NOTES TO UNAUDITED FINANCIAL STATEMENTS
SEPTEMBER 30, 2013
NOTE 1 – ORGANIZATION AND NATURE OF BUSINESS
BlueFire Equipment Corporation (“BFC” or the “Company”) was incorporated in Delaware on June 10, 2008. The Company has designed and manufactured a proprietary drill bit for use in the exploration and production of oil and gas. The Company generates revenue from the sale and lease of its products as well as after-sale service and repair. The Company’s corporate headquarters are located in Houston, Texas. In addition to its present product line, the Company intends to develop and commercialize additional products and technologies for the oil and gas industry.
On May 31, 2013, the Board of Directors of the Company effected a 2:1 forward split of the Company’s common stock. All share and per-share presentations in this report have been retroactively restated to reflect this forward split.
Summary of Significant Accounting Policies
Basis of Financial Statement Presentation
The Company prepares its financial statements in accordance with accounting principles generally accepted in the United States of America. The accompanying interim unaudited financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information in accordance with Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the Company’s opinion, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the nine-month period ended September 30, 2013 are not necessarily indicative of the results for the full year. While management of the Company believes that the disclosures presented herein are adequate and not misleading, these interim financial statements should be read in conjunction with the audited combined financial statements and the footnotes thereto for the period ended December 31, 2012.
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 disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments and other short-term investments with maturity of three months or less, when purchased, to be cash equivalents. The Company maintains cash and cash equivalent balances at one financial institution that is insured by the FDIC.
Inventory
The Company capitalizes new drill bit inventory at manufacturing costs plus refurbishment costs. These costs are amortized using industry standards of total average runs per bit. The inventory balance is stated net of amortization expense. Amortization is provided using the straight-line method over the estimated three refurbishment runs. Amortization expense is charged to Cost of Sales.
Accounts Receivable
Accounts receivable are stated at the amount billed to customers. Accounts receivable are due and payable upon receipt. Accounts are considered past due beyond the standard payment terms. The Company considers accounts receivable to be fully collectible; accordingly, no allowance for doubtful accounts is required.
Intangible Assets
The Company’s policy is to capitalize intellectual property related to the filing and acquisition of internally developed patents. The patent related expenses, such as legal fees and filing fees related to preparation, defense and filing of patent, are eligible for capitalization. The Company’s intangible assets are stated at cost, less accumulated amortization.
The Company reviews the recoverability of its long-lived assets on a periodic basis whenever events and changes in circumstances have occurred which may indicate a possible impairment. The assessment for potential impairment will be based primarily on the Company’s ability to recover the carrying value of its long-lived assets from expected future cash flows from its operations on an undiscounted basis. If such assets are determined to be impaired, the impairment recognized is the amount by which the carrying value of the assets exceeds the fair value of the assets.
Fair Value of Financial Instruments
The carrying amount reported in the balance sheets for cash and cash equivalents, accounts payable, and accrued expenses approximate fair value because of the immediate or short-term maturity of these financial instruments. The Company does not utilize derivative instruments.
Income Taxes
Deferred tax assets and liabilities are included in the financial statements at currently enacted income tax rates applicable to the period in which the deferred tax assets and liabilities are expected to be realized or settled as prescribed in FASB ASC 740, Accounting for Income Taxes. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. A valuation allowance is established to reduce deferred tax assets if it is more likely than not that a deferred tax asset will not be realized.
The Company applies the authoritative guidance in accounting for uncertainty in income taxes recognized in the financial statements. This guidance prescribes a two-step process to determine the amount of tax benefit to be recognized. First, the tax position must be evaluated to determine the likelihood that it will be sustained upon external examination. If the tax position is deemed “more-likely-than-not” to be sustained, the tax position is then assessed to determine the amount of benefit to recognize in the financial statements. The amount of the benefit that may be recognized is the largest amount that has a greater than 50% likelihood of being realized upon ultimate settlement.
Revenue Recognition
The Company recognizes revenue from the sale, lease, and refurbishment of drill bits. The criteria for recognition are as follows:
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Revenue from sale – recorded at cost when the drill bits have been shipped. The Company had made an agreement with the purchaser to sell bits at cost.
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Revenue from lease – recorded based upon the number of feet drilled. Revenue is recorded only after the product is used by the customer for the specific job booked. Upon completion of the job, the customer is billed based upon the agreed rates on a per footage basis.
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·
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Revenue from refurbishment – recorded when the refurbished item is shipped to the customers.
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Basic and Diluted Net Loss Per Common Share
Basic and diluted net loss per share calculations are calculated on the basis of the weighted average number of common shares outstanding during the periods presented. The per share amounts include the dilutive effect of common stock equivalents in years with net income. Basic and diluted loss per share is the same due to the anti-dilutive nature of potential common stock equivalents.
Stock Based Compensation
The Company accounts for stock-based employee compensation arrangements using the fair value method in accordance with the accounting provisions relating to share-based payments (“Codification Topic 718”). The company accounts for the stock options issued to non-employees in accordance with these provisions.
Recent Accounting Pronouncements
Recent accounting pronouncements issued by the FASB (including its EITF), the AICPA, and the SEC did not or are not believed by management to have a material impact on the Company's present or future financial statements.
BlueFire, LLC
On March 16, 2011 we entered into a joint venture agreement with two non-affiliates (the “JV Partners”) to form BlueFire LLC (“BFLLC”) in Oklahoma. On December 31, 2012, the members of BFLLC unanimously agreed to dissolve the joint venture to pursue other business interests. We owned 60% of BFLLC and acted as the managing member. The JV Partners owned the remaining 40% (20% each) and were responsible for the sales and marketing activities of BFLLC. The Company loaned $60,100 to BFLLC for its initial capitalization and the JV Partners funded an additional $40,000 to BFLLC during 2011.
As part of the dissolution of BFLLC, the cash then remaining in its bank accounts was distributed pro rata to the members of BFLLC, and the Company received a total of $52,600 in connection with the dissolution. BFLLC was dissolved as of December 31, 2012. Therefore, the accounts of BFLLC have been shown as discontinued operations in the financial statements.
NOTE 2 – GOING CONCERN
The Company sustained a loss of $287,098 for the nine months ended September 30, 2013, and does not have the resources at this time to repay its credit and debt obligations, make any payments in the form of dividends to its shareholders or fully implement its business plan. Without additional capital, the Company will not be able to remain in business.
In addition to operational expenses, as the Company executes its business plan, it is incurring expenses related to its public company reporting requirements. In order to finance these expenditures, the Company has raised capital in the form of debt, which will have to be repaid. The Company will need to raise capital in the next twelve months in order to remain in business.
Management anticipates that significant dilution will occur as the result of any future sales of the Company’s common stock and this will reduce the value of its outstanding shares. The Company cannot project the future level of dilution that will be experienced by investors as a result of its future financings, but it will significantly affect the value of its shares.
These factors raise a substantial doubt about the Company’s ability to continue as a going concern.
Management has plans to address the Company’s financial situation as follows:
In the near term, management plans to continue to focus on raising the funds necessary to fully implement the Company’s business plan. Management believes that certain shareholders will continue to advance the capital required to meet the Company’s financial obligations. There is no assurance, however, that these shareholders will continue to advance capital to the Company or that the new business operations will be profitable. The possibility of failure in obtaining additional funding and the potential inability to achieve profitability raise doubts about the Company’s ability to continue as a going concern.
In the long term, management believes that the Company’s projects and initiatives will be successful and will provide positive cash flow to the Company, which will be used to finance the Company’s future growth. However, there can be no assurances that the Company’s planned activities will be successful, or that the Company will ultimately attain profitability. The Company’s long-term viability depends on its ability to obtain adequate sources of debt or equity funding to meet current commitments and fund the continuation of its business operations and the ability of the Company to ultimately achieve adequate profitability and cash flows from operations to sustain its operations.
The accompanying financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result from the possible inability of the Company to continue as a going concern.
NOTE 3 – COMMON STOCK
Common Stock
On May 31, 2013, the Board of Directors of the Company effected a 2:1 forward split of the Company’s common stock. All share and per-share presentations in this report have been retroactively restated to reflect this forward split.
On January 15, 2012 the Company granted William Blackwell options to purchase 480,000 shares of common stock in connection with his employment agreement. The options vest at the rate of 20,000 per month and expire if not exercised within three years of the grant date. The exercise price of the options is $0.50. Upon the optionee's termination of employment, the non-vested portion of the options will lapse upon the date of such termination. The Company used a Black-Scholes calculation to value the options grant and determined the value of the grant to be zero.
On May 15, 2012, the Company filed a Registration Statement on Form S-1 with the Securities and Exchange Commission (“SEC”). The Form S-1 covered an offering of 15,000,000 shares of the Company’s common stock. The offering price was $0.005 per share. On July 24, 2012 the Form S-1 was declared effective by the SEC. In August and September 2012, the Company completed the offering, which was fully-subscribed and raised gross proceeds of $75,000. 400,000 shares of the offering were purchased by a related party. The Company used the proceeds from the offering for general working capital and administrative expenses.
NOTE 4 - NOTES PAYABLE
On April 1, 2011, BFC signed a promissory note with our then Chief Executive Officer and Director in the amount of $100,000. The note bears interest at a rate of 15%, was originally due and payable on April 1, 2012 and had no collateral. On March 31, 2012, the Company and Holder executed an amendment to the note extending the due date to April 1, 2013, removing from the note language allowing the conversion of the note into the Company’s common stock and amending the note to include a security interest over substantially all of our assets. On April 1, 2013, the Company and Holder again executed an amendment to the note extending the due date to October 1, 2013. On October 1, 2013, the Company and the Holder again executed an amendment to the note extending the due date until January 1, 2014.
On July 1, 2011 the father of our then Chief Executive Officer loaned us $25,000. The note is due 30 days from the date of demand for repayment is made to the Company and bears interest at the rate of 15% per annum provided that interest accrues at the rate of 18% per annum upon an event of default. On April 26, 2012, we amended the note to include a security interest over substantially all of our assets. No demand for repayment has been made to date.
On August 11, 2011, the brother of our then Chief Executive Officer loaned us $25,000. The note is due 30 days from the date of demand for repayment is made to the Company and bears interest at the rate of 15% per annum provided that interest accrues at the rate of 18% per annum upon an event of default. On April 26, 2012, we amended the note to include a security interest over substantially all of our assets. No demand for repayment has been made to date.
On March 28, 2013, we signed a promissory note for cash, which we received on April 10, 2013, in the amount of $150,000. The note bears interest at 12%, with overdue amounts bearing interest at the rate of 25% or the highest amount allowable by applicable law, whichever is higher. Principal and interest is due March 28, 2015. As of September 30, 2013, we have accrued $9,000 in interest. The principal amount of this note is included in non-current liabilities.
On April 18, 2013, we repaid an advance of $50,000 which we had received on December 28, 2012.
As of September 30, 2013, the outstanding total principal and accrued interest payable was $411,861, of which $11,861 is accrued interest. For the nine months ended September 30, 2013, we paid $17,124 in interest.
On July 1, 2013, the Company entered into a Master Credit Agreement (the “Credit Agreement”) with Levantera SA (“Lender”), a company formed under the laws of the Republic of the Marshall Islands, to provide us a lending facility of up to $1 million. The Company has the right to periodically prepare a Borrowing Certificate (a “Certificate”) drawing upon this facility. At the end of each fiscal quarter, the Lender may prepare an Evidence of Indebtedness, setting forth advances, payments and interest accruals made during that quarter. Each Certificate and the interest accrued thereon is due one year after the date of the Evidence of Indebtedness.
Interest accrued on un-matured amounts is 12% per year. Matured, unpaid amounts accrue interest at 18% per year.
The instrument is not considered a revolving note and therefore monies borrowed under this instrument cannot be repaid and re-borrowed. Under the terms of this arrangement, the Company is precluded from borrowing amounts from other parties in excess of $1.5 million and may not have trade accounts payable in the ordinary course of business greater than $1 million.
As of the date of this report, the Company has submitted three Borrowing Certificates for an aggregate of $150,000 and has received $100,000 of the proceeds thereon. We have accrued $986 in interest as of September 30, 2013 on this facility.
Grupo Sierra Alta
On February 20, 2013, we entered into an agreement with Grupo Sierra Alta, S.A.S. (“GSA”), a Colombian company to create a Colombian corporation (“BFCC”) to market our products in Columbia. Under the terms of the agreement, we are to own 51% of the outstanding stock of BFCC. Additionally, we will loan BFCC $50,000 for working capital. BFCC will purchase our PDC drill bits at our cost and pay all shipping fees, logistics costs, nationalization charges, customs duties, insurance taxes and tariffs and all other costs associated with transportation of our drill bits from Houston, Texas to customers in Columbia. As of September 30, 2013, we had not funded this loan and GSA had not begun operations.
NOTE 5 – INCOME TAXES
As of September 30, 2013, there is no provision for income taxes, current or deferred.
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09/30/13
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12/31/12
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Deferred tax assets:
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Net operating loss carry-forwards
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$
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172,821
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$
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60,852
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Valuation allowance
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(172,821
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)
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(60,852
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)
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Net deferred tax asset
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$
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-
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$
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-
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During the nine months ended September 30, 2013, the Company had a net operating loss of $287,098. As of September 30, 2013, the Company had net operating loss carry forwards in the amount of $443,100 available to offset future taxable income through 2032. The Company established valuation allowances equal to the full amount of the deferred tax assets due to the uncertainty of the utilization of the operating losses in future periods.
NOTE 6 – SUBSEQUENT EVENTS
On October 3, 2013, we received a payment of $92,302 from a company in Hong Kong as an advance payment against a purchase order for the sale of 8 bits. The total sales price is expected to be approximately $170,600.
On October 1, 2013, the Company and the holder of the $100,000 promissory note (see paragraph 1 of Note 4) extended the maturity date until January 1, 2014.
We have evaluated subsequent events through the date of issuance of the financial statements.