation, to accelerate our deployment of the Arkenol
Technology.
Company
History
We are a
Nevada corporation that was initially organized as Atlanta Technology Group,
Inc., a Delaware corporation, on October 12, 1993. The Company was re-named
Docplus.net Corporation on December 31, 1998, and further re-named Sucre
Agricultural Corp. (“Sucre”) and re-domiciled as a Nevada corporation on March
6, 2006. Immediately prior to the Reverse Merger described below,
Sucre changed its name 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.
The
Company's shares of common stock began trading under the symbol “BFRE.PK” on the
Pink Sheets of the National Quotation Bureau on July 11, 2006 and later began
trading on the OTCBB under the symbol “BFRE.OB” on June 19, 2007. On March 25,
2008, the closing price of our Common Stock was $3.10 per share.
Our
executive offices are located at 31 Musick, Irvine, California 92618 and our
telephone number at such office is (949) 588-3767.
OUR
BUSINESS
PRINCIPAL
PRODUCTS OR SERVICES AND THEIR MARKETS
Our goal
is to develop, own and operate high-value carbohydrate-based transportation fuel
plants, or biorefineries, to produce ethanol, a viable alternative to fossil
fuels, and to provide professional services to biorefineries worldwide. Our
biorefineries will convert widely available, inexpensive, organic materials such
as agricultural residues, high-content biomass crops, wood residues and
cellulose from municipal solid wastes into ethanol. This versatility enables us
to consider a wide variety of feedstocks and locations in which to develop
facilities to become a low cost producer of ethanol. We have licensed for use a
patented process from Arkenol, Inc., a Nevada corporation (“Arkenol”) to produce
ethanol from cellulose (“Arkenol Technology”) for sale into the transportation
fuel market. We are the exclusive North America licensee of the Arkenol
Technology.
ARKENOL
TECHNOLOGY
The
production of chemicals by fermenting various sugars is a well-accepted science.
Its use ranges from producing beverage alcohol and fuel-ethanol to making citric
acid and xantham gum for food uses. However, the high price of sugar and the
relatively low cost of competing petroleum based fuel has kept the production of
chemicals mainly confined to producing ethanol from corn sugar.
In the
Arkenol Technology process, incoming biomass feedstocks are cleaned and ground
to reduce the particle size for the process equipment. The pretreated material
is then dried to a moisture content consistent with the acid concentration
requirements for breaking down the biomass, then hydrolyzed (degrading the
chemical bonds of the cellulose) to produce hexose and pentose (C5 and C6)
sugars at the high concentrations necessary for commercial fermentation. The
insoluble materials left are separated by filtering and pressing into a cake and
further processed into fuel for other beneficial uses. The remaining
acid-sugar solution is separated into its acid and sugar components. The
separated sulfuric acid is recirculated and reconcentrated to the level required
to breakdown the incoming biomass. The small quantity of acid left in the sugar
solution is neutralized with lime to make hydrated gypsum which can be used as
an agricultural soil conditioner. At this point the process has produced a clean
stream of mixed sugars (both C6 and C5) for fermentation. In an
ethanol production plant, naturally-occurring yeast, which Arkenol has
specifically cultured by a proprietary method to ferment the mixed sugar stream,
is mixed with nutrients and added to the sugar solution where it efficiently
converts both the C6 and C5 sugars to fermentation beer (an ethanol, yeast and
water mixture) and carbon dioxide. The yeast culture is separated from the
fermentation beer by a centrifuge and returned to the fermentation tanks for
reuse. Ethanol is separated from the now clear fermentation beer by conventional
distillation technology, dehydrated to 200 proof and denatured with unleaded
gasoline to produce the final fuel-grade ethanol product. The still bottoms,
containing principally water and unfermented sugar, is returned to the process
for economic water use and for further conversion of the sugars.
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
We may
also utilize certain biorefinery related rights, assets, work-product,
intellectual property and other know-how related to 19 ethanol project
opportunities originally developed by ARK Energy, Inc, a Nevada corporation, to
accelerate our deployment of the Arkenol Technology. The opportunities consist
of ARK Energy's previous relationships, analysis, site development, permitting
experience and market research on various potential project locations within
North America. ARK Energy has transferred these assets to us and we valued these
business assets based on management’s best estimates as to its actual costs of
development. In the event 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 instead based our valuation of
the assets acquired by (i) an arms length review of the value assigned by ARK
Energy to the opportunities based on the actual costs it incurred in developing
the project opportunities, and (ii) anticipated financial benefits to
us.
PILOT
PLANTS
From 1994
to 2000, a test pilot biorefinery plant was built and operated by Arkenol in
Orange, California to test the effectiveness of the Arkenol Technology using
several different types of raw materials containing cellulose. The types of
materials tested included: rice straw, wheat straw, green waste, wood wastes,
and municipal solid wastes.
Various
equipment for use in the process was also tested and process conditions were
verified leading to the issuance of the certain patents in support of the
Arkenol Technology.
In 2002,
using the results obtained from the Arkenol California test pilot plant and also
based in the Arkenol Technology, JGC Corporation, based in Japan, built and
operated a bench scale facility followed by another test pilot biorefinery plant
in Izumi, Japan. At the Izumi plant Arkenol retained the rights to the Arkenol
Technology while the operations of the facility were controlled by JGC
Corporation.
BIOREFINERY
PROJECTS
We are
currently in the development stage of building biorefineries in North
America.
We plan
to use the Arkenol Technology and utilize JGC's operations knowledge from the
Izumi test pilot plant to assist in the design and engineering of our facilities
in North America. JGC will provide the preliminary design package for our first
facility and work with our selected U.S. engineering company MECS (formerly
Monsanto) to complete the detailed engineering design of the plant. This
completed design should provide the blueprint for subsequent plant
constructions.
We intend
to build a facility that will process approximately 170 tons of green waste
material to produce roughly 3 million gallons of ethanol annually. In connection
therewith, on November 9, 2007, we purchased the facility site which is located
in Lancaster, California. Permit applications were filed on June 24,
2007, to allow for construction of the Lancaster facility. We are currently in
preliminary engineering. Although the cost of construction is not readily
determinable, we estimate the cost to be approximately $30 million for this
first plant. We are currently in discussions with potential sources of financing
for this facility but no definitive agreements are in place.
We are
also considering a facility 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, Inc. (“PDI”) for the purchase
and sale of the ethanol produced from the facility. PDI is a significant blender
of denatured ethanol into motor fuel in Southern California. We have received an
Award from the DOE of up to $40 million for the El Sobrante Facility.
On or around October 4, 2007, we finalized Award 1 for a total approved budget
of just under $10,000,000 with the DOE. This award is a 60%/40% cost share,
whereby 40% of approve costs may be reimbursed by the DOE pursuant to the total
$40 million award announced in February 2007. The remainder of financing for
this project is yet to be determined.
We are
simultaneously researching and considering other suitable locations for other
similar biorefineries.
STATUS OF
PUBLICLY ANNOUNCED NEW PRODUCTS AND SERVICES
None.
DISTRIBUTION
METHODS OF THE PRODUCTS OR SERVICES
We will
utilize existing distribution channels to sell the ethanol that is produced from
our plants. For example, we have entered into a Letter of Intent with PDI
whereby PDI would purchase the ethanol produced by us in our El Sobrante
biomass-to-ethanol conversion facility to be located in the El Sobrante landfill
upon its completion. Ethanol is currently blended year-round at PDI's terminal
facility located in Long Beach, California.
COMPETITIVE
BUSINESS CONDITIONS AND OUR COMPETITIVE POSITION IN THE INDUSTRY AND METHODS OF
COMPETITION
Most of
the ethanol supply in the United States is derived from corn according to the
Renewable Fuels Association (“RFA”) website (http://www.ethanolrfa.org/)
and as of January 31, 2008 is produced at approximately 113 facilities, ranging
in size from 300,000 to 110 million gallons per year, located predominately in
the corn belt in the Midwest. According to the RFA, about 14% of the current
production is by the Archer-Daniels-Midland Company with over 1 billion gallons
annually and an additional 550 million gallons of capacity being
constructed/expanded currently. 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 that we are able to process, we are able to locate
production facilities in and around the markets where the ethanol will be
consumed We believe that this gives us a competitive advantage
against much larger traditional producers who must locate plants near their
feedstock, i.e., the corn belt in the Midwest and ship the ethanol to the end
market.
However,
in the area of biomass-to-ethanol production, there are few companies and no
commercial production infrastructure is built. As we continue to advance our
biomass technology platform, we are likely to encounter competition for the same
technologies from other companies that are also attempting to manufacture
ethanol from cellulosic biomass feedstocks.
Ethanol
production is also expanding internationally. Ethanol produced or processed in
certain countries in Central 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 countries may be a less
expensive alternative to domestically produced ethanol and may affect our
ability to sell our ethanol profitably.
INDUSTRY
OVERVIEW
On August
8, 2005, President Bush signed into law the Energy Policy Act of
2005. The Energy Policy Act transformed ethanol from a gasoline
additive under the 1990 Clean Air Act to a primary gasoline substitute, which we
believe will serve to strengthen and expand the role of ethanol in the U.S. fuel
economy. A highlight of the Energy Policy Act is the creation of a 7.5 billion
gallon renewable fuel standard ("RFS") increasing use of renewable domestic
fuels such as ethanol and biodiesel. The currently approved RFS of the Energy
Policy Act establishes that a percentage of the U.S. fuel supply will be
provided by renewable, domestic fuels such as ethanol. In addition, the Energy
Policy Act establishes a 30% tax credit up to $30,000 for the cost of installing
clean fuel refueling equipment, such as an E85 ethanol fuel pump.
On
December 19, 2007 President Bush signed into law the Energy Independence and
Security Act of 2007. The act 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 in 2022
16 billion gallon of which must come from cellulosic derived
fuel. Additionally, the Act 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.
Historically,
producers and blenders had a choice of fuel additives to increase the oxygen
content of fuels. MTBE (methyl tertiary butyl ether) was the most popular
additive, accounting for up to 75% of the fuel oxygenate market. However, in the
United States, ethanol is replacing MTBE as a common fuel additive. While both
increase octane and reduce air pollution, MTBE is a presumed carcinogen which
contaminates ground water. It has already been banned in California, New York,
Illinois and 16 other states. Major oil companies have voluntarily
abandoned MTBE and it is scheduled to be phased out under the Energy Policy Act.
As MTBE is phased out, we expect demand for ethanol as a fuel additive and fuel
extender to rise. A blend of 5.5% or more of ethanol, which does not contaminate
ground water like MTBE, effectively complies with EPA requirements for
reformulated gasoline, which is mandated in most urban areas.
Ethanol
is a clean, high-octane, high-performance automotive fuel commonly blended in
gasoline to extend supplies and reduce emissions. In 2004, according to the
American Coalition for Ethanol, 3% of all United States gasoline was blended
with some percentage of ethanol. The most common blend is E10, which contains
10% ethanol and 90% gasoline. There is also growing federal government support
for E85, which is a blend of 85% ethanol and 15% gasoline.
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 RFA indicate that approximately 5.0 billion gallons of ethanol
was consumed in 2006 in the United States and every automobile manufacturer
approves and warrants the use of E10. Because the ethanol molecule contains
oxygen, it allows an automobile engine to more completely combust fuel,
resulting in fewer emissions and improved performance. Fuel ethanol
has an octane value of 113 compared to 87 for regular unleaded gasoline.
Domestic ethanol consumption has tripled in the last eight years, and
consumption increases in some foreign countries, such as Brazil, are even
greater in recent years. For instance, 40% of the automobiles in Brazil operate
on 100% ethanol, and others use a mixture of 22% ethanol and 78% gasoline. The
European Union and Japan also encourage and mandate the increased use of
ethanol.
For every
barrel of ethanol produced, the American Coalition for Ethanol estimates that
1.2 barrels of petroleum are displaced at the refinery level, and that since
1978, U.S. ethanol production has replaced over 14.0 billion gallons of imported
gasoline or crude oil. According to a Mississippi State University Department of
Agricultural Economics Staff Report in August 2003, a 10% ethanol blend results
in a 25% to 30% reduction in carbon monoxide emissions by making combustion more
complete. The same 10% blend lowers carbon dioxide emissions by 6% to
10%.
During
the last 20 years, ethanol production capacity in the United States has grown
from almost nothing to an estimated 6 billion gallons per year in 2007. 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 150 billion gallons
annually, so the potential market for ethanol (assuming only a 10% blend) is 15
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 five million flexible
fuel vehicles on the road in the United States and automakers will produce
several millions per year, offering further potential for significant growth in
ethanol demand.
Cellulose
to Ethanol Production
In a
recent report, “Outlook For Biomass Ethanol Production Demand,” the U.S. Energy
Information Administration found that advancements in production technology of
ethanol from cellulose could reduce costs and result in production increases of
40% to 160% by 2010. Biomass (cellulosic feedstocks) includes agricultural
waste, woody fibrous materials, forestry residues, waste paper, municipal solid
waste and most plant material. Like waste starches and sugars, they are often
available for relatively low cost, or are even free. However, cellulosic
feedstocks are more abundant, global and renewable in nature. These waste
streams, which would otherwise be abandoned, land-filled or incinerated, exist
in populated metropolitan areas where ethanol prices are higher.
SOURCES
AND AVAILABILITY OF RAW MATERIALS
The U.S.
DOE and USDA in its April 2005 report “Biomass As Feedstock For a Bioenergy and
Bioproducts Industry: The Technical Feasibility of a Billion-Ton Annual Supply”
found that about one billion tons of cellulosic materials from agricultural and
forest residues are available to produce more than one-third of the current U.S.
demand for transportation fuels.
DEPENDENCE
ON ONE OR A FEW MAJOR CUSTOMERS
Currently,
we have no dependence on one or a few major customers, although we have entered
into a non-binding letter of intent with PDI to be our sole purchaser of ethanol
from our El Sobrante plant in Southern California. We are negotiating definitive
agreements but no definitive agreement has been signed with Petro-Diamond as of
yet. See “Distribution Methods of the Products or Services.”
PATENTS,
TRADEMARKS, LICENSES, FRANCHISES, CONCESSIONS, ROYALTY AGREEMENTS OR LABOR
CONTRACTS
On March
1, 2006, we entered into a Technology License Agreement with Arkenol, for use of
the Arkenol Technology. Arkenol holds the following patents in relation to the
Arkenol Technology: 11 U.S. patents, 21 foreign patents, and one pending foreign
patent. According to the terms of the agreement, we were granted an exclusive,
non-transferable, North American license to use and to sub-license the Arkenol
technology. The Arkenol Technology, converts cellulose and waste materials into
ethanol and other high value chemicals. As consideration for the grant of the
license, we are required to make a one time payment of $1,000,000 at first
project construction funding and for each plant make the following payments: (1)
royalty payment of 3% of the gross sales price for sales by us or our
sublicensees 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, we made a one time
exclusivity fee prepayment of $30,000 during the period ended December 31, 2006.
As of December 31, 2007, we have not become obligated to pay any of these
amounts. All sub-licenses issued by us will provide for payments of the license
fees and royalties due Arkenol.
NEED FOR
ANY GOVERNMENT APPROVAL OF PRINCIPAL PRODUCTS OR SERVICES
We are
not subject to any government oversight for our current operations other than
for corporate governance and taxes. However, the production facilities that we
will be constructing will be subject to various federal, state and local
environmental laws and regulations, including those relating to the discharge of
materials into the air, water and ground, the generation, storage, handling,
use, transportation and disposal of hazardous materials, and the health and
safety of our employees. In addition, some of these laws and regulations will
require our facilities to operate under permits that are subject to renewal or
modification. These laws, regulations and permits can often require expensive
pollution control equipment or operational changes to limit actual or potential
impacts to the environment. A violation of these laws and regulations or permit
conditions can result in substantial fines, natural resource damages, criminal
sanctions, permit revocations and/or facility shutdowns.
EFFECT OF
EXISTING OR PROBABLE GOVERNMENTAL REGULATIONS ON THE BUSINESS
Currently,
the federal government encourages the use of ethanol as a component in
oxygenated gasoline as a measure to protect the environment 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.
On August
8, 2005, President Bush signed into law the Energy Policy Act of
2005. The Energy Policy Act transformed ethanol from a gasoline
additive under the 1990 Clean Air Act to a primary gasoline substitute, which we
believe will serve to strengthen and expand the role of ethanol in the U.S. fuel
economy. A highlight of the Energy Policy Act is the creation of a 7.5 billion
gallon renewable fuel standard ("RFS") increasing use of renewable domestic
fuels such as ethanol and biodiesel. The currently approved RFS of the Energy
Policy Act establishes that a percentage of the U.S. fuel supply will be
provided by renewable, domestic fuels such as ethanol. In addition, the Energy
Policy Act establishes a 30% tax credit up to $30,000 for the cost of installing
clean fuel refueling equipment, such as an E85 ethanol fuel pump.
On
December 19, 2007 President Bush signed into law the Energy Independence and
Security Act of 2007. The act 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 in 2022
16 billion gallon of which must come from cellulosic derived
fuel. Additionally, the Act 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.
The use
of ethanol as an oxygenate to blend with fuel to comply with federal mandates
also has been aided by federal tax policy. The Energy Tax Act of 1978 exempted
ethanol blended gasoline from the federal gas tax as a means of stimulating the
development of a domestic ethanol industry and mitigating the country's
dependence on foreign oil. As amended, the federal tax exemption currently
allows the market price of ethanol to compete with the price of domestic
gasoline. The exemption for a 10% ethanol blend is the equivalent of providing a
per gallon “equalization” payment that allows blenders to pay more for ethanol
than the wholesale price of gasoline and still retain profit margins equal to
those received upon the sale of gasoline that is not blended with ethanol. Under
current legislation, the federal gasoline tax exemption for a 10% ethanol blend
is $0.052 per gallon. This exemption was to gradually drop to $0.051 per gallon
in 2005, however, as of January 1, 2005, this federal tax incentive was to be
replaced by a new volumetric ethanol excise tax credit discussed
below.
On
October 22, 2004, President Bush signed H.R. 4520, which contained the
Volumetric Ethanol Excise Tax Credit (“VEETC”) and amended the federal excise
tax structure effective as of January 1, 2005. Currently, ethanol-blended fuel
is taxed at a lower rate than regular gasoline (13.2 cents on a 10%
blend). Under VEETC, the existing ethanol excise tax exemption is
eliminated, thereby allowing the full federal excise tax of 18.4 cents per
gallon of gasoline to be collected on all gasoline and allocated to the highway
trust fund. This would add approximately $1.4 billion to the highway trust fund
revenue annually. In place of the current exemption, the bill creates a new
volumetric ethanol excise tax credit of $0.051 per gallon, at 10% blending
level, of ethanol blended. This equates to $0.51 per pure gallon of ethanol
blended. Refiners and gasoline blenders would apply for this credit on the same
tax form as before only it would be a credit from general revenue, not the
highway trust fund. Based on volume, the VEETC is expected to allow much greater
refinery flexibility in blending ethanol.
ESTIMATE
OF THE AMOUNT SPENT DURING EACH OF THE LAST TWO FISCAL YEARS ON RESEARCH AND
DEVELOPMENT ACTIVITIES.
For the
fiscal year ending 2006 (March 28, 2006 (Inception) to December 31, 2006), we
spent roughly $466,002 on project development costs.
For the
fiscal-year ending 2007, we have spent roughly $4,930,739 on project development
costs.
To date,
project development costs include the research and development expenses related
to our future cellulose-to-ethanol production facilities.
COSTS AND
EFFECTS OF COMPLIANCE WITH ENVIRONMENTAL LAWS (FEDERAL, STATE AND
LOCAL)
We will
be subject to extensive air, water and other environmental regulations and we
will have to obtain a number of environmental permits to construct and operate
our plants, including, air pollution construction permits, a pollutant discharge
elimination system general permit, storm water discharge permits, a water
withdrawal permit, and an alcohol fuel producer's permit. In addition, we may
have to complete spill prevention control and countermeasures
plans.
The
production facilities that we will build are subject to oversight activities by
the federal, state, and local regulatory agencies. There is always a risk that
the federal agencies may enforce certain rules and regulations differently than
state environmental administrators. State or federal rules are subject to
change, and any such changes could result in greater regulatory burdens on plant
operations. We could also be subject to environmental or nuisance claims from
adjacent property owners or residents in the area arising from possible foul
smells or other air or water discharges from the plant.
NUMBER OF
TOTAL EMPLOYEES AND NUMBER OF FULL TIME EMPLOYEES
We had 7
full time employees as of December 31, 2007 and 1 part time employee. None of
our employees are subject to a collective bargaining agreement, and we believe
that our relationship with our employees is good.
REPORTS
TO SECURITY HOLDERS
We are
subject to the reporting obligations of the Securities Exchange Act of 1934, as
amended (the “Exchange Act”). These obligations include filing an annual report
under cover of Form 10-KSB, with audited financial statements, unaudited
quarterly reports on Form 10-QSB 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.
We are
not a party to any material legal proceedings nor are we aware of any
circumstance that may reasonably lead a third party to initiate material legal
proceedings against us.
Our
officers and directors shall serve until our next annual stockholders' meeting.
Our directors and officers as of the date of this prospectus are as
follows:
|
Name
|
Age
|
Position
|
|
Arnold
Klann
|
56
|
Chairman
and Chief Executive Officer
|
|
Necitas
Sumait
|
48
|
Senior
Vice President and Director
|
|
Christopher
Scott
|
34
|
Chief
Financial Officer and Senior Vice President
|
|
John
Cuzens
|
57
|
Chief
Technology Officer and Senior Vice President
|
|
Chris
Nichols
|
41
|
Director
|
|
Joseph
Emas
|
53
|
Director
|
|
Victor
Doolan
|
67
|
Director
|
Arnold
Klann – Chairman of the Board and Chief Executive Officer
Mr. Klann
has been our Chairman of the Board and Chief Executive Officer since our
inception in March 2006. Mr. Klann has been President of ARK Energy,
Inc. and Arkenol, Inc. from January 1989 to present. Mr. Klann has an
AA from Lakeland College in Electrical Engineering.
Necitas
Sumait – Senior Vice President and Director
Mrs.
Sumait has been our Director and Senior Vice President since our inception in
March 2006. Prior to this, Mrs. Sumait was Vice President of ARK Energy/Arkenol
from December 1992 to July 2006. Mrs. Sumait has a MBA in Technological
Management from Illinois Institute of Technology and a B.S. in Biology from De
Paul University.
Christopher
Scott – Chief Financial Officer
Mr. Scott
has been our Chief Financial Officer since March 2007. Prior to this, from 2002
to March 2007, Mr. Scott was most recently the CFO/CCO and FinOp of Westcap
Securities, Inc, an NASD Member Broker/Dealer and Investment Bank headquartered
in Irvine, CA. Mr. Scott currently holds the Series 7, 63, 24, 4, 27, 55, and
Series 53 NASD licenses. From 1997 to 2002, Mr. Scott was a General Securities
and Registered Options Principal at First Allied Securities Inc. Mr. Scott
earned his Bachelors Degree in Business Administration, with a concentration in
Finance, from CSU, Fullerton.
John
Cuzens – Chief Technology Officer and Senior Vice President
Mr.
Cuzens has been our Chief Technology Officer and Senior Vice President since our
inception in March 2006. Mr. Cuzens was a Director from March 2006 until his
resignation from the Board of Directors in July 2007. Prior to this,
he was Director of Projects Wahlco Inc. from 2004 to June 2006. He was employed
by Applied Utility Systems Inc from 2001 to 2004 and Hydrogen Burner Technology
form 1997-2001. He was with ARK Energy and Arkenol from 1991 to 1997 and is the
co-inventor on seven of Arkenol's eight U.S. foundation patents for the
conversion of cellulosic materials into fermentable sugar products using a
modified strong acid hydrolysis process. Mr. Cuzens has a B.S. Chemical
Engineering degree from the University of California at Berkeley.
Chris
Nichols - Director
Mr.
Nichols has been our Director since our inception in March 2006. Mr.
Nichols is currently the Chairman of the Board and Chief Executive Officer of
Advanced Growing Systems, Inc. Since 2003 Mr. Nichols was the Senior
Vice President of Westcap Securities' Private Client Group. Prior to
this, Mr. Nichols was a Registered Representative at Fisher Investments from
December 2002 to October 2003. He was a Registered Representative with
Interfirst Capital Corporation from 1997 to 2002. Mr. Nichols is a graduate of
California State University in Fullerton with a B.A. degree in
Marketing.
Joseph
Emas - Director
Mr. Emas
is licensed to practice law in Florida, New Jersey and New York. Since 2001, Mr.
Emas has been the senior partner of Joseph I. Emas, P.A. Mr. Emas specializes in
securities regulation, corporate finance, mergers and acquisitions and corporate
law. Mr. Emas received his Honors BA at University of Toronto, Bachelor of
Administrative Studies, with distinction, at York University in Toronto, his JD,
cum laude from Nova Southeastern Shepard Broad Law School and his LL.M. in
Securities Regulation at Georgetown University Law Center. Mr. Emas was an
Adjunct Professor of Law at Nova Southeastern Shepard Broad Law School. Mr. Emas
received the William Smith Award, Pro Bono Advocate for Children in 2000 and the
2006 Child Advocacy Award in Florida and is the author of “Update of Juvenile
Jurisdiction Florida Practice in Juvenile Law.” Mr. Emas has been a member of
the Juvenile Court Rules Committee for the State of Florida from 1999 through
2006, and currently sits on the Florida Child Advocacy Committee. Mr. Emas is a
director of several public companies which trade on both the OTC.BB and
Amex.
Victor
Doolan - Director
Mr.
Doolan served for approximately three years as president of Volvo Cars North
America until his retirement in March 2005. Prior to joining Volvo, Mr. Doolan
served as the Executive Director of the Premier Automotive Group, the luxury
division of Ford Motor Company from July 1999 to June 2002. Mr. Doolan also
enjoyed a 23-year career with BMW, culminating with his service as President of
BMW of North America from September 1993 to July 1999. Mr. Doolan has worked in
the automotive industry for approximately 36 years. Mr. Doolan
currently serves on the Board of Directors for Sonic Automotive,
Inc.
Significant
Employee
William
Davis - VP Project Management.
Mr. Davis
is currently Vice President of Project Management for us. Prior to this he was
Director of Power Plant Project Development for Diamond Energy from 2001 to
2006. Prior to this he was VP of Business Development for Oxbow
Power. He has over 30 years in the energy business and was an energy
advisor to the Governor of California. He has been involved in domestic and
international power project development. Mr. Davis is a registered Architect in
three states and graduated from California State University at San Luis Obispo
with a Bachelors of Architecture and a Masters of Science in
Architecture.
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.
INVOLVEMENT
IN CERTAIN LEGAL PROCEEDINGS
For the
past five years, no director or officer of the Company has been involved in any
of the following: (1) any bankruptcy petition filed by or against any business
of which such person was a general partner or executive officer either at the
time of the bankruptcy or within two years prior to that time; (2) any
conviction in a criminal proceeding or being subject to a pending criminal
proceeding (excluding traffic violations and other minor offenses); (3) being
subject to any order, judgment, or decree, not subsequently reversed, suspended
or vacated, of any court of competent jurisdiction, permanently or temporarily
enjoining, barring, suspending or otherwise limiting his or her involvement in
any type of business, securities or banking activities; or (4) being found by a
court of competent jurisdiction (in a civil action), the SEC or the Commodity
Futures Trading Commission to have violated a federal or state securities or
commodities law, and the judgment has not been reversed, suspended, or
vacated.
AUDIT
COMMITTEE FINANCIAL EXPERT
Our Board
of Directors currently serves as its Audit Committee and Compensation
Committee. Victor Doolan is the Audit Committiee’s financial expert and he
currently serves as the Company’s Chairman for the Audit and Compensation
Committees.
SUMMARY
COMPENSATION TABLE YEAR
NAME
AND PRINCIPAL POSITION
|
YEAR
|
|
SALARY
($)
|
|
|
BONUS
($)
|
|
|
STOCK
AWARDS
($)
(3)
|
|
|
OPTIONS
AWARDS
($)
(3)
|
|
NON-EQUITY INCENTIVE
PLAN COMPENSATION ($)
|
CHANGE
IN
PENSION
VALUE
AND NON-QUALIFIED DEFERRED COMPENSA-TION EARNINGS ($)
|
|
ALL
OTHER COMPENSA-TION ($)
|
|
|
TOTAL
($)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Arnold
Klann Director and President
|
2007
|
|
|
216,583 |
|
|
|
51,780 |
|
|
|
5,070 |
(1) |
|
|
750,519 |
|
|
|
|
|
|
|
|
1,023,952 |
|
|
2006
|
|
|
113,000 |
|
|
|
|
|
|
|
16,750 |
(1) |
|
|
2,477,415 |
|
|
|
|
|
|
|
|
2,607,165 |
|
Necitas
Sumait Director, Secretary and VP
|
2007
|
|
|
149,500 |
|
|
|
51,780 |
|
|
|
5,070 |
(1) |
|
|
556,521 |
|
|
|
|
|
|
|
|
762,871 |
|
|
2006
|
|
|
78,000 |
|
|
|
|
|
|
|
16,750 |
(1) |
|
|
1,114,850 |
|
|
|
|
|
|
|
|
1,209,600 |
|
John
Cuzens Treasurer and VP
|
2007
|
|
|
149,500 |
|
|
|
51,780 |
|
|
|
|
|
|
|
556,521 |
|
|
|
|
|
|
|
|
757,801 |
|
|
2006
|
|
|
75,000 |
|
|
|
|
|
|
|
16,750 |
(1) |
|
|
1,114,850 |
|
|
|
|
|
|
|
|
1,206,600 |
|
Christopher
Scott Chief Financial Officer
|
2007
|
|
|
86,250 |
|
|
|
51,780 |
|
|
|
275,001 |
(2) |
|
|
556,521 |
|
|
|
|
|
|
|
|
969,552 |
|
Chris
Nichols Director
|
2007
|
|
|
7,500 |
(5) |
|
|
|
|
|
|
5,070 |
(1) |
|
|
|
|
|
|
|
|
|
|
|
12,570 |
|
|
2006
|
|
|
2,500 |
|
|
|
|
|
|
|
16,750 |
(1) |
|
|
|
|
|
|
|
|
73,000 |
(4) |
|
|
92,250 |
|
Joseph
Emmas Director
|
2007
|
|
|
5,000 |
|
|
|
|
|
|
|
25,350 |
(1) |
|
|
|
|
|
|
|
|
|
|
|
|
30,350 |
|
Victor
Doolan Director
|
2007
|
|
|
5,000 |
|
|
|
|
|
|
|
25,350 |
(1) |
|
|
|
|
|
|
|
|
|
|
|
|
30,350 |
|
(1)
|
Reflects
value of shares of restricted common stock received as compensation as
Director. See notes to consolidated financial statements for
valuation.
|
(2)
|
Reflects
value of 50,000 shares of restricted common stock received as compensation
related to February 2007 employment
agreement.
|
(3)
|
Valued
based on the Black-Scholes valuation model at the date of grant, see note
to the consolidated financial
statements.
|
(4)
|
Reflects
value of consideration received as compensation for consultant
services.
|
(5)
|
Includes
partial 2006 compensation of $2,500 paid in
2007.
|
2007
GRANTS OF PLAN-BASED AWARDS TABLE
|
|
|
|
ESTIMATED
FUTURE PAYOUTS UNDER NON-EQUITY INCENTIVE PLAN AWARDS
|
|
ESTIMATED
FUTURE PAYOUTS UNDER EQUITY INCENTIVE PLAN
AWARDS
|
Name
|
Grant
Date
|
Approval
Date
|
Number
of Non-Equity Incentive Plan Units Granted (#)
|
Threshold
($)
|
Target
($)
|
Maximum
($)
|
Threshold
(#)
|
Target
(#)
|
Maximum
(#)
|
|
All
Other Stock Awards: Number of Shares of Stock or Units (#)
|
|
|
All
Other Option Awards: Number of Securities Underlying Options
(#)
|
|
|
Exercise
or Base Price of Option Awards ($ / SH)
|
|
|
Closing
Price on Grant Date ($ / SH)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Arnold
Klann
|
12/20/07
|
12/20/07
|
|
|
|
|
|
|
|
|
|
|
|
|
250,000 |
(1) |
|
$ |
3.20 |
|
|
$ |
3.20 |
|
|
12/20/07
|
12/20/07
|
|
|
|
|
|
|
|
|
|
|
|
|
28,409 |
(2) |
|
$ |
3.52 |
|
|
$ |
3.20 |
|
Necitas
Sumait
|
12/20/07
|
12/20/07
|
|
|
|
|
|
|
|
|
|
|
|
|
206,250 |
(3) |
|
$ |
3.20 |
|
|
$ |
3.20 |
|
Christopher
Scott
|
12/20/07
|
12/20/07
|
|
|
|
|
|
|
|
|
|
50,000 |
(4) |
|
|
206,250 |
(3) |
|
$ |
3.20 |
|
|
$ |
3.20 |
|
John
Cuzens
|
12/20/07
|
12/20/07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
206,250 |
(3) |
|
$ |
3.20 |
|
|
$ |
3.20 |
|
Chris
Nichols
|
None
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Joseph
Emmas
|
None
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Victor
Doclan
|
None
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
50%
vest immediately, 25% vests on closing remainder of Lancaster Project
Funding, 25% vests at the start of construction of Lancaster
Project
|
(3)
|
Of
this amount, 31,250 vest immediately, of the remaining 175,000 options 50%
vest immediately, 25% vests on closing remainder of Lancaster Project
Funding, 25% vests at the start of construction of Lancaster
Project
|
(4)
|
Issued
to E-Info Solutions an entity controlled by Christopher
Scott
|
2007
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END TABLE
|
|
OPTION
AWARDS
|
|
|
|
STOCK
AWARDS
|
NAME
|
NUMBER
OF
SECURITIES
UNDERLYING
UNEXERCISED
OPTIONS
(#)
EXERCISABLE
|
NUMBER
OF
SECURITIES
UNDERLYING
UNEXERCISED
OPTIONS
(#)
UNEXERCISABLE
|
EQUITY
INCENTIVE
PLAN
AWARDS:
NUMBER
OF
SECURITIES
UNDERLYING
UNEXERCISED
UNEARNED
OPTIONS
(#)
|
OPTION
EXERCISE
PRICE
($)
|
OPTION
EXPIRATION
DATE
|
NUMBER
OF
SHARES
OR
UNITS
OF
STOCK
THAT
HAVE
NOT
VESTED
(#)
|
MARKET
VALUE
OF
SHARES
OR
UNITS
OF
STOCK
THAT
HAVE
NOT
VESTED
($)
|
EQUITY
INCENTIVE
PLAN
AWARDS:
NUMBER
OF
UNEARNED
SHARES,
UNITS
OR
OTHER
RIGHTS
THAT
HAVE
NOT
VESTED
(#)
|
EQUITY
INCENTIVE
PLAN
AWARDS:
MARKET
OR
PAYOUT
VALUE
OF
UNEARNED
SHARES,
UNITS
OR
OTHER
RIGHTS
THAT
HAVE
NOT
VESTED
($)
|
Arnold
Klann
|
500,000
|
500,000
|
|
2.00
|
12/14/11
|
|
|
|
|
|
28,409
|
-
|
|
3.52
|
12/20/12
|
|
|
|
|
|
125,000
|
125,000
|
|
3.20
|
12/20/12
|
|
|
|
|
Necitas
Sumait
|
225,000
|
225,000
|
|
2.00
|
12/14/11
|
|
|
|
|
|
118,750
|
87,500
|
|
3.20
|
12/20/12
|
|
|
|
|
John
Cuzens
|
225,000
|
225,000
|
|
2.00
|
12/14/11
|
|
|
|
|
|
118,750
|
87,500
|
|
3.20
|
12/20/12
|
|
|
|
|
Christopher
Scott
|
118,750
|
87,500
|
|
3.20
|
12/20/12
|
|
|
|
|
Chris
Nichols
|
|
|
|
|
|
|
|
|
|
Joseph
Emmas
|
|
|
|
|
|
|
|
|
|
Victor
Doolan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
DIRECTOR COMPENSATION TABLE
NAME
|
|
FEES
EARNED OR PAID IN CASH
($)
|
|
|
STOCK
AWARDS
($)
(1)
|
|
OPTION
AWARDS
($)
|
NON-EQUITY
INCENTIVE PLAN COMPENSATION
($)
|
CHANGE
IN PENSION VALUE AND NONQUALIFIED DEFERRED COMPENSATION
EARNINGS
($)
|
ALL
OTHER COMPENSATION
($)
|
|
TOTAL
($)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Arnold
Klann
|
|
|
|
|
|
5,070 |
|
|
|
|
|
|
|
5,070 |
|
Necitas
Sumait
|
|
|
|
|
|
5,070 |
|
|
|
|
|
|
|
5,070 |
|
Chris
Nichols
|
|
|
7,500 |
(2) |
|
|
5,070 |
|
|
|
|
|
|
|
10,070 |
|
Joseph
Emmas
|
|
|
5,000 |
|
|
|
25,350 |
|
|
|
|
|
|
|
30,350 |
|
Victor
Doclan
|
|
|
5,000 |
|
|
|
25,350 |
|
|
|
|
|
|
|
30,350 |
|
(1)
|
Reflects
value of shares of restricted common stock received as compensation for
service as Director. See notes to consolidated financial statements for
valuation.
|
(2)
|
Includes
partial 2006 compensation of $2,500 paid in
2007.
|
2007
POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE IN CONTROL TABLE
NAME
|
|
BENEFIT
|
|
BEFORE
CHANGE
IN
CONTROL
TERMINATION
W/O
CAUSE OR FOR
GOOD
REASON
|
|
AFTER
CHANGE IN
CONTROL
TERMINATION
W/O
CAUSE OR
OR
GOOD REASON
|
|
VOLUNTARY
TERMINATION
|
|
DEATH
|
|
DISABILITY
|
|
CHANGE
IN
CONTROL
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Arnold
Klann
|
|
|
|
|
|
|
|
|
|
|
|
Full
comp. first 2 months, 50% of comp. next 4 months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Necitas
Sumait
|
|
|
|
|
|
|
|
|
|
|
|
Full
comp. first 2 months, 50% of comp. next 4 months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Christopher
Scott
|
|
|
|
|
|
|
|
|
|
|
|
N.A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John
Cuzens
|
|
|
|
|
|
|
|
|
|
|
|
Full
comp. first 2 months, 50% of comp. next 4 months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chris
Nichols
|
|
|
|
|
|
|
|
|
|
|
|
Full
comp. first 2 months, 50% of comp. next 4 months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Joseph
Emmas
|
|
|
|
|
|
|
|
|
|
|
|
Full
comp. first 2 months, 50% of comp. next 4 months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Voctor
Doclan
|
|
|
|
|
|
|
|
|
|
|
|
Full
comp. first 2 months, 50% of comp. next 4 months
|
|
|
------------
* List
each applicable type of benefit in a separate row, e.g., severance pay, bonus
payment, stock option vesting acceleration, health care benefits continuation,
relocation benefits, outplacement services, financial planning services or tax
gross-ups.
EMPLOYMENT
CONTRACTS
On June
27, 2006, the Company entered into form employment agreements with its three
executive officers. The employment agreements are for a period of three years,
with prescribed percentage increases beginning in 2007 and can be cancelled upon
a written notice by either employee or employer (if certain employee acts of
misconduct are committed). The total aggregate annual amount due under the
employment agreements is approximately $520,000.
In
addition, on June 27, 2006, the Company entered into agreements with four
individuals to join the Company's board of directors. Under the terms of the
agreement the non-employee Director (Chris Nichols) will receive annual
compensation in the amount of $5,000 and all Directors receive a one time grant
of 5,000 shares of the Company's common stock. The common shares vest over the
period of one year. The value of the common stock granted was determined to be
approximately $67,000 based on the estimated fair market value of the Company's
common stock over a reasonable period of time.
Effective
March 16, 2007, in connection with Mr. Scott's appointment as the Company's CFO,
the Company and Mr. Scott entered into an at-will letter Employment Agreement
(attached as Exhibit 10.7 hereto) containing the following material terms:
(i) initial monthly salary of $7,500, to be raised to $10,000 on the
earlier of April 30, 2007 or receipt by the Company of a qualified investment
financing, (ii) standard employee benefits, and (iii) 50,000
shares of
common stock issued through the year ended December 31, 2007 to a consulting
company beneficially owned by him.
In
addition, on July 7, 2007, the Company entered into an agreement with two
individuals to join the Company’s board of directors. Under the terms of the
agreement these non-employee Directors will receive annual compensation in
the amount of $5,000 and all Directors receive a one time grant of 5,000 shares
of the Company’s common stock. The common shares vest immediately. The value of
the common stock granted was determined to be approximately $66,000 based
on the fair market value of the Company’s common stock of $5.07 on the date of
the grant. As of September 30, 2007, the Company expensed all of the costs
approximating $81,000 to general and administrative expenses.
SHARE
ISSUANCES/CONSULTING AGREEMENTS
On
January 1, 2007, the Company entered into an employment agreement with a former
consultant to be Vice President of Project Management. Pursuant to the terms of
this agreement, the consultant was issued 10,000 shares of the Company’s
restricted common stock.
On
February 13, 2007, the Company entered into a consulting agreement with a
corporate technology consultant. The consultant shall review, comment, and
implement as requested by the Company on any Information Technology rollout.
Under the terms of the agreement, the consultant received 12,500 restricted
shares of the Company’s common stock at the signing of the agreement, 12,500
shares on June 1, 2007, 12,500 shares on September 1, 2007, and 12,500 shares on
December 1, 2007.
In
addition, on July 7, 2007, the Company entered into an agreement with two
individuals to join the Company’s board of directors. Under the terms of the
agreement these non-employee Directors will receive annual compensation in
the amount of $5,000 and all Directors receive a one time grant of 5,000 shares
of the Company’s common stock. The common shares vest immediately. The value of
the common stock granted was determined to be approximately $66,000 based
on the fair market value of the Company’s common stock of $5.07 on the date of
the grant. As of September 30, 2007, the Company expensed all of the costs
approximating $81,000 to general and administrative expenses.
STOCK
OPTION ISSUANCES UNDER AMENDED 2006 PLAN
On
December 20, 2007 the Company’s Board of Directors granted the following stock
options to employees and outside consultants as compensation:
DATE
ISSUED:
|
OPTIONEE
NAME
|
NUMBER
OF
OPTIONS
|
TYPE
|
PRICE
|
EXPIRATON
DATE
|
December
20, 2007
December
20, 2007
|
Arnold
Klann, Officer and Director
|
28,409
250,000
|
ISO
(1)
NSO
(2)
|
$3.52
$3.20
|
December
20, 2012
December
20, 2012
|
December
20, 2007
December
20, 2007
|
Necitas
Sumait, Officer and Director
|
31,250
175,000
|
ISO
(1)
NSO
(2)
|
$3.20
$3.20
|
December
20, 2012
December
20, 2012
|
December
20, 2007
December
20, 2007
|
John
Cuzens, Officer
|
31,250
175,000
|
ISO
(1)
NSO
(2)
|
$3.20
$3.20
|
December
20, 2012
December
20, 2012
|
December
20, 2007
December
20, 2007
|
Chris
Scott, Officer
|
31,250
175,000
|
ISO
(1)
NSO
(2)
|
$3.20
$3.20
|
December
20, 2012
December
20, 2012
|
December
20, 2007
December
20, 2007
|
Bill
Davis, Employee
|
31,250
175,000
|
ISO
(1)
NSO
(2)
|
$3.20
$3.20
|
December
20, 2012
December
20, 2012
|
December
20, 2007
December
20, 2007
|
Rigel
Stone, Employee
|
31,250
150,000
|
ISO
(1)
NSO
(2)
|
$3.20
$3.20
|
December
20, 2012
December
20, 2012
|
December
20, 2007
|
Barbi
Rios, Employee
|
5,000
|
ISO
(1)
|
$3.20
|
December
20, 2012
|
December
20, 2007
|
Scott
Olson, Outside Consultant
|
10,000
|
NSO
(3)
|
$3.20
|
December
20, 2012
|
December
20, 2007
|
Aleshia
Knickerbocker, Outside Consultant
|
2,500
|
NSO
(3)
|
$3.20
|
December
20, 2012
|
December
20, 2007
|
Bill
Orr, Outside Consultant
|
10,000
|
NSO
(3)
|
$3.20
|
December
20, 2012
|
December
20, 2007
|
Elsa
Ebro, Outside Consultant
|
5,000
|
NSO
(3)
|
$3.20
|
December
20, 2012
|
Totals
|
|
1,317,159
|
|
|
|
(1) These
Incentive Stock Options (“ISO”) vest immediately
(2) These
Non-Qualified Stock Options (“NSO”) vest as follows:
a. 50%
vest immediately
b. 25%
vest on the Company closing the remainder of funding for the Lancaster
Project
c. 25%
vest at the start of construction of the Lancaster Project
(3) These
NSO’s vest monthly over 12 months (1/12th monthly vesting)
On March
1, 2006, we entered into a Technology License agreement with Arkenol, a company
in which our Chairman, Chief Executive Officer and majority stockholder Arnold
Klann, holds a 25.5% interest. Arkenol has its own management and board separate
and apart from us. 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 (discussed above in “Description of Business”). As
consideration for the grant of the license, we are required to make a one time
payment of $1,000,000 at first project construction funding and for each plant
make the following payments: (1) royalty payment of 3% of the gross sales price
for sales by us or our sublicensees 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, we made
a one time exclusivity fee prepayment of $30,000 during the period ended
December 31, 2006.
On March
1, 2006, we entered into an Asset Transfer and Acquisition Agreement with ARK
Energy, a company which is fifty percent (50%) owned by the Company's Chairman,
Chief Executive Officer and majority stockholder, Arnold Klann. ARK Energy has
its own management and board separate and apart from us. 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. In consideration, we have agreed to pay a
performance bonus of up to $16,000,000 when certain milestones are met. These
milestones include, but are not limited to, transferee's project implementation
which would be demonstrated by start of the construction of a facility or
completion of financial closing, whichever is earlier. We did not incur the
costs of a third party valuation but instead based our valuation of the assets
acquired by (1) an arms length review of the value assigned by ARK Energy to the
opportunities based on the actual costs it incurred in developing the project
opportunities and (2) anticipated financial benefits to us.
In
December 2006, we entered into a Promissory Note with its Chairman, Chief
Executive Officer and majority stockholder, Arnold Klann, whereby Mr. Klann
loaned us $91,000 with a flat fee of 10% of the principal, or lower if required
by law, to be repaid upon our achieving certain investor financing milestones.
In addition, on January 5, 2007, we entered into a $25,000 promissory note with
our Chairman, Chief Executive Officer and majority stockholder. Under the terms
of the note, we are to repay any principal balance within 30 days of receiving
qualified investment financing and a maximum fee of $2,500. The principal
balance and all accrued interest were paid in full during the month of January
of 2007.
On
December 18, 2006, we engaged Director Christopher Nichols as a consultant on a
non-exclusive basis to prepare, review and comment on various presentations,
press releases, or other public relations documentation as requested by us. The
consultant shall also provide us with capital market support through its network
of portfolio managers, hedge funds, brokers, market-makers, institutions and
other market support professionals and organizations. The consultant may also
advise us from time to time, as requested by us, on potential development and
business relationships that may benefit our financial market positioning. The
consultant was compensated in the form of 20,000 shares of restricted common
stock.
On
February 13, 2007, we entered into a consulting agreement with a corporate
technology consulting company, E-Info Solutions, LLC, which entity is controlled
by our Chief Financial Officer, Christopher Scott. The consultant shall review,
comment, and implement as requested by us on any information technology rollout.
Under the terms of the agreement consultant received 12,500 restricted shares of
our common stock at the signing of the agreement and 37,500 shares after
effectiveness of the agreement in equal parts on June 1, 2007, September 1,
2007, and December 1, 2007.
On March
16, 2007, we obtained a 10% annual interest line of credit in the amount of
$1,500,000 from our Chairman, Chief Executive Officer and majority stockholder,
Arnold Klann, to provide additional liquidity to us as needed. Under the terms
of the note, we are to repay any principal balance and interest within 30 days
of receiving qualified investment financing of $5,000,000 or more.
On July
10, 2007, we and Director Chris Nichols mutually terminated our consulting
agreement dated December 21, 2006. The material terms of this agreement were
payment of 20,000 shares of our restricted common stock for Mr. Nichols to
prepare, review and comment on various presentations, press releases, or other
public relations documentation as requested by us, and provide us with capital
market support through its network of portfolio managers, hedge funds, brokers,
market- makers, institutions and other market support professionals and
organizations. Under the terms of the agreement, we had granted Mr. Nichols a
non-exclusive right to deploy our licensed technology on a to be determined
future cellulosic ethanol project. The purpose of the termination of this
agreement is for Mr. Nichols to qualify as an independent member of our Board of
Directors.
On July
13, 2007, we issued several convertible notes aggregating a total of $500,000
with eight accredited investors, including $25,000 from our Chief Financial
Officer. Under the terms of the notes, we are required to repay any principal
balance and interest, at 10% per annum within 120 days of the note. The
convertible promissory note is convertible only upon default. The holders also
received warrants to purchase common stock at $5.00 per share. The warrants vest
immediately and expire in five years. The total warrants issued pursuant to this
transaction were 200,000 on a pro-rata basis to investors. The convertible
promissory notes are only convertible into shares of our common stock in the
event of a default. The conversion price is determined based on one third of the
average of the last-trade prices of our common stock for the ten trading days
preceding the default date. On November 7, 2007, we re-paid all of our 10%
convertible promissory notes dated July 13, 2007, to all our private investors,
totaling approximately $516,000, including interest of approximately
$16,000.
AND
MANAGEMENT
As of
March 25, 2008, our authorized capitalization was 101,000,000 shares of capital
stock, consisting of 100,000,000 shares of common stock, $0.001 par value per
share and 1,000,000 shares of preferred stock, no par value per share. As of
March 25, 2008, there were 28,061,553 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 March 25, 2008, the number of shares of our
common stock owned by (i) each person who is known by us to own of record
or beneficially five percent (5%) or more of our outstanding shares,
(ii) each of our directors, (iii) each of our executive officers and
(iv) all of our directors and executive officers as a group. Unless
otherwise indicated, each of the persons listed below has sole voting and
investment power with respect to the shares of our common stock beneficially
owned.
Executive
Officers, Directors, and More than 5% Beneficial Owners
The
address of each owner who is an officer or director is c/o the Company at 31
Musick, Irvine California 92618.
Title
of Class
|
Name
of Beneficial Owner(1)
|
|
Number
of
shares
|
|
|
Percent
of
Class(2)
|
|
Common
|
Arnold
Klann, Chairman and Chief Executive Officer
|
|
14,460,242
|
(4)
|
|
50.00
|
%
|
Common
|
Necitas
Sumait, Senior Vice President and Director
|
|
1,643,500
|
(5)
|
|
5.77
|
%
|
Common
|
John
Cuzens, Chief Technology Officer and Senior Vice President
|
|
1,621,000
|
(6) |
|
5.69
|
%
|
Common
|
Chris
Scott, Chief Financial Officer
|
|
213,730
|
(7)
|
|
*
|
|
Common
|
Chris
Nichols, Director
|
|
57,000
|
|
|
*
|
|
Common
|
Victor
Doolan, Director
|
|
5,000
|
|
|
*
|
|
Common
|
Joseph
Emas, Director
|
|
5,000
|
|
|
*
|
|
Common
|
Quercus
Trust(3)
|
|
11,607,512
|
(8)
|
|
34.53
|
%
|
|
|
|
|
|
|
|
|
|
All
officers and directors as a group (7 persons)
|
|
18,005,472
|
|
|
60.16
|
%
|
|
|
|
|
|
|
|
|
|
All
officers, directors and 5% holders as a group (8 persons)
|
|
29,612,984
|
|
|
83.46
|
%
|
(1)
|
Beneficial
ownership is determined in accordance with Rule 13d-3(a) of the Exchange
Act and generally includes voting or investment power with respect to
securities.
|
|
|
(2)
|
Figures
may not add up due to rounding of percentages.
|
|
|
(3)
|
David
Gelbaum and Monica Chavez Gelbaum are co-trustees of The Quercus
Trust. Each of David Gelbaum and Monica Chavez Gelbaum, acting
alone, has the power to exercise voting and investment control over the
shares of common stock owned by the Trust. The address for
Quercus Trust is 1835 Newport Blvd., A109-PMB 467, Costa Mesa, CA 92627,
attn: David Gelbaum and Monica Chavez
Gelbaum.
|
|
Includes
options to purchase 861,742 shares of common stock vested within sixty
days of December 31, 2007.
|
|
|
(5)
|
Includes
options to purchase 437,500 shares of common stock vested within sixty
days of December 31, 2007.
|
|
|
(6)
|
Includes
options to purchase 437,500 shares of common stock vested within sixty
days of December 31, 2007.
|
|
|
(7)
|
Includes
options and warrants to purchase 128,750 shares of common stock vested
within sixty days of December 31, 2007.
|
|
|
(8)
|
Includes
a warrant to purchase 5,555,556 shares of common
stock.
|
The
Company is authorized to issue 100,000,000 shares of $0.001 par value common
stock, and 1,000,000 shares of no par value preferred stock. As of March 25,
2008, the Company has 28,061,553 shares of common stock outstanding, and no
shares of preferred stock outstanding.
COMMON
STOCK
As of
March 25, 2008, we had 28,061,553 shares of common stock outstanding.
Holders of our common stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the stockholders. Subject to any
preferential rights of holders of our preferred stock, holders of common stock
are entitled to receive a pro rata share of distributions declared by our Board
of Directors. Our common stock does not provide for preemptive or other
subscription rights, and there are no conversion rights or redemption or sinking
fund provisions with respect to our common stock. All outstanding shares of our
common stock are fully paid and non-assessable. To the extent that we issue
additional shares of our common stock in the future, the relative interests of
the then existing stockholders may be diluted.
PREFERRED
STOCK
As
of March 25, 2008, we had no shares of preferred stock outstanding. We may issue
preferred stock in one or more class or series pursuant to resolution of the
Board of Directors. The Board of Directors may determine and alter the rights,
preferences, privileges, and restrictions granted to or imposed upon any wholly
unissued series of preferred stock, and fix the number of shares and the
designation of any series of preferred stock. The Board of Directors may
increase or decrease (but not below the number of shares of such series then
outstanding) the number of shares of any wholly unissued class or series
subsequent to the issue of shares of that class or series. We have no present
plans to issue any shares of preferred stock.
WARRANTS
As of
March 25, 2008, we had warrants to purchase an aggregate of 7,386,694
shares of our common stock outstanding. The exercise prices for the warrants
range from $2.70 per share to $5.45 per share, with a weighted average exercise
price of approximately per share of $3.02.
OPTIONS
As of
March 25, 2008, we had options to purchase an aggregate of 3,287,159 shares
of our common stock outstanding, with exercise prices for the options ranging
from $2.00 per share to $3.52 per share, with a weighted average exercise price
per share of $2.48.
REGISTRATION
RIGHTS
We
entered into a registration rights agreement with the investors in the December
Private Placement whereby we are required to file an initial registration
statement on Form SB-2 (or another applicable registration form) with the SEC in
order to register the resale of the common stock and warrants to purchase common
stock issued in the December Private Placement. The registration statement is
required to be filed within 45 days from December 14, 2007. The registration
statement must then be declared effective no later than 150 calendar days (May
12, 2008) from the initial filing date.
We also
agreed to register the conversion shares and shares underlying the warrants
issued in connection with our previously issued Convertible Notes. The details
of the registration rights of the Convertible Notes can be found in our
September 30, 2007 10-QSB.
In the
event we fail to file the initial registration statement within the 45 day
period or, in the event that we fail to have the registration statement declared
effective by the SEC by the dates described above, then we must pay certain
liquidated damages.
ANTI-TAKEOVER
PROVISIONS
Our
Amended and Restated Articles of Incorporation and Amended and Restated Bylaws
contain provisions that may make it more difficult for a third party to acquire
or may discourage acquisition bids for us. Our Board of Directors may, without
action of our stockholders, issue authorized but unissued common stock and
preferred stock. The issuance of additional shares to certain persons allied
with our management could have the effect of making it more difficult to remove
our current management by diluting the stock ownership or voting rights of
persons seeking to cause such removal. The existence of unissued preferred stock
may enable the Board of Directors, without further action by the stockholders,
to issue such stock to persons friendly to current management or to issue such
stock with terms that could render more difficult or discourage an attempt to
obtain control of us, thereby protecting the continuity of our management. Our
shares of preferred stock could therefore be issued quickly with terms that
could delay, defer, or prevent a change in control of us, or make removal of
management more difficult.
FOR
SECURITIES ACT LIABILITIES
The
Company's Amended and Restated Bylaws provide for indemnification of directors
and officers against certain liabilities. Officers and directors of the Company
are indemnified generally for any threatened, pending or completed action, suit
or proceeding, whether civil, criminal, administrative or investigative, except
an action by or in the right of the corporation, against expenses, including
attorneys' fees, judgments, fines and amounts paid in settlement actually and
reasonably incurred by him in connection with the action, suit or proceeding if
he acted in good faith and in a manner which he reasonably believed to be in or
not opposed to the best interests of the corporation, and, with respect to any
criminal action or proceeding, has no reasonable cause to believe his conduct
was unlawful.
The
Company's Amended and Restated Articles of Incorporation further provides the
following indemnifications:
(a) a
director of the Corporation shall not be personally liable to the Corporation or
to its shareholders for damages for breach of fiduciary duty as a director of
the Corporation or to its shareholders for damages otherwise existing for (i)
any breach of the director's duty of loyalty to the Corporation or to its
shareholders; (ii) acts or omission not in good faith or which involve
intentional misconduct or a knowing violation of the law; (iii) acts revolving
around any unlawful distribution or contribution; or (iv) any transaction from
which the director directly or indirectly derived any improper personal benefit.
If Nevada Law is hereafter amended to eliminate or limit further liability of a
director, then, in addition to the elimination and limitation of liability
provided by the foregoing, the liability of each director shall be eliminated or
limited to the fullest extent permitted under the provisions of Nevada Law as so
amended. Any repeal or modification of the indemnification provided in these
Articles shall not adversely affect any right or protection of a director of the
Corporation under these Articles, as in effect immediately prior to such repeal
or modification, with respect to any liability that would have accrued, but for
this limitation of liability, prior to such repeal or modification.
(b) the
Corporation shall indemnify, to the fullest extent permitted by applicable law
in effect from time to time, any person, and the estate and personal
representative of any such person, against all liability and expense (including,
but not limited to attorney's fees) incurred by reason of the fact that he is or
was a director or officer of the Corporation, he is or was serving at the
request of the Corporation as a director, officer, partner, trustee, employee,
fiduciary, or agent of, or in any similar managerial or fiduciary position of,
another domestic or foreign corporation or other individual or entity of an
employee benefit plan. The Corporation shall also indemnify any person who is
serving or has served the Corporation as a director, officer, employee,
fiduciary, or agent and that person's estate and personal representative to the
extent and in the manner provided in any bylaw, resolution of the shareholders
or directors, contract, or otherwise, so long as such provision is legally
permissible.
Insofar
as indemnification for liabilities arising under the Securities Act may be
permitted to directors, officers and controlling persons of the Company pursuant
to the foregoing provisions, or otherwise, the Company has been advised that in
the opinion of the SEC such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by us of expenses incurred or paid by our directors, officers or
controlling persons in the successful defense of any action, suit or
proceedings) is asserted by such director, officer, or controlling person in
connection with any securities being registered, we will, unless in the opinion
of our counsel the matter has been settled by controlling precedent, submit to
court of appropriate jurisdiction the question whether such indemnification by
us is against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issues.
The
Selling Stockholders are offering a total of up to 9,693,840 shares of our
common stock. Certain of the Selling Stockholders may be deemed
“underwriters” within the meaning of the Securities Act in connection with the
sale of their Common Stock under this prospectus.
The
column “Shares Owned After the Offering” gives effect to the sale of all the
shares of Common Stock being offered by this prospectus. We agreed to register
for resale shares of Common Stock by the Selling Stockholders listed below. The
Selling Stockholders may from time to time offer and sell any or all of their
shares that are registered under this prospectus. All expenses incurred with
respect to the registration of the Common Stock will be borne by us, but we will
not be obligated to pay any underwriting fees, discounts, commissions or other
expenses incurred by the Selling Stockholders in connection with the sale of
such shares.
The
following table sets forth information with respect to the maximum number of
shares of common stock beneficially owned by the Selling Stockholders named
below and as adjusted to give effect to the sale of the shares offered hereby.
The shares beneficially owned have been determined in accordance with rules
promulgated by the SEC, and the information is not necessarily indicative of
beneficial ownership for any other purpose. The information in the table below
is current as of the date of this prospectus. All information contained in the
table below is based upon information provided to us by the Selling
Stockholders. The Selling Stockholders are not making any representation that
any shares covered by the prospectus will be offered for sale. The Selling
Stockholders may from time to time offer and sell pursuant to this prospectus
any or all of the Common Stock being registered.
The
Selling Stockholders may, from time to time, offer and sell any or all of their
shares listed in this table. Because the Selling Stockholders are not obligated
to sell their shares, or they may also acquire publicly traded shares of our
common stock, or they may not exercise warrants relating to certain shares
offered under this prospectus, we are unable to estimate how many shares they
may beneficially own after this offering. For presentation of this table,
however, we have estimated the percentage of our common stock beneficially owned
after the offering based on assumptions that the Selling Stockholders exercise
all warrants for shares included in this offering and sell all of the shares
being offered by this Prospectus.
|
No.
of Shares owned
prior
to the
|
|
No.
of Shares included in
|
|
|
Shares
Owned After The Offering
|
|
Selling
Stockholder
|
Offering
(1)
|
|
Prospectus
|
|
|
Number
|
|
|
Percentage
|
|
Quercus
Trust (2)
|
11,607,512
|
|
|
7,316,441
|
|
|
|
4,291,071
|
|
|
|
11.08
|
%
|
Aurarian
Capital Partners II, L.P. (3)
|
1,218,794
|
|
|
1,147,670
|
|
|
|
71,124
|
|
|
|
*
|
|
Aurarian
Offshore, Ltd. (4)
|
580,604
|
|
|
557,128
|
|
|
|
23,476
|
|
|
|
*
|
|
James
G. Speirs (5)
|
855,185
|
|
|
148,148
|
|
|
|
707,037
|
|
|
|
1.83
|
%
|
Charles
Schwab Custodian for the James G. Speirs SEP IRA (6)
|
222,222
|
|
|
222,222
|
|
|
|
0
|
|
|
|
0
|
%
|
Merriman
Curhan Ford (7)
|
23,731
|
|
|
23,731
|
|
|
|
0
|
|
|
|
0
|
% |
Seaside
Capital II, LLC (8)
|
125,000
|
|
|
125,000
|
|
|
|
0
|
|
|
|
0
|
%
|
James
Gavin Speirs Custodian for the Mackensey Speirs IRA (10)
|
9,500
|
|
|
8,000
|
|
|
|
1,500
|
|
|
|
*
|
|
James
Gavin Speirs Custodian for the Megan Speirs IRA (10)
|
9,500
|
|
|
8,000
|
|
|
|
1,500
|
|
|
|
*
|
|
Baxter
Capital Management, LLC (9)
|
12,500
|
|
|
12,500
|
|
|
|
0
|
|
|
|
0
|
%
|
Herbert
C Pohlmann (8)
|
131,000
|
|
|
125,000
|
|
|
|
6,000
|
|
|
|
*
|
|
__________________
* Indicates
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)
Includes 5,555,556 shares of common stock and 1,760,885 out of 5,555,556
warrants issued to them to purchase common stock at $2.90 per share issued in a
private placement in December 2007 (in which Quercus paid $15,000,000 in cash
consideration). The closing price of the common stock on the date of
the private placement final closing was $3.21 (December 14, 2007). Each of
David Gelbaum and Monica Chavez Gelbaum, acting alone, has voting and
dispositive power over the shares beneficially owned by Quercus Trust. Other
than the December 2007 Offering, the Company has had no relationship with the
Quercus Trust. The address of Quercus Trust is 1835 Newport Blvd, A109-PMB 467,
Costa Mesa, CA 92627, attn: David Gelbaum and Monica Chaves
Gelbaum.
(3)
Includes 464,276 shares of common stock issued upon the conversion of a
convertible note, 673,200 shares issuable upon exercise of warrants to purchase
common stock issued in connection with a senior secured convertible note
offering in August 2007 (in which Aurarian Capital Partners II, L.P. paid
$1,346,400 in cash consideration), and 10,194 shares issued for interest
payments made in stock thereon. Jason Gold has voting and dispositive power over
the shares beneficially owned by Aurarian Capital Partners II, L.P. Other
than the August 2007 Offering, and December 2007 Offering, the Company has had
no relationship with Aurarian Capital Partners II, L.P. within the last 3 years.
The address for Aurarian Capital Partners II, L.P. is 712 Fifth Ave., 39th
Fl, New York, NY 10019, attn: Jason Gold.
(4)
Includes 225,379 shares of common stock issued upon the conversion of a
convertible note, 326,800 shares issuable upon exercise of warrants to purchase
common stock issued in connection with a senior secured convertible note
offering in August 2007 (in which Aurarian Offshore, Ltd. paid $653,000 in cash
consideration), and 4,949 shares issued for interest payments made in stock
thereon. Jason Gold has voting and dispositive power over the shares
beneficially owned by Aurarian Offshore, Ltd. Other than the August 2007
Offering, and December 2007 Offering, the Company has had no relationship with
Aurarian Offshore, Ltd. within the last 3 years. The address for Aurarian
Offshore, Ltd. is 712 Fifth Ave., 39th Fl, New York, NY 10019, attn: Jason
Gold.
(5)
Includes 74,074 shares of common stock and 74,074 shares issuable upon exercise
of warrants to purchase common stock issued in a private placement in December
2007 (in which Mr. Speirs paid $200,000 in cash consideration). James
G. Speirs has been an active investor in the Company since the Reverse Merger in
July 2006. Mr. Speirs or accounts controlled by him have invested in the January
2007 Offering (amounting to $32,000), July 2007 Short-term Note Offering
(amounting to $50,000), and the December 2007 Offering. Other than
these offerings, the Company has had no relationship with Mr. Speirs within the
last 3 years. The address for James G. Speirs is 19 Flagstone, Trabuco Canyon,
CA 92679.
(6)
Includes 111,111 shares of common stock and 111,111 shares issuable upon
exercise of warrants to purchase common stock issued in a private placement in
December 2007 (in which Mr. Speirs paid $300,000 in cash
consideration). James G. Speirs has been an active investor in the
Company since the Reverse Merger in July 2006. Mr. Speirs or accounts controlled
by him have invested in the January 2007 Offering (amounting to $32,000), July
2007 Short-term Note Offering (amounting to $50,000), and the December 2007
Offering. Other than these offerings, the Company has had no
relationship with Mr. Speirs within the last 3 years. James G. Speirs has voting
and dispositive power over the shares. The address for James G. Speirs is 19
Flagstone, Trabuco Canyon, CA 92679.
(7)
23,731 shares issuable upon exercise of warrants to purchase common stock issued
as compensation to Merriman Curhan Ford, a Broker-Dealer registered with the SEC
and member of FINRA, pursuant to a senior secured convertible note offering in
August 2007. On July 9, 2007 the Company retained Merriman Curhan
Ford & Co. as a non-exclusive financial advisor to the Company. The
Company had presented at the Merriman Curhan Ford & Co. investor
conference May 2007. D. Jonathan Merriman has voting and
dispositive power over the shares beneficially owned by Merriman Curhan
Ford. Merriman Curhan Ford is an underwriter with respect to the
shares they are offering for resale. The address for Merriman Curhan
Ford is 600 California Street, 9th Fl, San Francisco, CA 94108, attn:
Christopher Aguilar, General Counsel. Other than these offerings, the Company
has had no relationship with Merriman Curhan Ford within the last 3
years.
(8)
Represents shares issued in a private offering in January 2007 (in which Seaside
Capital II, LLC and Mr. Pohlmann each paid $250,000 in cash
consideration). William J. Ritger has voting and dispositive power
over the shares beneficially owned by Seaside Capital II, LLC. Other
than the January 2007 Offering and the July 2007 Short-Term Note
Offering (in which Seaside Capital II, LLC and Mr. Pohlmann each paid $125,000
in cash consideration), the Company had no relationship with Seaside Capital II,
LLC or Herbert C Pohlmann. The address for Seaside Capital II, LLC is
750 Ocean Royale Way, Suite 805, Juno Beach, FL 33408, attn: William J. Ritger,
and for Herbert C Pohlmann is 1290 N. Ocean Drive, Palm Beach, FL
33480.
(9)
Represents shares issued in a private offering in January 2007 (in which
Baxter Capital Management, LLC paid $25,000 in consideration). Other than
the January 2007 Offering and the July 2007 Offering (in which Baxter Capital
Management, LLC paid $25,000 in cash consideration), the Company has had no
relationship with Baxter Capital Management, LLC within the last 3 years,
although on November 21, 2006, the Company entered into an agreement with a
certain Consultant, PMG Capital (Paul Gozzo has voting and dispositive
power over the shares beneficially owned by Baxter Capital Management, LLC and
PMG Capital). Under the terms of the agreement the Company is to receive
market capitalization and support services in exchange for the a
monthly fee of $7,500, restricted stock totaling 150,000 shares, 200,000
warrants to buy stock at $5 for 5 years, and certain travel
expenses. The address for Baxter Capital Management, LLC is 113 Inner
Harbor Way, Jupiter, FL 33477, attn: Paul Gozzo.
(10) Represents shares issued in a private offering to accounts
controlled by Mr. Speirs in January 2007 (in which Mr. Speirs or accounts
controlled by him invested a total of $32,000). Other than the January
2007 Offering, July 2007 Short-term Note Offering (amounting to $50,000) and the
December 2007 Offering, the Company has had no relationship with Mr. Speirs
within the last 3 years. James G. Speirs has voting and dispositive power
over the shares. The address for James G. Speirs is 19 Flagstone, Trabuco
Canyon, CA 92679.
This
prospectus relates to the resale of up to 9,693,840 shares (i) issued or (ii) to
be issued upon the exercise of certain outstanding warrants, each held by
certain Selling Stockholders.
The
Selling Stockholders and any of their respective pledges, donees, assignees and
other successors-in-interest may, from time to time, sell any or all of their
shares of Common Stock on any stock exchange, market or trading facility on
which the shares are traded or in private transactions. These sales may be at
fixed or negotiated prices. The Selling Stockholders may use any one or more of
the following methods when selling shares:
●
|
ordinary
brokerage transactions and transactions in which the broker-dealer
solicits purchasers;
|
●
|
block
trades in which the broker-dealer will attempt to sell the shares as
agent, but may position and resell a portion of the block as principal to
facilitate the transaction;
|
●
|
purchases
by a broker-dealer as principal and resale by the broker-dealer for its
account;
|
●
|
an
exchange distribution in accordance with the rules of the applicable
exchange;
|
●
|
privately
negotiated transactions;
|
●
|
short
sales after this registration statement becomes
effective;
|
●
|
broker-dealers
may agree with the Selling Stockholders to sell a specified number of such
shares at a stipulated price per
share;
|
●
|
through
the writing of options on the
shares;
|
●
|
a
combination of any such methods of sale;
and
|
●
|
any
other method permitted pursuant to applicable
law.
|
The
Selling Stockholders may also sell shares under Rule 144 under the Securities
Act, if available, rather than under this prospectus. The Selling Stockholders
will have the sole and absolute discretion not to accept any purchase offer or
make any sale of shares if they deem the purchase price to be unsatisfactory at
any particular time.
To the
extent permitted by law, the Selling Stockholders may also engage in short sales
against the box after this registration statement becomes effective, puts and
calls and other transactions in our securities or derivatives of our securities
and may sell or deliver shares in connection with these trades.
The
Selling Stockholders or their respective pledgees, donees, transferees or other
successors in interest, may also sell the shares directly to market makers
acting as principals and/or broker-dealers acting as agents for themselves or
their customers. Such broker-dealers may receive compensation in the form of
discounts, concessions or commissions from the Selling Stockholders and/or the
purchasers of shares for whom such broker-dealers may act as agents or to whom
they sell as principal or both, which compensation as to a particular
broker-dealer might be in excess of customary commissions. Market makers and
block purchasers purchasing the shares will do so for their own account and at
their own risk. It is possible that a Selling Stockholder will attempt to sell
shares of Common Stock in block transactions to market makers or other
purchasers at a price per share which may be below the then market price. The
Selling Stockholders cannot assure that all or any of the shares offered in this
prospectus will be issued to, or sold by, the Selling Stockholders. The Selling
Stockholders that are broker-dealers are deemed to be underwriters. In addition,
the other Selling Stockholders and any brokers, dealers or agents, upon
effecting the sale of any of the shares offered in this prospectus, may be
deemed to be “underwriters” as that term is defined under the Securities Act or
the Exchange Act, or the rules and regulations under such acts. In such event,
any commissions received by such broker-dealers or agents and any profit on the
resale of the shares purchased by them may be deemed to be underwriting
commissions or discounts under the Securities Act.
Discounts,
concessions, commissions and similar selling expenses, if any, attributable to
the sale of shares will be borne by a Selling Stockholder. The Selling
Stockholders may agree to indemnify any agent, dealer or broker-dealer that
participates in transactions involving sales of the shares if liabilities are
imposed on that person under the Securities Act .
The
Selling Stockholders may from time to time pledge or grant a security interest
in some or all of the shares of Common Stock owned by them and, if they default
in the performance of their secured obligations, the pledgee or secured parties
may offer and sell the shares of Common Stock from time to time under this
prospectus after we have filed an amendment to this prospectus under Rule
424(b)(3) or any other applicable provision of the Securities Act amending the
list of Selling Stockholders to include the pledgee, transferee or other
successors in interest as Selling Stockholders under this
prospectus.
The
Selling Stockholders also may transfer the shares of Common Stock in other
circumstances, in which case the transferees, pledgees or other successors in
interest will be the selling beneficial owners for purposes of this prospectus
and may sell the shares of Common Stock from time to time under this prospectus
after we have filed an amendment to this prospectus under Rule 424(b)(3) or
other applicable provision of the Securities Act amending the list of Selling
Stockholders to include the pledgee, transferee or other successors in interest
as Selling Stockholders under this prospectus.
We are
required to pay all fees and expenses incident to the registration of the shares
of Common Stock. Otherwise, all discounts, commissions or fees incurred in
connection with the sale of our Common Stock offered hereby will be paid by the
selling stockholders.
Each of
the Selling Stockholders acquired the securities offered hereby in the ordinary
course of business and have advised us that they have not entered into any
agreements, understandings or arrangements with any underwriters or
broker-dealers regarding the sale of their shares of Common Stock, nor is there
an underwriter or coordinating broker acting in connection with a proposed sale
of shares of Common Stock by any Selling Stockholder. We will file a supplement
to this prospectus if a Selling Stockholder enters into a material arrangement
with a broker-dealer for sale of Common Stock being registered. If the Selling
Stockholders use this prospectus for any sale of the shares of Common Stock,
they will be subject to the prospectus delivery requirements of the Securities
Act.
Pursuant
to a requirement by the Financial Industry Regulatory Authority, or FINRA, the
maximum commission or discount to be received by any FINRA member or independent
broker/dealer may not be greater than eight percent (8%) of the gross proceeds
received by us for the sale of any securities being registered pursuant to SEC
Rule 415 under the Securities Act of 1933, as amended.
The
anti-manipulation rules of Regulation M under the Exchange Act, may apply to
sales of our Common Stock and activities of the Selling Stockholders. The
Selling Stockholders will act independently of us in making decisions with
respect to the timing, manner and size of each sale.
Effective
September 14, 2006, we engaged McKennon, Wilson & Morgan LLP as our new
independent accountants. There have been no disagreements on accounting and
financial disclosures with our accountants.
The
validity of the Common Stock offered by this prospectus has been passed upon for
us by Scott D. Olson, Esq., Coto de Caza, California. Certain legal
matters with respect to this offering will be passed upon for the Company by
Seward & Kissel LLP, New York, New York.
Our
consolidated financial statements included in this prospectus as of December 31,
2007 and for the year then ended, the period from March 28, 2006 (Inception)
through December 31, 2006 and for the period from March 28, 2006 (Inception)
through December 31, 2007 (as indicated in their reports) have been audited by
McKennon, Wilson & Morgan LLP, Irvine, California, an independent registered
public accounting firm and are included herein in reliance upon the authority as
experts in giving said reports.
We filed
with the SEC a registration statement on Form SB-2 under the Securities Act
for the shares of Common Stock in this offering. This prospectus does not
contain all of the information in the registration statement and the exhibits
and schedule that were filed with the registration statement. For further
information with respect to our Common Stock and us, we refer you to the
registration statement and the exhibits that were filed with the
registration statement. Statements contained in this prospectus about the
contents of any contract or any other document that is filed as an exhibit to
the registration statement are not necessarily complete, and we refer you to the
full text of the contract or other document filed as an exhibit to the
registration statement. A copy of the registration statement and the exhibits
that were filed with the registration statement may be inspected without charge
at the public reference facilities maintained by the SEC, 100 F Street N.E.,
Washington, D.C. 20549, and copies of all or any part of the registration
statement may be obtained from the SEC upon payment of the prescribed fee or for
free at the SEC’s website, www.sec.gov. Information regarding the operation of
the Public Reference Room may be obtained by calling the SEC at 1(800)
SEC-0330. The SEC maintains a web site that contains reports, proxy and
information statements, and other information regarding registrants that file
electronically with the SEC. The address of the site is http://www.sec.gov. We
are subject to the information and periodic reporting requirements of the
Exchange Act and, in accordance with the requirements of the Exchange Act, file
periodic reports, proxy statements, and other information with the SEC. These
periodic reports, proxy statements, and other information are available for
inspection and copying at the regional offices, public reference facilities and
web site of the SEC referred to above.
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
Report
of Independent Registered Public Accounting Firm
|
F-1
|
|
|
Consolidated
Balance Sheet as of December 31, 2007
|
F-2
|
|
|
Consolidated
Statements of Operations for the year ended December 31, 2007, for the
period from March 28, 2006 (Inception) to December 31, 2006 and for the
period from March 28, 2006 (Inception) to December 31,
2007
|
F-3
|
|
|
Consolidated
Statements of Stockholders Equity (Deficit) for the period from March 28,
2006 (Inception) to December 31, 2006, and for the year ended December 31,
2007
|
F-4
|
|
|
Consolidated
Statements of Cash Flows for the year ended December 31, 2007, the period
from March 28, 2006 (Inception) to December 31, 2006, and for the period
from March 28, 2006 (Inception) to December 31, 2007
|
F-6
|
|
|
Notes
to Consolidated Financial Statements
|
F-8
|
|
|
The Board
of Directors and Shareholders of BlueFire Ethanol Fuels, Inc. and
Subsidiary
We have
audited the accompanying consolidated balance sheet of BlueFire Ethanol Fuels,
Inc. and subsidiary, a development-stage company, (the “Company”) as of December
31, 2007, and the related consolidated statements of operations, stockholders’
deficit, and cash flows for the year ended December 31, 2007, the period from
March 28, 2006 (“Inception”) to December 31, 2006, and for the period from
Inception to December 31, 2007. 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 consolidated financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our 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 includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall consolidated financial
statement presentation. We believe that our 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 Ethanol
Fuels, Inc. and subsidiary, as of December 31, 2007, and the results of their
operations and their cash flows for the year ended December 31, 2007, the period
from Inception to December 31, 2006, and the period from Inception to
December 31, 2007, in conformity with accounting principles generally
accepted in the United States of America.
/s/
McKennon Wilson & Morgan LLP
Irvine,
California
February
22, 2008
(A
DEVELOPMENT-STAGE COMPANY)
CONSOLIDATED
BALANCE SHEET
|
|
December
31, 2007
|
|
ASSETS
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
Cash
and cash equivalents
|
|
$
|
13,031,939
|
|
Accounts
receivable
|
|
|
49,000
|
|
Prepaid
expenses
|
|
|
16,542
|
|
Total
current assets
|
|
|
13,097,481
|
|
|
|
|
|
|
Prepaid
fees to related party
|
|
|
30,000
|
|
Property
and equipment, net of accumulated
depreciation
of $406
|
|
|
151,007
|
|
|
|
|
|
|
Total
assets
|
|
$
|
13,278,488
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
Accounts
payable
|
|
$
|
382,679
|
|
Accrued
liabilities
|
|
|
267,671
|
|
Total
current liabilities
|
|
|
650,350
|
|
|
|
|
|
|
Commitments
and contingencies (Note6)
|
|
|
-
|
|
|
|
|
|
|
Stockholders’
equity (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; 28,061,553 shares
|
|
|
|
|
issued
and outstanding
|
|
|
28,061
|
|
Additional
paid-in capital
|
|
|
28,431,992
|
|
Deficit
accumulated during the development stage
|
|
|
(15,831,915
|
)
|
Total
stockholders’ equity
|
|
|
12,628,138
|
|
|
|
|
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
13,278,488
|
|
See
accompanying notes to consolidated financial statements
(A
DEVELOPMENT-STAGE COMPANY)
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
For
the year ended December 31,
|
|
|
From
March 28, 2006 (Inception) Through December 31,
|
|
|
From
March 28, 2006 (Inception) Through December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
49,000
|
|
|
$
|
-
|
|
|
$
|
49,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Project
development, including stock based compensation of $2,387,634,
$2,500 and $2,390,134, respectively
|
|
|
4,930,739
|
|
|
|
466,002
|
|
|
|
5,396,741
|
|
General
and administrative, including stock based compensation of $4,061,808,
$112,311 and $4,174,119, respectively
|
|
|
5,595,125
|
|
|
|
1,083,195
|
|
|
|
6,678,320
|
|
Total
operating expenses
|
|
|
10,525,864
|
|
|
|
1,549,197
|
|
|
|
12,075,061
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
loss
|
|
|
(10,476,864
|
)
|
|
|
(1,549,197
|
)
|
|
|
(12,026,061
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income and (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income
|
|
|
18,903
|
|
|
|
2,800
|
|
|
|
21,703
|
|
Financing
related charge
|
|
|
(211,660
|
)
|
|
|
-
|
|
|
|
(211,660
|
)
|
Amortization
of debt discount
|
|
|
(676,982
|
)
|
|
|
-
|
|
|
|
(676,982
|
)
|
Interest
expense
|
|
|
(56,097
|
)
|
|
|
-
|
|
|
|
(56,097
|
)
|
Related
party interest expense
|
|
|
(55,348
|
)
|
|
|
(9,100
|
)
|
|
|
(64,448
|
)
|
Loss
on extinguishment of debt
|
|
|
(2,818,370
|
)
|
|
|
-
|
|
|
|
(2,818,370
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(14,276,418
|
)
|
|
$
|
(1,555,497
|
)
|
|
$
|
(15,831,915
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted loss per common share
|
|
$
|
(0.65
|
)
|
|
$
|
(0.08
|
)
|
|
|
|
|
Weighted
average common shares outstanding, basic and diluted
|
|
|
21,848,126
|
|
|
|
19,711,225
|
|
|
|
|
|
See
accompanying notes to consolidated financial statements
(A
DEVELOPMENT-STAGE COMPANY)
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
|
|
Common
Stock
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Additional
Paid-in
Capital
|
|
Deficit
Accumulated
During
Development
Stage
|
|
Stockholders'
Equity
(Deficit)
|
Balance
at March 28, 2006 (inception)
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Issuance
of founder’s share at $.001 per share
|
|
17,000,000
|
|
|
|
17,000
|
|
|
|
|
|
|
|
|
|
|
|
17,000
|
|
Common
shares retained by Sucre Agricultural Corp., Shareholders
|
|
4,028,264
|
|
|
|
4,028
|
|
|
|
685,972
|
|
|
|
-
|
|
|
|
690,000
|
|
Costs
associated with the acquisition of Sucre Agricultural
Corp.
|
|
|
|
|
|
|
|
|
|
(3,550
|
)
|
|
|
|
|
|
|
(3,550
|
)
|
Common
shares issued for services in November 2006 at $2.99 per share
(Note 5)
|
|
37,500
|
|
|
|
38
|
|
|
|
111,962
|
|
|
|
-
|
|
|
|
112,000
|
|
Common
shares issued for services in November 2006 at $3.35 per share (Note
5)
|
|
20,000
|
|
|
|
20
|
|
|
|
66,981
|
|
|
|
-
|
|
|
|
67,001
|
|
Common
shares issued for services in December 2006 at $3.65 per share (Note
5)
|
|
20,000
|
|
|
|
20
|
|
|
|
72,980
|
|
|
|
-
|
|
|
|
73,000
|
|
Common
shares issued for services in December 2006 at $3.65 per share (Note
5)
|
|
20,000
|
|
|
|
20
|
|
|
|
72,980
|
|
|
|
-
|
|
|
|
73,000
|
|
Estimated
value of common shares at $3.99 per share and warrants at $2.90 issuable
for services upon vesting in February 2007 (Note 5)
|
|
-
|
|
|
|
-
|
|
|
|
160,000
|
|
|
|
-
|
|
|
|
160,000
|
|
Share-based
compensation related to options (Note 6)
|
|
-
|
|
|
|
-
|
|
|
|
114,811
|
|
|
|
-
|
|
|
|
114,811
|
|
Share-based
compensation related to warrants (Note 6)
|
|
-
|
|
|
|
-
|
|
|
|
100,254
|
|
|
|
-
|
|
|
|
100,254
|
|
Net
Loss
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,555,497
|
)
|
|
|
(1,555,497
|
)
|
Balances
at December 31, 2006
|
|
21,125,764
|
|
|
$
|
21,126
|
|
|
$
|
1,382,390
|
|
|
$
|
(1,555,497
|
)
|
|
$
|
(151,981
|
)
|
See
accompanying notes to consolidated financial statements
(A
DEVELOPMENT-STAGE COMPANY)
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
|
|
Common
Stock
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Additional
Paid-in
Capital
|
|
Deficit
Accumulated
During
Development
Stage
|
|
Stockholders'
Equity
(Deficit)
|
Balances
at December 31, 2006
|
|
21,125,764
|
|
|
$
|
21,126
|
|
|
$
|
1,382,390
|
|
|
$
|
(1,555,497
|
)
|
|
$
|
(151,981
|
)
|
Common
shares issued for cash in January 2007, at $2.00 per share to unrelated
individuals, including costs associated with private placement of 6,250
common shares and $12,500 cash paid
|
|
284,750
|
|
|
|
285
|
|
|
|
755,875
|
|
|
|
-
|
|
|
|
756,160
|
|
Amortization
of share based compensation related to employment agreement in January
2007 $3.99 per share
|
|
10,000
|
|
|
|
10
|
|
|
|
39,890
|
|
|
|
-
|
|
|
|
39,900
|
|
Common
shares issued for services in February 2007 at $5.92 per
share
|
|
37,500
|
|
|
|
38
|
|
|
|
138,837
|
|
|
|
-
|
|
|
|
138,875
|
|
Adjustment
to record remaining value of warrants at $4.70 per share issued for
services in February 2007
|
|
-
|
|
|
|
-
|
|
|
|
158,118
|
|
|
|
-
|
|
|
|
158,118
|
|
Common
shares issued for services in March 2007 at $7.18 per
share
|
|
37,500
|
|
|
|
37
|
|
|
|
269,213
|
|
|
|
-
|
|
|
|
269,250
|
|
Fair
value of warrants at $6.11 for services vested in March
2007
|
|
-
|
|
|
|
-
|
|
|
|
305,307
|
|
|
|
-
|
|
|
|
305,307
|
|
Fair
value of warrants at $5.40 for services vested in June
2007
|
|
-
|
|
|
|
-
|
|
|
|
269,839
|
|
|
|
-
|
|
|
|
269,839
|
|
Common
shares issued for services in June 2007 at $6.25 per share
|
|
37,500
|
|
|
|
37
|
|
|
|
234,338
|
|
|
|
-
|
|
|
|
234,375
|
|
Share-based
compensation related to employment agreement in February 2007 $5.50 per
share
|
|
50,000
|
|
|
|
50
|
|
|
|
274,951
|
|
|
|
-
|
|
|
|
275,001
|
|
Common
shares issued for services in August 2007 at $5.07 per
share
|
|
13,000
|
|
|
|
13
|
|
|
|
65,901
|
|
|
|
-
|
|
|
|
65,914
|
|
Share-based
compensation related to options
|
|
-
|
|
|
|
-
|
|
|
|
4,692,863
|
|
|
|
-
|
|
|
|
4,692,863
|
|
Fair
value of warrants issued in August 2007 for debt placement services valued
at $4.18 per share
|
|
-
|
|
|
|
-
|
|
|
|
107,459
|
|
|
|
-
|
|
|
|
107,459
|
|
Relative
fair value of warrants associated with July 2007 convertible note
agreement
|
|
-
|
|
|
|
-
|
|
|
|
332,255
|
|
|
|
-
|
|
|
|
332,255
|
|
Exercise
of stock options in July 2007 at $2.00 per
share
|
|
20,000
|
|
|
|
20
|
|
|
|
39,980
|
|
|
|
-
|
|
|
|
40,000
|
|
Relative
fair value of warrants and beneficial conversion feature in connection
with the $2,000,000 convertible note payable in August
2007
|
|
-
|
|
|
|
-
|
|
|
|
2,000,000
|
|
|
|
-
|
|
|
|
2,000,000
|
|
Stock
issued in lieu of Interest payments on the senior secured convertible note
at $4.48 and $2.96 per share in October and December 2007
|
|
15,143
|
|
|
|
15
|
|
|
|
55,569
|
|
|
|
-
|
|
|
|
55,584
|
|
Conversion
of $2,000,000 note payable in August 2007 at $2.90 per
share
|
|
689,655
|
|
|
|
689
|
|
|
|
1,999,311
|
|
|
|
-
|
|
|
|
2,000,000
|
|
Common
shares issued for cash at $2.70 per share, December 2007, net of legal
costs of $90,000 and placement agent cost of $1,050,000
|
|
5,740,741
|
|
|
|
5,741
|
|
|
|
14,354,259
|
|
|
|
-
|
|
|
|
14,360,000
|
|
Loss
on extinguishment of debt in December 2007
|
|
-
|
|
|
|
-
|
|
|
|
955,637
|
|
|
|
-
|
|
|
|
955,637
|
|
Net
loss
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(14,276,418
|
)
|
|
|
(14,276,418
|
)
|
Balances
at December 31, 2007
|
|
28,061,553
|
|
|
$
|
28,061
|
|
|
$
|
28,431,992
|
|
|
$
|
(15,831,915
|
)
|
|
$
|
12,628,138
|
|
See
accompanying notes to consolidated financial statements
(A
DEVELOPMENT-STAGE COMPANY)
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
For
the Year ended December 31,
|
|
|
From
March 28, 2006 (Inception) to December 31,
|
|
|
From
March 28, 2006 (Inception) to December 31,
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
Net
loss
|
$
|
(14,276,418
|
)
|
|
$
|
(1,555,497
|
)
|
|
$
|
(15,831,915
|
)
|
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
|
)
|
Interest
expense on beneficial conversion feature
of
convertible notes
|
|
676,983
|
|
|
|
-
|
|
|
|
676,983
|
|
Loss
on extinguishment of convertible debt
|
|
2,718,370
|
|
|
|
-
|
|
|
|
2,718,370
|
|
Common
stock issued for interest on convertible
notes
|
|
55,585
|
|
|
|
-
|
|
|
|
55,585
|
|
Discount
on sale of stock associated with private
placement
|
|
211,660
|
|
|
|
-
|
|
|
|
211,660
|
|
Share-based
compensation
|
|
6,449,441
|
|
|
|
700,066
|
|
|
|
7,149,507
|
|
Depreciation
|
|
409
|
|
|
|
-
|
|
|
|
409
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
(49,000
|
)
|
|
|
-
|
|
|
|
(49,000
|
)
|
Prepaid
fees to related party
|
|
-
|
|
|
|
(30,000
|
)
|
|
|
(30,000
|
)
|
Prepaid
expenses and other current assets
|
|
(16,542
|
)
|
|
|
-
|
|
|
|
(16,542
|
)
|
Accounts
payable
|
|
315,729
|
|
|
|
66,949
|
|
|
|
382,678
|
|
Accrued
liabilities
|
|
249,978
|
|
|
|
17,692
|
|
|
|
267,670
|
|
Accrued
interest to related party
|
|
(9,100
|
)
|
|
|
9,100
|
|
|
|
-
|
|
Net
cash used in operating activities
|
|
(3,672,905
|
)
|
|
|
(778,240
|
)
|
|
|
(4,451,145
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition
of property and equipment
|
|
(151,416
|
)
|
|
|
-
|
|
|
|
(151,416
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
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 exercise of stock options
|
|
40,000
|
|
|
|
-
|
|
|
|
40,000
|
|
Proceeds
from issuance of common stock
|
|
14,360,000
|
|
|
|
-
|
|
|
|
14,360,000
|
|
Proceeds
from convertible notes payable
|
|
2,500,000
|
|
|
|
-
|
|
|
|
2,500,000
|
|
Repayment
of notes payable
|
|
(500,000
|
)
|
|
|
-
|
|
|
|
(500,000
|
)
|
Proceeds
from related party notes payable
|
|
25,000
|
|
|
|
91,000
|
|
|
|
116,000
|
|
Repayment
of related party notes payable
|
|
(116,000
|
)
|
|
|
-
|
|
|
|
(116,000
|
)
|
Net
cash provided by financing activities
|
|
16,853,500
|
|
|
|
781,000
|
|
|
|
17,634,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase in cash and cash equivalents
|
|
13,029,179
|
|
|
|
2,760
|
|
|
|
13,031,939
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents beginning of period
|
|
2,760
|
|
|
|
-
|
|
|
|
-
|
|
Cash
and cash equivalents end of period
|
$
|
13,031,939
|
|
|
$
|
2,760
|
|
|
$
|
13,031,939
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosures of cash flow information
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
$
|
56,375
|
|
|
$
|
-
|
|
|
$
|
56,375
|
|
Income
taxes
|
$
|
800
|
|
|
$
|
800
|
|
|
$
|
800
|
|
Supplement
schedule of noncash investing and financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
Conversion
of senior secured convertible notes payable
|
$
|
2,000,000
|
|
|
$
|
-
|
|
|
$
|
2,000,000
|
|
Interest
converted to common stock
|
$
|
55,569
|
|
|
$
|
-
|
|
|
$
|
55,569
|
|
Fair
value of warrents issued to placement agents
|
$
|
725,591
|
|
|
$
|
-
|
|
|
$
|
725,591
|
|
See
accompanying notes to consolidated financial statements
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.
BlueFire’s
business will encompass development activities leading to the construction and
long-term operation of production facilities. BlueFire is currently in the
development stage of deploying project opportunities for converting cellulose
fractions of municipal solid waste and other opportunistic feedstock into
ethanol fuels. The Company entered into an Asset Transfer and Acquisition
Agreement with ARK Energy, Inc. (“ARK Energy”). Based upon the terms of the
agreement, ARK Energy transferred certain rights, assets, work-product,
intellectual property and other know-how on 19 project opportunities, that
management estimates is worth approximately $16,000,000, which may be used by
BlueFire to accelerate its deployment of the Arkenol technology.
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, the issuance of
convertible notes with warrants in July and in August 2007 and from the sale of
the Company’s common stock in December 2007. 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
December 31, 2007, the Company has working capital of approximately $12,450,000.
In December 2007, the Company obtained net proceeds of approximately $14,500,000
from the issuance of its common stock. The proceeds received are
expected to be used in operations, and in funding plant design and development
costs. Management has estimated that cash operating expenses for the
next twelve months will approximate roughly $2,400,000, excluding engineering
costs related to the development of bio-refinery projects. Although
the costs of construction is not readily determinable, the Company estimates the
cost to be approximately $30 million for its first plant. The Company is
currently in discussions with potential sources of financing for this facility
but no definitive agreements are in place.
BLUEFIRE
ETHANOL FUELS, INC. AND SUBSIDIARY
(A
DEVELOPMENT-STAGE COMPANY)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Changes
in Reporting Entity
The
acquisition of Sucre Agricultural Corp. by BlueFire Ethanol, Inc., as discussed
in Note 1, was accounted for as a reverse acquisition, whereby the assets and
liabilities of BlueFire are reported at their historical cost since the entities
are under common control immediately after the acquisition in accordance with
Statement of Financial Accounting Standards (“SFAS”) No. 141 “Business
Combinations.” The assets and liabilities of Sucre, which were not significant,
were recorded at fair value on June 27, 2006, the date of the acquisition. No
goodwill was recorded in connection with the reverse acquisition since Sucre had
no business. The reverse acquisition resulted in a change in the reporting
entity of Sucre, for accounting and reporting purposes. Accordingly, the
financial statements herein reflect the operations of BlueFire from Inception
and Sucre from June 27, 2006, the date of acquisition, through December 31,
2006. The 4,028,264 shares retained by the stockholders of Sucre have been
recorded on the date of acquisition of June 27, 2006.
The
consolidated financial statements include the accounts of BlueFire Ethanol
Fuels, Inc., and its wholly-owned subsidiary BlueFire Ethanol, Inc. All
significant 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. Significant estimates include the fair value of
options and warrants issued during the reporting period. Actual results could
materially differ from those estimates.
Cash
and Cash Equivalents
Accounts
Receivable
Accounts
receivable are reported net of allowance for expected losses. It
represents the amount management expects to collect from outstanding balances.
Differences between the amount due and the amount management expects to collect
are charged to operations in the year in which those differences are determined,
with an offsetting entry to a valuation allowance.
Depreciation
The
Company’s fixed assets are depreciated using primarily the straight-line method
over a period ranging from one to five years.
Revenue
Recognition
The
Company is currently a developmental-stage company. The Company recognizes
revenues from 1) consulting services rendered to potential sublicensees for
development and construction of cellulose to ethanol projects, and 2) will
recognize 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.
BLUEFIRE
ETHANOL FUELS, INC. AND SUBSIDIARY
(A
DEVELOPMENT-STAGE COMPANY)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
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 year ended
December 31, 2007, for the period from March 28, 2006 (Inception) to December
31, 2006, and for the period from March 28, 2006 (Inception) to December 31,
2007 research and development costs included in Project Development were
approximately $2,543,000 , $464 ,000 and $3,084,000 respectively.
Convertible
debt is accounted for under the guidelines established by APB Opinion No. 14
“Accounting for Convertible Debt and Debt issued with Stock Purchase
Warrants” under the direction of Emerging Issues Task Force (“EITF”)
98-5, Accounting for Convertible Securities with Beneficial Conversion Features
or Contingently Adjustable Conversion Ratios, (“EITF 98-5”) EITF 00-27
Application of Issue No 98-5 to Certain Convertible Instruments (“EITF 00-27”),
and EITF 05-8 Income Tax Consequences of Issuing Convertible Debt with
Beneficial Conversion Features. The Company records a beneficial conversion
feature (BCF) related to the issuance of convertible debt that have conversion
features at fixed or adjustable rates that are in-the-money when issued and
records the fair value of warrants issued with those instruments. The BCF for
the convertible instruments is recognized and measured by allocating a portion
of the proceeds to warrants and as a reduction to the carrying amount of the
convertible instrument equal to the intrinsic value of the conversion features,
both of which are credited to paid-in-capital. The Company calculates the fair
value of warrants issued with the convertible instruments using the
Black-Scholes valuation method, using the same assumptions used for valuing
employee options for purposes of SFAS No. 123R, except that the contractual life
of the warrant is used. Under these guidelines, the Company allocates the value
of the proceeds received from a convertible debt transaction between the
conversion feature and any other detachable instruments (such as warrants) on a
relative fair value basis. The allocated fair value is recorded as a debt
discount or premium and is amortized over the expected term of the convertible
debt to interest expense. For a conversion price change of a convertible debt
issue, the additional intrinsic value of the debt conversion feature, calculated
as the number of additional shares issuable due to a conversion price change
multiplied by the previous conversion price, is recorded as additional debt
discount and amortized over the remaining life of the debt.
The
Company accounts for modifications of its Embedded Conversion Features (“ECF’s”)
in accordance with EITF” 06- 6”) . EITF 06-6 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 pursuant to EITF 96-19.”Debtor’s Accounting for a
Modification or Exchange of Debt Instruments” (“EITF 96-16”).
Equity
Instruments Issued with Registration Rights Agreement
The
Company accounts for these penalties as contingent liabilities, applying the
accounting guidance of SFAS No. 5, “Accounting for Contingencies”. This
accounting is consistent with views established by FASB Staff Positions FSP EITF
00-19-2 “Accounting for Registration Payment Arrangements”, which was issued
December 21, 2006. Accordingly, the Company recognizes damages when it becomes
probable that they will be incurred and amounts are reasonably
estimable.
BLUEFIRE
ETHANOL FUELS, INC. AND SUBSIDIARY
(A
DEVELOPMENT-STAGE COMPANY)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
In
connection with the issuance of common stock for gross proceeds of $15,500,000
in December 2007 and the $2,000,000 convertible note financing in
August 2007, the Company was required to file a registration statement on Form
SB-2 or Form S-3 with the Securities and Exchange Commission in order to
register the resale of the common stock under the Securities Act. The
Company filed that registration statement on December 18, 2007 and is required
under the registration rights agreement to have that registration statement
declared effective by the Securities and Exchange Commission (“SEC”) by May 12,
2008 and March 18, 2008, respectively. In the event the registration statement
is not declared effective by these date, the Company will be required to pay
liquidated damages equal to 1% per 30 day period equal to the purchase price
paid by the investors. As of December 31, 2007, the Company does not believe
that damages are probable and thus no amounts have been accrued in the
accompanying 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.
In
July 2006, the FASB issued Interpretation No. (“FIN”) 48, “ Accounting
for Uncertainty in Income Taxes ”. This Interpretation sets forth a recognition
threshold and valuation method to recognize and measure an income tax position
taken, or expected to be taken, in a tax return. The evaluation is based on a
two-step approach. The first step requires an entity to evaluate whether the tax
position would “more likely than not,” based upon its technical merits, be
sustained upon examination by the appropriate taxing authority. The second step
requires the tax position to be measured at the largest amount of tax benefit
that is greater than 50 percent likely of being realized upon ultimate
settlement. In addition, previously recognized benefits from tax positions that
no longer meet the new criteria would no longer be recognized. The application
of this Interpretation will be considered a change in accounting principle with
the cumulative effect of the change recorded to the opening balance of retained
earnings in the period of adoption. This Interpretation was effective for the
Company on January 1, 2007. Adoption of this new standard did not have a
material impact on our financial position, results of operations or cash
flows.
The
financial instruments consist of cash, accounts receivable and accounts payable.
The fair value of the financial instruments approximates the carrying value at
December 31, 2007.
Risks
and Uncertainties
The
Company’s operations are subject to new innovations in product design and
function. Significant technical changes can have an adverse effect on product
lives. Design and development of new products are important elements to achieve
and maintain profitability in the Company’s industry segment. The Company may be
subject to federal, state and local environmental laws and regulations. The
Company does not anticipate expenditures to comply with such laws and does not
believe that regulations will have a material impact on the Company’s financial
position, results of operations, or liquidity. The Company believes that its
operations comply, in all material respects, with applicable federal, state, and
local environmental laws and regulations.
Concentrations
of Credit Risk
The
Company maintains its cash accounts in a commercial bank and in an institutional
money-market fund account. The total cash balances held in a commercial bank are
secured by the Federal Deposit Insurance Corporation (“FDIC”) up to $100,000. 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 $100,000. At times, the Company
has cash deposits in excess of federally and institutional insured
limits.
BLUEFIRE
ETHANOL FUELS, INC. AND SUBSIDIARY
(A
DEVELOPMENT-STAGE COMPANY)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
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. For the year ended December 31, 2007 and for the period from March
28, 2006 (Inception) to December 31, 2006, the Company had approximately
3,287,000 and 1,990,000 options and 7,387,000 and 200,000 warrants,
respectively, to purchase shares of common stock that were excluded from the
calculation of diluted loss per share as their effects would have been
anti-dilutive.
Debt
Issuance Costs
Debt
issuance costs represent costs incurred related to the Company’s senior secured
convertible note payable. These costs were amortized over the term of the note
using the effective interest method and expensed upon conversion of senior
secured convertible note (Note 5).
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.
The
Company measures compensation expense for its non-employee stock-based
compensation under EITF No. 96-18 “Accounting for Equity Instruments that are
Issued to Other Than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services” (“EITF 96-18”). The fair value of the option issued or
committed to be issued is used to measure the transaction, as this is more
reliable than the fair value of the services received. The fair value is
measured at the value of the Company’s common stock on the date that the
commitment for performance by the counterparty has been reached or the
counterparty’s performance is complete. The fair value of the equity instrument
is charged directly to stock-based compensation expense and credited to
additional paid-in capital.
New
Accounting Pronouncements
In
September 2006, the FASB issued SFAS 157, “Fair Value Measurements,” to increase
consistency and comparability in fair value measurements by defining fair value,
establishing a framework for measuring fair value in generally accepted
accounting principles, and expanding disclosures about fair value measurements.
SFAS 157 emphasizes that fair value is a market-based measurement, not an
entity-specific measurement. It clarifies the extent to which fair value is used
to measure recognized assets and liabilities, the inputs used to develop the
measurements, and the effect of certain measurements on earnings for the period.
SFAS 157 is effective for financial statements issued for fiscal years beginning
after November 15, 2007, and is applied on a prospective basis. On February 6,
2008, the FASB announced it will issue a FASB Staff Position (FSP) to allow a
one-year deferral of adoption of SFAS 157 for nonfinancial assets and
nonfinancial liabilities that are recognized at fair value on a nonrecurring
basis. The FSP will also amend SFAS 157 to exclude SFAS 13, “Accounting for
Leases,” and its related interpretive accounting pronouncements. The FSP is
expected to be issued in the near future. The Company is currently assessing the
impact of SFAS 157 on its consolidated financial position, results of operations
or cash flows.
BLUEFIRE
ETHANOL FUELS, INC. AND SUBSIDIARY
(A
DEVELOPMENT-STAGE COMPANY)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
Combinations” (“SFAS 141(R)”). SFAS 141(R) expands the definition of a business
combination and requires the fair value of the purchase price of an acquisition,
including the issuance of equity securities, to be determined on the acquisition
date. SFAS141(R) also requires that all assets, liabilities, contingent
considerations, and contingencies of an acquired business be recorded at fair
value at the acquisition date. In addition, SFAS 141(R) requires that
acquisition costs generally be expensed as incurred, restructuring costs
generally be expensed in periods subsequent to the acquisition date, changes in
accounting for deferred tax asset valuation allowances be expensed after the
measurement period, and acquired income tax uncertainties be expensed after the
measurement period. SFAS 141(R) is effective for fiscal years beginning after
December 15, 2008 with early adoption prohibited. The Company is currently
assessing the impact of SFAS 157 on its consolidated financial position, results
of operations or cash flows.
NOTE
3 – DEVELOPMENT CONTRACTS
Department
of Energy Award 1
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.
During
October 2007, the Company finalized Award 1 for a total approved budget of just
under $10,000,000 with the DOE. This award is a 60%/40% cost share, whereby 40%
of approve costs may be reimbursed by the DOE pursuant to the total $40 million
award announced in February 2007. As of December 31, 2007, the Company has not
recorded a receivable related to the DOE contract as it cannot be readily
estimated due to the uncertainty of the allowable reimbursables and the
reimbursable period.
California
Energy Commission
In March
2007, the Company was selected to receive an award of approximately $1,000,000
in funding from the California Energy Commission (“CEC”). After careful review
and consideration of the CEC Grant Agreement, in January 2008, the Company
determined it would be to the best interest of its shareholders to decline the
acceptance of the grant. The terms under which the Company would have received
the grant come at a premium and clouds otherwise clear ownership structures of
the Company’s technology and its commercial projects. When compared
to other available funding sources this presents difficulties to the Company’s
ongoing fund raising activities with private parties. Thus, the Company believes
it would not be the best interest of their shareholders to execute the
agreement.
BLUEFIRE
ETHANOL FUELS, INC. AND SUBSIDIARY
(A
DEVELOPMENT-STAGE COMPANY)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Property
and Equipment consist of the following:
|
|
|
December
31, 2007
|
|
|
Land
|
|
$
|
109,108
|
|
|
Furniture
and fixtures
|
|
|
35,629
|
|
|
Office
equipment
|
|
|
6,676
|
|
|
|
|
|
151,413
|
|
|
Accumulated
depreciation
|
|
|
(406
|
)
|
|
|
|
$
|
151,007
|
|
Purchase
of Lancaster Land
On
November 9 2007, the Company purchased approximately 10 acres of land in
Lancaster, California for approximately $109,000, including certain site
surveying and other acquisition costs. The Company intends to use the land for
the construction of their first pilot refinery plant.
NOTE
5 – NOTES PAYABLE
Convertible
Notes Payable
On July
13, 2007, the Company issued several convertible notes aggregating a total of
$500,000 with eight accredited investors including $25,000 from the Company’s
Chief Financial Officer. Under the terms of the notes, the Company is
to repay any principal balance and interest, at 10% per annum within 120 days of
the note. The holders also receive 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 notes payable and the warrants
issued to the convertible note holders based on their relative fair
values and resulted in $167,744 being allocated to the convertible notes and
$332,256 allocated to the warrants. The amount allocated to the warrants
resulted in a discount to the convertible notes. The Company is
amortizing the discount over the term of the convertible notes. During the year
ended December 31, 2007, the Company amortized $332,256 of the discount to
interest expense.
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
approximately $332,000 of which $167,744 was allocated to the convertible notes.
However, since the convertible notes are only convertible upon a contingent
event, the value will not be recorded until such event is
triggered.
On
November 7, 2007, the Company re-paid the 10% convertible promissory notes
totaling approximately $516,000 including interest of approximately
$16,000. This included approximately $800 of accrued interest to the
Company’s Chief Financial Officer.
On August
21, 2007, the Company issued senior secured convertible notes aggregating a
total of $2,000,000 with two institutional accredited
investors. Under the terms of the notes, the Company is to repay any
principal balance and interest, at 8% per annum, due August 21, 2009. On a
quarterly basis, the Company has the option to pay interest due in cash or in
stock. The senior secured convertible notes were secured by
substantially all of the Company’s assets. The total warrants issued pursuant to
this transaction were 1,000,000 on a pro-rata basis to investors. These include
class A warrants to purchase 500,000 common stock at $5.48 per share and class B
warrants to purchase an additional 500,000 shares of common stock at $6.32 per
share. The warrants vested immediately and expire in three years. The senior
secured convertible note holders have the option to convert the note into shares
of the Company’s common stock at $4.21 per share at any time prior to maturity.
If, before maturity, the Company consummates a Financing of at least $10,000,000
then the principal and accrued unpaid interest of the senior secured convertible
notes shall be automatically converted into shares of the Company’s common stock
at $4.21 per share.
BLUEFIRE
ETHANOL FUELS, INC. AND SUBSIDIARY
(A
DEVELOPMENT-STAGE COMPANY)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The fair
value of the warrants was approximately $3,500,000 as determined by the
Black-Scholes option pricing model using the following weighted-average
assumptions: volatility of 118%, risk-free interest rate of 4.05%, dividend
yield of 0% and a term of three years. The proceeds were allocated
between the senior secured convertible notes and the warrants issued to the
convertible note holders based on their relative fair values and resulted in
$728,571 being allocated to the senior secured convertible promissory notes and
$1,279,429 allocated to the warrants. The resulting discount was to be amortized
over the life of the notes.
In
accordance with EITF 98-05 “Accounting for Convertible Securities with
Beneficial Conversion Features or Contingently Adjustable Conversion Ratios”, as
amended by EITF 00-27, the Company calculated the value of the beneficial
conversion feature to be approximately $1,679,000 of which approximately
$728,000 was allocated to the beneficial conversion feature resulting in 100%
discount to the convertible promissory notes. During the year ended December 31,
2007, the Company amortized approximately $312,000 of the discount related to
the warrants and beneficial conversion feature to interest expense and
$1,688,000 to loss on extinguishment, see below for discussion.
In
addition, the Company entered into a registration rights agreement with the
holders of the senior secured convertible notes agreement whereby the Company is
required to file an initial registration statement on Form SB-2 or Form S-3 with
the Securities and Exchange Commission in order to register the resale of the
maximum amount of common stock underlying the secured convertible notes within
120 days of the Exchange Agreement (December 19, 2007). The
registration statement was filed with the SEC on December 19,
2007. The registration statement must then be declared effective no
later than 90 calendar days (March 18, 2008), in the event of a full or no
review by the Securities and Exchange Commission, days from the initial filing
date.
In the
event that the Company fails to have the registration statement declared
effective by the SEC by the dates described above, or fails to maintain on the
registration statement the effectiveness of the registration statement
thereafter, then the Company must pay the Holders an amount equal to 2% of the
aggregate purchase price paid by each Holder, for each month the registration
statement remains uncured. Liquidated damages cannot exceed 15% of
the face amount of the senior secured convertible notes. No accrual
has been made to the accompanying financial statements as management does not
believe that such damages are probable of being incurred.
Modification
of Conversion Price and Warrant Exercise Price on Senior Secured Convertible
Note Payable
On
December 3, 2007, the Company modified the conversion price into common stock on
its outstanding senior secured convertible notes from $4.21 to $2.90 per share.
The Company also modified the exercise price of the Class A and B warrants
issued with convertible notes from $5.48 and $6.32, respectively, to $2.90 per
share.
In
accordance with EITF 96-19 and EITF 06-6, the Company recorded an extinguishment
loss of approximately $2,818,000 for the modification of the conversion price as
the fair value of the conversion price immediately before and after the
modification was greater than 10% of the carrying amount of the original debt
instrument immediately prior to the modification. The loss on
extinguishment was determined based on the difference between the fair value of
the new instruments issued and the previous carrying value of the convertible
debt at the date of extinguishment. Upon modification, the carrying amount of
the senior secured convertible notes payable of $2,000,000 and accrued interest
of approximately $33,000 was converted into a total of 700,922 shares of common
stock at $2.90 and $2.96 per share, respectively. Prior to the
modification, during the quarter ended September 30, 3007, the Company satisfied
its interest obligation of approximately $20,000 by issuing 3,876 shares of the
Company’s common stock at $4.48 per share in lieu of cash.
BLUEFIRE
ETHANOL FUELS, INC. AND SUBSIDIARY
(A
DEVELOPMENT-STAGE COMPANY)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Debt
Issuance Costs
Debt
issuance fees and expenses of approximately $207,000 have been incurred in
connection with the senior secured convertible note. These fees consist of a
cash payment of $100,000 and the issuance of warrants to purchase 23,731 shares
of common stock. The warrants have an exercise price of $5.45, vest immediately
and expire in five years. The warrants were valued at approximately $107,000 as
determined by the Black-Scholes option pricing model using the following
weighted-average assumptions: volatility of 118%, risk-free interest rate of
4.05%, dividend yield of 0% and a term of five years. These costs were amortized
over the term of the note using the effective interest method and expensed upon
conversion of senior secured convertible note. During the year ended
December 31, 2007, the Company amortized approximately $32,000 of the debt
issuance costs to interest expense and approximately $175,000 to loss on
extinguishment, see above for further discussion.
NOTE
6 - COMMITMENTS AND CONTINGENCIES
Employment
Agreements
On June
27, 2006, the Company entered into employment agreements with three key
employees. The employment agreements are for a period of three years, with
prescribed percentage increases beginning in 2007 and can be cancelled upon a
written notice by either employee or employer (if certain employee acts of
misconduct are committed). The total aggregate annual amount due under the
employment agreements is approximately $520,000 per year.
Board
of Director Arrangements
On July
7, 2007, the Company entered into an agreement with two Directors to serve on
the Company’s Board. Under the terms of the agreement the individuals
will receive annual compensation in the amount of $5,000 and a one-time grant of
5,000 shares of the Company’s common stock. In addition, the Company
renewed three of its existing Directors appointment, issued 1,000 shares to each
and paid $5,000 to the one outside member. Pursuant to the Board of
Director agreements, the Company’s “in-house” board members (CEO and
Vice-President) waived their annual cash compensation of $5,000. The
value of the common stock granted was determined to be approximately $66,000
based on the fair market value of the Company’s common stock of $5.07 on the
date of the grant. During the year ended December 31, 2007, the
Company expensed approximately $81,000 related to the agreements.
On June
27, 2006, the Company entered into an agreement with four individuals to join
the Company’s board of directors. Under the terms of the agreement the
individuals will receive annual compensation in the amount of $5,000 and
received a one-time grant of 5,000 shares of the Company’s common
stock. The value of the common stock granted was determined to be
approximately $67,000 based on the estimated fair market value of the Company’s
common stock over a reasonable period of time near the date of
grant. During the year ended December 31, 2006, the Company expensed
approximately $87,000 related to the agreements.
Investor
Relations Agreements
On
November 9, 2006, the Company entered into an agreement with a consultant. Under
the terms of the agreement, the Company is to receive investor relations and
support services in exchange for a monthly fee of $7,500, 150,000 shares of
common stock, warrants to purchase 200,000 shares of common stock at $5.00 per
share, expiring in five years, and the reimbursement of certain travel expenses.
The common stock and warrants vested in equal amounts on November 9, 2006,
February 1, 2007, April 1, 2007 and June 1, 2007. The Company accounted for the
agreement under the provisions of EITF 96-18.
BLUEFIRE
ETHANOL FUELS, INC. AND SUBSIDIARY
(A
DEVELOPMENT-STAGE COMPANY)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
At
December 31, 2006, the consultant was vested in 37,500 shares of common
stock. The shares were valued at $112,000 based upon the closing
market price of the Company’s common stock on the vesting date. The warrants
were valued on the vesting date at $100,254 based on the Black-Scholes option
pricing model using the following assumptions: volatility of 88%, expected life
of five years, risk free interest rate of 4.75% and no dividends. The value of
the common stock and warrants was recorded in general and administrative expense
on the accompanying statement of operations.
On March
31, 2007, the fair value of the vested common stock issuable under the contract
based on the closing market price of the Company’s common stock was $7.18 per
share and thus expensed $269,250. As of March 31, 2007, the Company estimated
the fair value of the vested warrants issuable under the contract to be $6.11
per share. The warrants were valued on March 31, 2007 based on the Black-Scholes
option pricing model using the following assumptions: volatility of 114%,
expected life of five years, risk free interest rate of 4.58% and no dividends.
The Company recorded an additional estimated expense of approximately $305,000
related to the remaining unvested warrants.
The
Company revalued the shares on June 1, 2007, vesting date, and recorded an
additional adjustment of $234,375. On of June 1, 2007 the warrants were revalued
at $5.40 per share based on the Black-Scholes option pricing method using the
following assumptions: volatility of 129%, expected life of four and a half
years, risk free interest rate of 4.97% and no dividends. The Company recorded
an additional expense of $269,839 related to these vested warrants during the
three months ended June 30, 2007.
During
the year ended December 31, 2007, total compensation expense related to the
common stock and warrants was $642,500 and $733,264, respectively.
On
December 18, 2006, the Company entered into a consulting agreement with two
individuals. Each consultant shall support the strategic, financial
and market objectives of the Company. Under the terms of the
agreement each consultants received 20,000 restricted shares of the Company’s
common stock. The value of each of the individuals common stock was
determined to be approximately $73,000 based on the closing market price of the
Company’s common stock on the date of the agreement and was expensed to general
and administrative expenses on the accompanying statement of operations. The
shares vested immediately and are not at risk for forfeiture.
Professional
Services Agreement
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 pilot
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 December 31, 2007, the Company has incurred total
costs of $970,000 of which all were expensed under project development on the
accompanying statement of operations.
BLUEFIRE
ETHANOL FUELS, INC. AND SUBSIDIARY
(A
DEVELOPMENT-STAGE COMPANY)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
7 -STOCKHOLDERS’ EQUITY
Founders
Shares
In March
2006, upon incorporation BlueFire Ethanol, Inc. issued 10,000 shares of $1.00
par value common stock to various individuals. The shares were recorded at their
par value of $10,000 and expensed. In connection with the reverse acquisition,
as discussed in Note 2, these individuals received an aggregate of 17,000,000
shares of Sucre’s common stock with a par value of $0.001 per share. At the time
of the transaction, BlueFire Ethanol, Inc. did not have sufficient paid-in
capital to reclass the additional par value of the common shares to common
stock, thus the Company expensed an additional $7,000 during the period from
March 28, 2006 (Inception) to December 31, 2006. The amounts were recorded as
general and administrative expense on the accompanying statement of operations
for the period from March 28, 2006 (Inception) to December 31,
2006..
In
connection with the acquisition of Sucre, the Company incurred legal costs of
$3,550. The costs have been treated as a reduction of additional paid-in capital
during the period from March 28, 2006 (Inception) to December 31,
2006.
Financing
Prior to Reverse Acquisition .
Prior to
the reverse acquisition, Sucre entered into an agreement with an investor for
the sale of 3,000,000 shares of the Sucre’s common stock for gross proceeds of
$1,000,000. The previous management of Sucre erroneously issued 4,000,000 shares
of Sucre’s common stock to the investor. To date, the excess shares of 1,000,000
have not been returned to the transfer agent. The Company has demanded the
return of the 1,000,000 and is actively pursuing every possible channel to get
the shares returned. Since the Company cannot predict the ultimate outcome, the
1,000,000 shares have been accounted for as outstanding and included in the
common shares retained by Sucre shareholders. At the time of the reverse
acquisition, Sucre had $690,000 in cash as reflected in the accompanying
statements of stockholders deficit.
Amended
and Restated 2006 Incentive and Nonstatutory Stock Option Plan
On
December 14, 2006, the Company established the 2006 incentive and nonstatutory
stock option plan (the “Plan”). The Plan is intended to further the growth and
financial success of the Company by providing additional incentives to selected
employees, directors, and consultants. Stock options granted under the Plan may
be either “Incentive Stock Options,” or “Nonstatutory Options” at the discretion
of the Board of Directors. The total number of shares of Stock which may be
purchased through exercise of Options granted under this Plan shall not exceed
ten million (10,000,000) shares, they become exercisable over a period of no
longer than five (5) years and no less than 20% of the shares covered thereby
shall become exercisable annually.
On
October 16, 2007, the Board reviewed the Plan. As such, it determined
that the Plan was to be used as a comprehensive equity incentive program for
which the Board serves as the Plan administrator; and therefore added the
ability to grant restricted stock awards under the Plan.
Under the
amended and restated Plan, an eligible person in the Plan 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, 2007, 3,307,159 options and
113,000 shares have been issued under the plan. As of December 31, 2007,
6,559,841 shares are still issuable under the Plan.
On
December 14, 2006, the Company granted options to purchase 1,990,000 shares of
common stock to various employees and consultants having a $2.00 exercise price.
The value of the options granted was determined to be approximately $4,900,000
based on the Black-Scholes option pricing model using the following assumptions:
volatility of 99%, expected life of five years, risk free interest rate of
4.73%, market price per share of $3.05, and no dividends. The Company is
currently expensing the value of the common stock over the vesting period of two
years for the employees under SFAS 123 (R). For non-employees the Company is
revaluing the fair market value of the options at each reporting period under
the provisions of EITF 96-18.
BLUEFIRE
ETHANOL FUELS, INC. AND SUBSIDIARY
(A
DEVELOPMENT-STAGE COMPANY)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
On
December 20, 2007, the Company granted options to purchase 1,038,750 shares of
the Company’s common stock to various employees and consultants having an
exercise price of $3.20 per share. In addition, on the same date, the Company
granted its President and Chief Executive Officer 250,000 and 28,409 options to
purchase shares of the Company’s common stock having an exercise price of $3.20
and $3.52, respectively. The aggregate value of the options granted
on this date was determined to be approximately $3,482,000 based on the
Black-Scholes option pricing model using the following assumptions: volatility
of 122.9%, expected life of five years, risk free interest rate of 3.09%, market
price per share of $3.20, and no dividends. Of the total 1,317,159 options
granted on December 20, 2007, 739,659 vested immediately 27,500 issued to
consultants vest monthly over a one year period, and 550,000 of the options vest
contingent upon two future events. In connection with the initial
options, the Company expensed approximately $2,082,000. Management’s
belief is that the event is probable to occur and is within their control, and
thus accounted for the remaining vesting under SFAS 123(R) by straight-lining
the remaining compensation through the expected date on which the future event
is to occur. Management believes that future date will be June 30,
2008. The Company accounts for the stock options to consultants under the
provisions of EITF 96-18.
In
accordance with EITF 96-18, as of December 31, 2007, the options awarded to
consultants under the 2007 stock option grant were re-valued using the
Black-Scholes option pricing model with the following assumptions: volatility of
124.0%, expected life of five years, risk free interest rate of 3.05% and no
dividends.
In
connection with the Company’s 2007 and 2006 stock option awards, during the year
ended December 31, 2007 and for the period from March 28, 2006 (Inception) to
December 31, 2006, the Company amortized stock-based compensation, including
consultants, of approximately $2,452,000 and $112,000 to general and
administrative expenses and $2,287,000 and $2,500 to project development
expenses, respectively. Related to these the 2007 and 2006 options awards, the
Company will record estimated future compensation expense of approximately
$3,721,000 during the year ending December 31, 2008.
A summary
of the status of the stock option grants under the Plan as of the year ended
December 31, 2007 and changes during this period is presented as
follows:
|
Options
|
|
Weighted
Average Exercise Price
|
|
Weighted
Average Remaining Contractual Term (Years)
|
|
Aggregate
Intrinsic Value
|
|
|
|
|
|
|
|
|
Outstanding
January 1, 2007
|
|
1,990,000
|
|
$
|
2.00
|
|
|
|
|
Granted
during the year
|
|
1,317,159
|
|
|
3.21
|
|
|
|
|
Exercised
during the year
|
|
(20,000
|
|
|
2.00
|
|
|
|
|
Outstanding
December 31, 2007
|
|
3,287,159
|
|
$
|
2.48
|
|
4.40
|
|
$
|
4,162,847
|
Options
exercisable at
December
31, 2007
|
|
1,724,659
|
|
$
|
2.52
|
|
4.43
|
|
$
|
2,121,472
|
Options
expected to vest at
December
31, 2007
|
|
3,287,159
|
|
$
|
2.48
|
|
4.40
|
|
$
|
4,162,847
|
BLUEFIRE
ETHANOL FUELS, INC. AND SUBSIDIARY
(A
DEVELOPMENT-STAGE COMPANY)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The total
amount of cash received from the exercise of stock options and the total
intrinsic value of options exercised during the year ended December 31, 2007,
was $40,000 and $35,000, respectively.
Private
Offerings of Common Stock
On
January 5, 2007, the Company completed a private offering of its stock, and
entered into subscription agreements with four accredited
investors. In this offering, the Company sold an aggregate of 278,500
shares of the Company’s common stock at a price of $2.00 per share for total
proceeds of $557,000. The shares of common stock were offered and
sold to the investors in private placement transactions made in reliance upon
exemptions from registration pursuant to Section 4(2) under the Securities Act
of 1933. In addition, the Company paid $12,500 in cash and issued 6,250 shares
of their common stock as a finder’s fee.
On
December 3, 2007 and December 14, 2007, the Company issued an aggregate of
5,740,741 shares of common stock at $2.70 per share and issued warrants to
purchase 5,740,741 shares of common stock for gross proceeds of
$15,500,000. The warrants have an exercise price of $2.90 per share
and expire five years from the date of issuance.
The value
of the warrants was determined to be approximately $15,968,455 based on the
Black-Scholes option pricing model using the following assumptions: volatility
of 122.9%, expected life of five (5) years, risk free interest rate of 3.28%,
market price per share of $3.26, and no dividends. The relative fair
value of the warrants did not have an impact on the financial statements as they
were issued in connection with a capital raise and recorded as additional
paid-in capital.
In
connection with the capital raise, the Company paid $1,050,000 to placement
agents, $90,000 in legal fees and issued warrants for the purchase of 222,222
shares of common stock. The warrants were valued at $618,133 based on the
Black-Scholes assumptions above as recorded as as a cost of the capital raised
by the Company.
Issuance
of Common Stock related to Employment Agreements
In
January 2007, the Company issued 10,000 shares of common stock to an employee in
connection with an employment agreement. The shares were valued on
the initial date of employment at $40,000 based on the closing market of the
Company’s common stock on that date.
On
February 12, 2007, the Company entered into an employment agreement with a key
employee, and simultaneously entered into a consulting agreement with an entity
controlled by such employee; both agreements were effective March 16, 2007.
Under the terms of the consulting agreement, the consulting entity received
50,000 restricted shares of the Company’s common stock. The common stock was
valued at approximately $275,000 based on the closing market price of the
Company’s common stock on the date of the agreement. The shares vest in equal
quarterly installments on February 12, 2007, June 1, December 1, and December 1,
2007. The Company amortized the entire fair value of the common stock of
$275,000 over the vesting period during the year ended December 31,
2007.
Private
Placement Agreements
During
the year ended December 31, 2007, the Company entered into various placement
agent agreements, whereby payments are only ultimately due if capital is raised.
As of December 31, 2007, no other amounts are due under the
agreements.
BLUEFIRE
ETHANOL FUELS, INC. AND SUBSIDIARY
(A
DEVELOPMENT-STAGE COMPANY)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Warrants Outstanding
A summary
of the status of the warrants as of the year ended December 31, 2007 and changes
during this period is presented as follows:
|
|
Warrants
|
|
Weighted
Average Exercise Price
|
|
Weighted
Average Remaining Contractual Term
(Years)
|
|
|
|
|
|
|
|
Outstanding
January 1, 2007
|
|
|
200,000
|
|
$
|
5.00
|
|
|
Issued
during the year
|
|
|
7,186,694
|
|
|
2.96
|
|
|
Outstanding
and exercisable at December 31, 2007
|
|
|
7,386,694
|
|
$
|
3.02
|
|
|
4.60
|
Technology
Agreement with Arkenol, Inc.
On March
1, 2006, the Company entered into a Technology License agreement with Arkenol,
Inc. (“Arkenol”), which the Company’s majority shareholder and other family
members hold an interest in. Arkenol has its own management and board separate
and apart from the Company. According to the terms of the agreement, the Company
was granted an exclusive, non-transferable, North American license to use and to
sub-license the Arkenol technology. The Arkenol Technology, onverts
cellulose and waste materials into Ethanol and other high value chemicals. As
consideration for the grant of the license, the Company shall make a one time
payment of $1,000,000 at first project construction funding and for each plant
make the following payments: (1) royalty payment of 4% of the gross sales price
for sales by the Company or its sub licensees of all products produced from the
use of the Arkenol Technology (2) and a one time license fee of $40.00 per 1,000
gallons of production capacity per plant. According to the terms of the
agreement, the Company made a one-time exclusivity fee prepayment of $30,000
during the period ended December 31, 2006. As of December 31, 2007, the amount
has been reflected as a long-term prepaid asset as the Company does not expect
to incur any liabilities under this agreement prior to one year from the balance
sheet date. As of December 31, 2007, the Company had not incurred any
liabilities related to the agreement.
Asset
Transfer Agreement with Ark Entergy, Inc.
On March
1, 2006, the Company entered into an Asset Transfer and Acquisition Agreement
with ARK Energy, Inc. (“ARK Energy”), which is owned (50%) by the Company’s CEO.
ARK Energy has its own management and board separate and apart from the Company.
Based upon the terms of the agreement, ARK Energy transferred certain rights,
assets, work-product, intellectual property and other know-how on project
opportunities that may be used to deploy the Arkenol technology (as described in
the above paragraph). In consideration, the Company has agreed to pay a
performance bonus of up to $16,000,000 when certain milestones are met. These
milestones include transferee’s project implementation which would be
demonstrated by start of the construction of a facility or completion of
financial closing whichever is earlier. The payment is based on ARK Energy’s
cost to acquire and develop 19 sites which are currently at different stages of
development. As of December 31, 2007, the Company had not incurred any
liabilities related to the agreement.
BLUEFIRE
ETHANOL FUELS, INC. AND SUBSIDIARY
(A
DEVELOPMENT-STAGE COMPANY)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Related
Party Promissory Note
In
addition, on December 12, 2006 the Company entered into a $91,000 promissory
note with the Company’s Chairman, CEO and majority shareholder. Under the terms
of the note, the Company is to repay any principal balance within 30 days of
receiving a qualified investment financing and a mandatory 10% interest fee of
$9,100. In January 2007 the Company borrowed an additional $25,000 and incurred
a 10% interest fee of $2,500. In January 2007, the Company paid back
loan amounts of $116,000 and accrued interest of $11,600.
Related
Party Line of Credit
In March
2007, the Company obtained a line of credit in the amount of $1,500,000 from its
Chairman/Chief Executive Officer and majority shareholder to provide additional
liquidity to the Company as needed. Under the terms of the note, the Company is
to repay any principal balance and interest, at 10% per annum, within 30 days of
receiving qualified investment financing of $5,000,000 or more. As of December
31, 2007, the Company repaid its outstanding balance on line of credit of
approximately $631,000 which included interest of $37,800. As of December 31,
2007 $1,500,000 was available on the line of credit.
Purchase
of Property and Equipment
During
the year ended December 31, 2007, the Company purchased various office furniture
and equipment from ARK Energy costing approximately $39,000 (see Note
3).
Notes
Payable
As
mentioned in Note 3, on July 13, 2007, the Company issued several convertible
notes aggregating a total of $500,000 with eight accredited investors including
$25,000 invested by the Company’s Chief Financial Officer.
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’s deferred tax assets consist solely of net operating loss carry
forwards of approximately $3,347,000. For federal tax purposes these
carry forwards expire beginning 2026 and for the State of California purposes
they expire beginning 2011. A full valuation allowance has been placed on 100%
of the Company’s deferred tax assets as it cannot be determined if the assets
will be ultimately used. During the year ended December 31, 2007 and
for the period from March 28, 2006 (Inception) to December 31, 2006, the
valuation allowance increased by $3,002,000 and $345,000,
respectively.
In
addition, the Company is not current in their federal and state income tax
filings due to previous delinquencies by Sucre prior to the reverse acquisition.
The Company is currently assessing how delinquent the filings are. However, the
effect of non filing is not expected to be significant, as Sucre has not had
active operations for a significant period of time.
BlueFire
Ethanol Fuels, Inc.
9,693,840
Shares
__________________________
PROSPECTUS
__________________________
[____] __,
2008
PART
II
INFORMATION
NOT REQUIRED IN PROSPECTUS
Item
24. Indemnification of Directors and Officers.
The
Company's Amended and Restated Bylaws provide for indemnification of directors
and officers against certain liabilities. Officers and directors of the Company
are indemnified generally for any threatened, pending or completed action, suit
or proceeding, whether civil, criminal, administrative or investigative, except
an action by or in the right of the corporation, against expenses, including
attorneys' fees, judgments, fines and amounts paid in settlement actually and
reasonably incurred by him in connection with the action, suit or proceeding if
he acted in good faith and in a manner which he reasonably believed to be in or
not opposed to the best interests of the corporation, and, with respect to any
criminal action or proceeding, has no reasonable cause to believe his conduct
was unlawful.
The
Company's Amended and Restated Articles of Incorporation further provides the
following indemnifications:
(a) a
director of the Corporation shall not be personally liable to the Corporation or
to its shareholders for damages for breach of fiduciary duty as a director of
the Corporation or to its shareholders for damages otherwise existing for (i)
any breach of the director's duty of loyalty to the Corporation or to its
shareholders; (ii) acts or omission not in good faith or which involve
intentional misconduct or a knowing violation of the law; (iii) acts revolving
around any unlawful distribution or contribution; or (iv) any transaction from
which the director directly or indirectly derived any improper personal benefit.
If Nevada Law is hereafter amended to eliminate or limit further liability of a
director, then, in addition to the elimination and limitation of liability
provided by the foregoing, the liability of each director shall be eliminated or
limited to the fullest extent permitted under the provisions of Nevada Law as so
amended. Any repeal or modification of the indemnification provided in these
Articles shall not adversely affect any right or protection of a director of the
Corporation under these Articles, as in effect immediately prior to such repeal
or modification, with respect to any liability that would have accrued, but for
this limitation of liability, prior to such repeal or modification.
(b) the
Corporation shall indemnify, to the fullest extent permitted by applicable law
in effect from time to time, any person, and the estate and personal
representative of any such person, against all liability and expense (including,
but not limited to attorney's fees) incurred by reason of the fact that he is or
was a director or officer of the Corporation, he is or was serving at the
request of the Corporation as a director, officer, partner, trustee, employee,
fiduciary, or agent of, or in any similar managerial or fiduciary position of,
another domestic or foreign corporation or other individual or entity of an
employee benefit plan. The Corporation shall also indemnify any person who is
serving or has served the Corporation as a director, officer, employee,
fiduciary, or agent and that person's estate and personal representative to the
extent and in the manner provided in any bylaw, resolution of the shareholders
or directors, contract, or otherwise, so long as such provision is legally
permissible.
Insofar
as indemnification for liabilities arising under the Securities Act, as amended,
may be permitted to our directors, officers, and controlling persons pursuant to
the foregoing provisions, or otherwise, we have been advised that in the opinion
of the SEC such indemnification is against public policy as expressed in the
Securities Act and is therefore unenforceable.
Item
25. Other Expenses of Issuance and Distribution.
The
estimated expenses payable by us in connection with the registration of the
shares is as follows:
|
SEC
Registration
|
|
$
|
2,500
|
|
|
Accounting
Fees and Expenses
|
|
$
|
10,000
|
|
|
Legal
Fees and Expenses
|
|
$
|
50,000
|
|
|
Printing
Costs
|
|
$
|
2,500
|
|
|
Miscellaneous
Expenses
|
|
$
|
10,000
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
Item
26. Recent Sales of Unregistered Securities.
In March
2006, upon incorporation, we issued 10,000 shares of $1.00 par value common
stock to various individuals. In connection with the Reverse Merger, these
individuals received an aggregate of 17,000,000 shares of our restricted common
stock.
Prior to
the Reverse Merger, Sucre entered into an agreement with two related investors
for the sale of 3,000,000 free trading shares of the Sucre’s common stock for
gross proceeds of $1,000,000. The previous management of Sucre erroneously
issued 4,000,000 shares of the Sucre’s common stock to the investors. To date,
the excess shares of 1,000,000 have not been returned to the transfer agent. We
have demanded the return of the 1,000,000 and are actively pursuing every
possible channel to get the shares returned. Since we cannot predict the
ultimate outcome, the 1,000,000 shares have been accounted for as outstanding
and included in the common shares retained by Sucre’s stockholders. These
securities were issued exempt from registration pursuant to Rule 504 of
Regulation D of the Securities Act of 1933 as amended.
Convertible
Notes Payable
On July
13, 2007, we issued several convertible notes aggregating a total of $500,000
with seven accredited investors, including $25,000 from our Chief Financial
Officer. Under the terms of the notes, we are required to repay any principal
balance and interest, at 10% per annum within 120 days of the note. The
convertible promissory note is convertible only upon default. The holders also
received warrants to purchase common stock at $5.00 per share. The warrants vest
immediately and expire in five years. The total warrants issued pursuant to this
transaction were 200,000 on a pro-rata basis to investors. The convertible
promissory notes are only convertible into shares of our common stock in the
event of a default. The conversion price is determined based on one third of the
average of the last-trade prices of our common stock for the ten trading days
preceding the default date. On November 7, 2007, we re-paid all of our 10%
convertible promissory notes dated July 13, 2007, to all our private investors,
totaling approximately $516,000, including interest of approximately $16,000.
This private offering was completed as an offering exempt from registration
pursuant to Section 4(2) of the Securities Act of 1933.
Senior
Secured Convertible Notes Payable
On August
21, 2007, we issued senior secured convertible notes (the “Convertible Notes”)
aggregating a total of $2,000,000 with two institutional accredited investors.
Under the terms of the Convertible Notes, we are required to repay any principal
balance and interest, at 8% per annum, due August 21, 2009. On a quarterly
basis, we have the option to pay interest due in cash or in stock. The
Convertible Notes are secured by substantially all of our assets. The total
warrants issued pursuant to this transaction were 1,000,000 on a pro-rata basis
to investors. These include class A warrants to purchase 500,000 common stock at
$5.48 per share and class B warrants to purchase an additional 500,000 shares of
common stock at $6.32 per share. The warrants vest immediately and expire in
three years. The holders of the Convertible Notes have the option to convert the
Convertible Notes into shares of our common stock at $4.21 per share at any time
prior to maturity. If, before maturity, we consummate a financing of at least
$10,000,000, then the principal and accrued unpaid interest of the Convertible
Notes shall be automatically converted into shares of our common stock at $4.21
per share. In addition, we entered into a registration rights agreement with the
holders of the Convertible Notes whereby we are required to file an initial
registration statement on Form SB-2 or Form S-3 with the SEC in order to
register the resale of the maximum amount of common stock underlying the
Convertible Notes within 120 days of the agreement (December 19, 2007). The
registration statement must then be declared effective no later than 90 calendar
days (March 18, 2008), in the event of a full or no review by the SEC, days from
the initial filing date.
In the
event that we fail to file a registration statement within the 120 day period,
we must pay the holder 3% of the face amount as liquidated damages. In the event
that we fail to have the registration statement declared effective by the SEC by
the dates described above, or fail to maintain on the registration statement the
effectiveness of the registration statement thereafter, then we must pay the
holders an amount equal to 2% of the aggregate purchase price paid by each
holder, for each month the registration statement remains uncured. In addition,
if we do not complete a qualified financing within 120 days of the a (December
19, 2007), we must pay the holder an additional 1% of the face amount as
liquidated damages. Liquidated damages cannot exceed 15% of the face amount of
the Convertible Notes. No accrual has been made to the accompanying financial
statements as management does not believe that such damages are probable of
being incurred.
On
December 3, 2007 and December 14, 2007, we consummated an agreement to issue up
to 5,740,741 shares of common stock and warrants to purchase 5,740,741 shares of
common stock for net proceeds of $14,360,000 (the “December Private Placement”).
The warrants have an exercise price of $2.90 per share and expire five years
from the date of issuance.
In
connection with the December Private Placement, we modified the conversion price
of our previously issued 8% Senior Secured Convertible Promissory Notes
(“Convertible Notes”) from $4.21 to $2.90 per share. We also modified the
exercise price of the class “A” and class “B” warrants issued with the
Convertible Notes from $5.48 and $6.32, respectively to $2.90 per
share.
On
December 14, 2007, the holders of the Convertible Notes converted their
outstanding principal balance of $2,000,000 and accrued interest of
$33,333 into 700,922 shares of common stock.
Equity
Offering
On
December 3, 2007 and December 14, 2007, the Company consummated an agreement to
issue up to 5,740,741 shares of common stock and warrants to purchase 5,740,741
shares of common stock for aggregate proceeds of $14,360,000. The warrants have
an exercise price of $2.90 per share and expire five years from the date of
issuance.
In
addition, the Company entered into a registration rights agreement with the
investors whereby the Company is required to file an initial registration
statement on Form SB-2 (or another applicable registration form) with the SEC in
order to register the resale of the above common stock and warrants to purchase
common stock. The registration statement is required to be filed within 45 days
from December 14, 2007. The registration statement must then be declared
effective no later than 150 calendar days (May 12, 2008) from the initial filing
date.
The
Company also agreed to register the conversion shares and shares underlying the
warrants issued in connection with its previously Convertible Notes. The details
of the registration rights of the Convertible Notes can be found in the
Company’s August 28, 2007 8-K.
In the
event the Company fails to file its initial registration statement within the 45
day period or, in the event that the Company fails to have the registration
statement declared effective by the SEC by the dates described above, then the
Company must pay the investors certain liquidated damages.
Item
27. Exhibits.
Exhibit
No.
|
|
Description
|
|
|
|
2.1
|
|
Stock
Purchase Agreement and Plan of Reorganization dated May 31, 2006, filed
December 13, 2006 (1)
|
|
|
|
3.1
|
|
Amended
and Restated Articles of Incorporation dated July 2, 2006, filed December
13, 2006 (1)
|
|
|
|
3.2
|
|
Amended
and Restated Bylaws dated May 27, 2006, filed December 13, 2006
(1)
|
|
|
|
4.1
|
|
Form
of Promissory Note (2)
|
|
|
|
4.2
|
|
Form
of Subscription Agreement (2)
|
|
|
|
4.3
|
|
Description
of Promissory Note dated July 13, 2007 (4)
|
|
|
|
4.4
|
|
Form
of Convertible Promissory Note dated August 22, 2007
(5)
|
|
|
|
4.5
|
|
Form
of Warrant Agreement dated August 22, 2007 (5)
|
|
|
|
4.6
|
|
Stock
Purchase Agreement dated December 3, 2007 (7)
|
|
|
|
4.7
|
|
Securities
Purchase Agreement dated December 14, 2007 (7)
|
|
|
|
4.8
|
|
Form
of Warrant dated December 14, 2007 (7)
|
|
|
|
5.1
|
|
Opinion
of Scott D. Olson, Esq. as to the validity of the common stock
(8)
|
|
|
|
10.1
|
|
Form
Directors Agreement, filed December 13, 2006 (1)
|
|
|
|
10.2
|
|
Form
Executive Employment Agreement, filed December 13, 2006
(1)
|
|
|
|
10.3
|
|
Arkenol
Technology License Agreement, dated March 1, 2006, filed December 13, 2006
(1)
|
|
|
|
10.4
|
|
ARK
Energy Asset Transfer and Acquisition Agreement, dated March 1, 2006,
filed December 13, 2006 (1)
|
|
|
|
10.5
|
|
Form
of the Consulting Agreement (2)
|
|
|
|
10.6
|
|
Amended
and Restated 2006 Incentive and Nonstatutory Stock Option Plan, dated
December 13, 2006 (6)
|
|
|
|
10.7
|
|
CFO
Employment Agreement (3)
|
|
|
|
14.1
|
|
Code
of Ethics (10)
|
|
|
|
21.1
|
|
List
of Subsidiaries (3)
|
|
|
|
23.1
|
|
Consent
of McKennon Wilson & Morgan LLP (8)
|
|
|
|
23.2
|
|
Consent
of Scott D. Olson, Esq. (included in opinion set forth in Exhibit 5.1
hereto)
|
|
|
|
24.1
|
|
Power
of Attorney (9)
|
|
|
|
99.1
|
|
Audit
Committee Charter (2)
|
|
|
|
99.2
|
|
Compensation
Committee Charter (2)
|
(1)
Incorporated by reference to the Company’s Form 10-SB, as filed with the
SEC on December 13, 2006.
(2)
Incorporated by reference to the Company’s Form 10-SB/A, as filed with the SEC
on February 28, 2007.
(3)
Incorporated by reference to the Company’s Form 10-SB/A , as filed with the SEC
on April 17, 2007.
(4)
Incorporated by reference to the Company’s Form 8-K as filed with the SEC on
July 16, 2007.
(5)
Incorporated by reference to the Company’s Form 8-K as filed with the SEC on
August 28, 2007.
(6)
Incorporated by reference to the Company’s Form S-8, as filed with the SEC on
December 17, 2007.
(7)
Incorporated by reference to the Company’s Form 8-K, as filed with the SEC on
December 18, 2007.
(8) Filed
herewith.
(9)
Included on signature page of this Registration Statement.
(10) Incorporated
by reference to the Company’s Form 10K-SB, as filed with the SEC on February 28,
2008
Item
28. Undertakings.
The
undersigned Registrant hereby undertakes:
1) To
file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(a) To
include any prospectus required by Section 10(a)(3) of the Securities
Act;
(b)
Reflect in the prospectus any facts or events which, individually or together,
represent a fundamental change in the information in the registration statement.
Notwithstanding the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not exceed that
which was registered) any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed with the
SEC pursuant to ule 424(b) (Sec.230.424(b) of this chapter) if,
in the aggregate, the changes in volume and price represent no more than a 20%
change in the maximum aggregate offering price set forth in the “Calculation of
Registration Fee” table in the effective registration statement;
and
(c)
Include any additional or changed material information on the plan of
distribution.
2) That,
for the purpose of determining any liability under the Securities Act, each such
post-effective amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof.
3) To
remove from registration by means of post-effective amendment any of the
securities being registered which remain unsold at the termination of the
offering.
4) For
determining liability of the undersigned under the Securities Act to any
purchaser in the initial distribution of the securities, the undersigned
undertakes that in a primary offering of securities of the undersigned pursuant
to this registration statement, regardless of the underwriting method used to
sell the securities to the purchaser, if the securities are offered or sold to
such purchaser by means of any of the following communications, the undersigned
will be a seller to the purchaser and will be considered to offer or sell such
securities to such purchaser:
(i) Any
preliminary prospectus or prospectus of the undersigned relating to the offering
required to be filed pursuant to Rule 424;
(ii) Any
free writing prospectus relating to the offering prepared by or on behalf of the
undersigned or used or referred to by the undersigned;
(iii) The
portion of any other free writing prospectus relating to the offering containing
material information about the undersigned or its securities provided by or on
behalf of the undersigned; and
(iv) Any
other communication that is an offer in the offering made by the undersigned to
the purchaser.
Insofar
as indemnification for liabilities arising under the Securities Act may be
permitted to our directors, officers, and controlling persons pursuant to the
provisions described above in Item 24, or otherwise, we have been advised that
in the opinion of the SEC such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by us of the expenses incurred or paid by a director, officer or
controlling person in the successful defense of any action, suit or proceeding)
is asserted by such director, officer or controlling person in connection with
the securities being registered, we will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
SIGNATURES
In
accordance with the requirements of the Securities Act, BlueFire Ethanol Fuels,
Inc., the Registrant, certifies that it has reasonable grounds to believe that
it meets all of the requirements for filing on Form S-1 and authorized this
registration statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Irvine, California, on March 26,
2008.
|
BLUEFIRE
ETHANOL FUELS, INC.
|
|
|
|
|
|
By:
|
/s/
Arnold R. Klann
|
|
|
Arnold
R. Klann,
|
|
|
President
and Chief Executive Officer (Principal Executive
Officer)
|
|
|
|
|
|
|
|
By:
|
/s/Christopher
Scott
|
|
|
Christopher
Scott
|
|
|
Chief
Financial Officer (Principal Financial Officer and Principal Accounting
Officer)
|