Digital Locations, Inc. - Annual Report: 2012 (Form 10-K)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
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ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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FOR THE FISCAL YEAR ENDED DECEMBER 31, 2012
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TRANSITION REPORT UNDER SECTION13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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FOR THE TRANSITION PERIOD FROM __________ TO __________
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COMMISSION FILE NUMBER: 000-54817
CARBON SCIENCES, INC.
(Name of registrant in its charter)
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NEVADA
(State or other jurisdiction of incorporation or organization)
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20-5451302
(I.R.S. Employer Identification No.)
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5511C Ekwill Street, Santa Barbara, CA 93111
(Address of principal executive offices) (Zip Code)
Issuer’s telephone Number: (805) 456-7000
Securities registered under Section 12(b) of the Exchange Act: None.
Securities registered under Section 12(g) of the Exchange Act: Common Stock, $0.001 par value per share
Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes o No x
Indicate by check mark whether the registrant (1) has filed all reports required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files. Yes [X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer o
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Accelerated filer o
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Non-accelerated filer o
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Smaller reporting company x
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant, based upon the price at which the Company’s common stock was sold as reported on the OTC-Bulletin Board on June 29, 2012 was $9,107,058.40.
The number of shares of registrant’s common stock outstanding, as of March 30, 2013 was 11,576,680.
DOCUMENTS INCORPORATED BY REFERENCE
None.
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TABLE OF CONTENTS
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PART I
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Item 1. Business
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Item 1A. Risk Factors
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Item 2. Properties
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Item 3. Legal Proceedings
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Item 4. Mine Safety Disclosures
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PART II
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Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
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Item 6. Selected Financial Data
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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Item 8. Financial Statements and Supplementary Data
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Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure
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Item 9A. Controls and Procedures
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Item 9B. Other Information
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PART III
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Item 10. Directors, Executive Officers and Corporate Governance
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Item 11. Executive Compensation
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Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
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Item 13. Certain Relationship and Related Transactions, and Director Independence
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Item 14. Principal Accounting Fees and Services
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Item 15. Exhibits, Financial Statement Schedules
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SIGNATURES
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PART I
Unless otherwise stated or the context requires otherwise, references in this annual report on Form 10-K to“Carbon Sciences”, the “Company”, “we”, “us”, or “our” refer to Carbon Sciences, Inc.
Introduction
Although found in abundant supply at affordable prices in the U.S. and throughout the world, natural gas must be converted into liquid transportation fuels, such as diesel or gasoline, before it can be used in the existing transportation infrastructure. To meet this need, we are in the early stages of developing a small-scale natural gas-to-liquids (“GTL”) plant to produce diesel or gasoline (the “miniGTL plant” or the “Plant”). The miniGTL plant will be based on integrating and optimizing existing GTL technology components and processes into a modular diesel or gasoline production facility. Developing the Plant will require bringing together natural gas resource holders, engineering firms, and technology firms. Based on our internal economic analysis and conversations with prospective partners, we believe that the miniGTL, a modular Plant producing approximately 1,000 barrels per day of diesel or gasoline may be economically viable in the United States, given the low price and abundance of natural gas. A modular Plant would be mobile and could be moved from one gas field to another, amortizing the capital cost of the plant over several small gas fields, which are more plentiful than large gas fields. In January 2013, we entered into a Technical Services Agreement with Fluor Corporation to assist us with this project.
We are also developing a proprietary GTL catalyst technology, a dry reforming process that can consume carbon dioxide (CO2) and natural gas to produce hydrogen (H2) and carbon monoxide (CO), an industry standard gas mixture commonly known as syngas. Syngas can then be processed into liquid fuels, such as gasoline and diesel, using commercially available technology, based on Fischer Tropsch and Methanol-to-Gasoline chemistry. The development work on this catalyst is based on a patented catalyst, for which we have an exclusive license from the University of Saskatchewan, Canada. The patented catalyst is a laboratory scale catalyst with over 2,000 hours of uninterrupted run time with high efficiency in converting natural gas and CO2 to syngas. Initial testing of the catalyst under industrial conditions, such as high temperature and high pressure, confirmed our belief that some variation of our base catalyst may be developed to outperform existing natural gas reforming catalysts by (a) lowering the amount of steam required in the reaction chamber, which decreases the energy required and increases the natural gas throughput rate, and (b) consuming carbon dioxide, which reduces the carbon footprint of the process. Our research and development efforts are based on developing a commercial form of this catalyst for use in industrial scale natural gas reforming processes. Our development activities have been primarily performed by outside catalyst development firms and we are also seeking a strategic partner to help accelerate the commercial development of our catalyst.
The commercialization of an industrial grade natural gas reforming catalyst is a lengthy process that requires many iterative long-term and expensive testing programs. To capitalize on what management believes to be the growing natural gas industry and the growing need for liquid transportation fuels, we have shifted our focus toward actual fuel production project development. We believe that by integrating commercially available GTL technology components in partnership with natural gas suppliers, we can develop a small scale GTL plant that can produce diesel or gasoline from natural gas that is cost competitive with traditional liquid fuels made from petroleum. Because natural gas is the cleanest of all fossil fuels, GTL diesel and gasoline are also cleaner and have smaller carbon footprints than their petroleum counterparts.
In developing a profitable GTL plant, we also intend to test our proprietary CO2 based catalyst technology through an integrated slip-stream subsystem.
Market Opportunity
In the International Energy Outlook 2010 report, the EIA predicts that worldwide energy consumption will increase by 49% from 2007 to 2035. This increase translates to a requirement of over 114 million barrels of crude oil per day in 2035, up from 86 million barrels per day in 2007. The EIA reports that the biggest use of crude oil, making up nearly 80% of the increase, is in the production of liquid fuels for the transportation sector.
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The 2010 World Energy Outlook report published by the International Energy Agency (IEA) stated that 2006 was the year that the world’s conventional oil production reached its peak of 70 million barrels per day.
In the World Energy Outlook 2011 report, the IEA postulates that the world is entering a “Golden Age of Gas.” Management believes that while the supply of world crude oil is declining, the global natural gas resource base is vast and widely dispersed geographically. The IEA estimates that conventional recoverable gas resources are equivalent to more than 120 years of current global consumption, while total recoverable resources could sustain today’s production for over 250 years.
We believe that we can apply our technology to natural gas resources to enable the production of non-petroleum liquid fuels to meet the world’s growing demand for use in cars, trucks, planes and ships. Additionally, because our catalyst technology consumes CO2, we believe we can help reduce the amount of CO2 emissions being released into the atmosphere, which we believe is harmful to the environment and may contributes to climate change.
Most of the world’s natural gas reserves contain some amount of CO2, which must be removed before the natural gas methane is marketable. If the CO2 content is high, then the removal process is prohibitively expensive, therefore leaving those natural gas reserves uneconomical to develop. Since our technology uses CO2 and methane as feedstocks, it can utilize high CO2 natural gas reserves directly. Natural gas containing as much as 50% CO2 by volume is suitable for our syngas technology. We believe this is a specific GTL market opportunity that existing technologies cannot address.
Gas to Liquids Overview
Many natural gas proponents are proposing the use of compressed natural gas (CNG) or liquefied natural gas (LNG) for use in new trucks and other vehicles. We believe this is a step in the right direction, but new engines mean new and expensive infrastructure. We believe a better solution is the direct transformation of natural gas into gasoline, diesel and jet fuel for use in existing engines and fuel delivery infrastructure.
We believe there are four main reasons why natural gas should be the new feedstock for liquid fuels:
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Energy independence from petroleum;
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Resulting liquid fuels can be used directly in the existing infrastructure;
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Natural gas is abundant and affordable; and
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Reduction of greenhouse gas emissions.
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Current industrial scale gas-to-liquids (GTL) technology, invented by German chemists Franz Fischer and Hans Tropsch in the 1920’s, can convert a gas mixture of hydrogen (H2) and carbon monoxide (CO) into liquid fuels without using petroleum. However, H2 and CO do not exist naturally and must be manufactured synthetically. There are a number of ways to make this synthesis gas, or syngas, but the most promising and scalable approach is the reforming of natural gas, which is primarily methane (CH4).
There are four (4) known processes to reform natural gas (methane) into syngas:
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Steam Reforming – Reacts steam with methane.
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Partial Oxidation – Reacts pure oxygen with methane.
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Autothermal Reforming – A combination of steam and partial oxidation reforming.
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Dry Reforming – Reacts carbon dioxide with methane, without steam or oxygen.
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In our miniGTL plant, we intend to use a combination of existing and well known reforming processes - steam, partial oxidation, and/or autothermal. Dry reforming, which is what our proprietary catalyst does, will be an experimental process.
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Business Model
We are in the early stages of developing a small-scale natural gas-to-liquids (“GTL”) plant to produce diesel or gasoline (the “miniGTL plant” or the “Plant”). The miniGTL plant will be based on integrating and optimizing existing GTL technology components and processes into a modular diesel or gasoline production facility. Developing the Plant will require bringing together natural gas resource holders, engineering firms, and technology firms. Based on our internal economic analysis and conversations with prospective partners, we believe that the miniGTL, a modular Plant producing approximately 1,000 barrels per day of diesel or gasoline may be economically viable in the United States, given the low price and abundance of natural gas. A modular Plant would be mobile and could be moved from one gas field to another, amortizing the capital cost of the plant over several small gas fields, which are more plentiful than large gas fields.
Our plan is to act as the project developer, and then own and operate the miniGTL Plant. However, at any stage of this business process, we may choose to partner with other companies and or/sell our interest in the miniGTL Plant.
Marketing Strategy
We expect that our marketing strategy will include media and analyst communication, blogs, and selected trade show attendance. We intend to utilize appropriate opportunities to place our brand in general and industry specific publications, using press releases, white papers and authored articles and Internet publications.
Research and Development
In January 2013, we entered into a Technical Services Agreement with Fluor Corporation to assist us with the development of our miniGTL plant. From time to time, we engage other scientific advisors and part-time technical contractors, to help us develop our miniGTL plant. As a project developer, we plan to outsource as much of the development activity as possible.
Government Regulation
With respect to technology development and licensing activities, we do not intend to sell, manufacture or produce any products. We are currently not subject to any government regulations that have a material effect on these operations. However, in the event that we successfully complete the development and then begin operating a miniGTL plant, we will be subject to a number of government regulations, including those administered by the Environmental Protection Agency and various states. Additionally, we are not aware of any pending legislation or regulations that would have a material effect on our operations.
Manufacturing and Distribution
With respect to technology development and licensing activities, we do not intend to manufacture and distribute any products. However, in the event that we successfully complete the development and begin operating a miniGTL plant, we will manufacture and distribute liquid transportation fuels, such as gasoline and diesel.
Intellectual Property
We have filed numerous patent applications with the United States Patent and Trademark Office in the course of our business history.
On December 23, 2010, we entered in to a License Agreement with the University of Saskatchewan (UOS), pursuant to which we have an exclusive, worldwide, sub-licensable, royalty-bearing right and license to make, have made, use, offer for sale, sell, reproduce, distribute, incorporate into other technology, or otherwise exploit certain patent-pending technology and relevant improvements from UOS, for a high performance catalyst for the dry reforming of methane with carbon dioxide for the production of synthesis gas. This License Agreement commenced on December 23, 2010, and will continue until the expiration date of the last of the licensed patents. In consideration for the grant of the patents, we are required to pay license fee of $20,000 a year for the term of the license Agreement. In addition, we are obligated to pay UOS $50,000 upon the first application of a licensed product in a
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pilot-scale or commercial facility and $50,000 upon the first sale of a licensed product. We are also required to pay royalties ranging from 0.9% to 3.6% of the sales revenue from a customer that uses a tangible licensed product or system made by us. In the event that we sublicense the licensed patents, we shall pay UOS sublicense compensation ranging from 6.25% to 12.5% of the sublicense fees that we receive. Under the License Agreement, we are also required to maintain general liability insurance with policy limits of no less than $2,000,000 during the term of the License Agreement and products liability insurance coverage with policy limits of no less than $5,000,000 to protect against our activities in relation to the license agreement.
The License Agreement may be terminated upon the party’s mutual consent or upon the expiration of six months after notice of termination to the UOS. In addition, the License Agreement may be terminated upon the occurrence of an event of default under the agreement.
The patent subject to the license agreement was issued by the PTO on July 26, 2011 as patent No.7,985,710.
We intend to continue our research and development efforts in dry reforming. Based on the UOS catalyst and new developments in the course of our business, we intend to file additional applications and build a global patent portfolio related to methods of catalyst preparation, commercial form of the catalyst, application of the catalyst, process design and optimizations. Until patent protection is granted, we must rely on trade secret protection, which requires reasonable steps to preserve secrecy. Therefore, we require that our personnel, contractors and sublicensees not disclose the trade secrets and confidential information pertaining to the technology. In addition, trade secret protection does not provide any barrier to a third party “reverse engineering” fuel made with the technology, to the extent that the technology is readily ascertainable by proper means. Neither the patent, if it issues, nor trade secret protection will preclude third parties from asserting that the technology, or the products we or our sub-licensees commercialize using the technology, infringes upon their proprietary rights.
Competition
The market for liquid fuel is large, as is the number of competitors providing technology to the fuel industry. For example, companies that offer fuel production technologies include UOP LLC (A Honeywell Company), Chevron Corp, Royal Dutch Shell plc, BP plc, and ExxonMobil Corp. Royal Dutch Shell and Sasol have profitably commercialized large scale, multi-billion dollar GTL plants. To our knowledge, there are currently no providers or operators of small scale GTL plants in the 1,000 – 2,000 barrel per day range. We see this as a lucrative market opportunity and we expect new entrants into the market. Many of these competitors may be more capitalized and may have more human resources than we do to develop a GTL project. However, since we are developing one profitable fuel production GTL plant at a time, competition may limit the availability of new opportunities but it does not change the economics of our project once it is up and running. In fact, the more competitive activity we see in the development of small scale GTL plants, the more it validates the vibrancy of our market.
Employees
As of March 30, 2013 we had 2 full-time employees. We have not experienced any work stoppages and we consider relations with our employees to be good. We have used an outsourced work-for-hire development model to date. We intend to increase our internal research and development staffing with the proceeds of this offering.
ITEM 1A. RISK FACTORS
We are in the early stages of development and have limited operating history which you can base an investment decision.
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We were formed in August 2006 and are currently developing a new technology that is still being developed for commercial use. We have generated no revenues, have no real operating history upon which you can evaluate our business strategy or future prospects, and have negative working capital. As a result, our auditor issued an opinion in connection with our December 31, 2012 financial statements, which expressed substantial doubt about our ability to continue as a going concern unless we obtain additional financing. While this offering addresses such concern and is expected to see us through until we begin to generate revenues, our ability to generate such revenues will depend on whether we can successfully develop, commercialize and license our technology and make the transition from a development stage company to an operating company. We expect to continue to incur losses until approximately 2015 when we estimate we may begin to generate revenues. In making your evaluation of our prospects, you should consider that we are a start-up business focused on a new technology, are designing solutions that have no proven market acceptance, and operate in a rapidly evolving industry. As a result, we may encounter many expenses, delays, problems and difficulties that we have not anticipated and for which we have not planned. There can be no assurance that at this time we will successfully commercialize our technology, operate profitably or that we will have adequate working capital to fund our operations or meet our obligations as they become due.
Our proposed operations are subject to all of the risks inherent in the initial expenses, challenges, complications and delays frequently encountered in connection with the formation of any new business. Investors should evaluate an investment in our company in light of the problems and uncertainties frequently encountered by companies attempting to develop markets for new products, services and technologies. Despite best efforts, we may never overcome these obstacles to achieve financial success. Our business is speculative and dependent upon the implementation of our business plan, as well as our ability to successfully complete the development of our technology or enter into licensing agreements with third parties on terms that will be commercially viable for us. There can be no assurance that our efforts will be successful or result in revenue or profit. There is no assurance that we will earn significant revenues or that our investors will not lose their entire investment.
If we are unable to effectively manage the transition from a development stage company to an operating company, our financial results will be negatively affected.
For the period from our inception, August 25, 2006, through December 31, 2012, we incurred an aggregate net loss, and had an accumulated deficit, of $(10,951,830). For the years ended December 31, 2012 and 2011, we incurred net losses of $(3,273,158) and $(1,861,490). Our losses are expected to continue to increase for at least the next 48 months as we commence full scale development of our technology. We believe we will require at least the net proceeds of this offering to make this transition and do not expect to transition from a development stage company to an operating company until 2015. As we do make such transition, we expect our business to grow significantly in size and complexity. This growth is expected to place significant additional demands on our management, systems, internal controls and financial and operational resources. As a result, we will need to expend additional funds to hire additional qualified personnel, retain professionals to assist in developing appropriate control systems and expand our operating infrastructures. Our inability to secure additional resources, as and when needed, or manage our growth effectively, if and when it occurs, would significantly hinder our transition to an operating company, as well as diminish our prospects of generating revenues and, ultimately, achieving profitability.
We may not be able to finance the development of a miniGTL plant.
The cost of developing a miniGTL plant may require in excess of $100,000,000. We may not be able to attract sufficient interest from private equity partners and banks to complete the project. If we are not able to fund the cost of the miniGTL plant, we may not be forced to scale back our plans to develop a miniGTL plant.
We may not be able to obtain sufficient quantities of natural gas at a reasonable cost to successfully to operate a miniGTL plant.
While natural gas is abundant in the United States at this time, we may not be able contract for a sufficient quantity for the successful long-term operation of a miniGTL plant. Also, we have no assurance at this time that a long-term supply of natural gas can be obtained at cost that will allow us to successfully operate a miniGTL plant.
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Changes in government regulations may delay or threaten the development and operation of a miniGTL plant.
In the event that we successfully complete the development and then begin operating a miniGTL plant, we will be subject to a number of government regulations, including those administered by the Environmental Protection Agency and various states. Changes in any of these government regulations may delay or threaten the development and operation of a miniGTL plant.
Sufficient customer acceptance for our technology may never develop or may take longer to develop than we anticipate, and as a result, our revenues and profits, if any, may be insufficient to fund our operations.
Sufficient markets may never develop for our technology, may develop more slowly than we anticipate or may develop with economics that are not favorable for us. The development of sufficient markets for our technology at favorable pricing may be affected by cost competitiveness of our technology, customer reluctance to try new technology and emergence of more competitive technologies. Because out technology has not yet been used to manufacture syngas or liquid fuels, potential customers may be skeptical about product stability, supply availability, quality control and our financial viability, which may prevent them from purchasing our technology or entering into long-term licensing agreements with us. We cannot estimate or predict whether a market for our technology will develop, whether sufficient demand for our technology will materialize at favorable prices, or whether satisfactory profit margins will be achieved. If such pricing levels are not achieved or sustained, or if our technologies and business approach to our markets do not achieve or sustain broad acceptance, our business, operating results and financial condition will be materially and adversely impacted.
The ability of our catalyst technology to be utilized on a commercially sustainable basis is unproven, and until we can develop and prove our technology, we likely will not be able to generate or sustain sufficient revenues to continue operating our business.
While producing syngas is not a new technology, our dry reforming catalyst is not currently suitable for commercial use and has never been utilized on a commercially sustainable basis. The tests that we have conducted to date with respect to our technology have been performed in a limited scale environment, and the same or similar results may not be obtainable at competitive costs on a large-scale commercial basis. While industrial processes exist to convert syngas into liquid fuels, we have not conducted end-to-end tests on the ability of our technology to produce liquid gas.
We have never utilized our technology under the conditions or in the volumes that will be required for us to be profitable and cannot predict all of the difficulties that may arise. Our technology requires further research, development, regulatory approvals, environmental permits, design and testing prior to commercialization. Accordingly, our technology may not perform successfully on a commercial basis and may never generate any meaningful revenues or profits.
We likely will not be able to generate significant revenues until we can successfully validate the performance of our technology with customers.
To date, we have generated no revenues. Revenue generation could be impacted by any of the following:
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delays in demonstrating the technological advantages or commercial viability of our proposed technology;
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delays in developing our technology; and
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inability to interest early adopter customers in our technology.
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We may not be able to enter into agreements to license our technology at prices that will cover our costs. Potential customers may require lengthy or complex trials or long sampling periods before committing to license our technology.
The current credit and financial market conditions may exacerbate certain risks affecting our business.
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Due to the continued disruption in the financial markets arising from the global recession and the slow pace of economic recovery, many of our potential customers are unable to access capital necessary to accommodate the use of our technology. Many are operating under austerity budgets that limit their ability to invest in infrastructure necessary to use alternative fuels and that make it significantly more difficult to take risks with new fuel sources. As a result, we may experience increased difficulties in convincing customers to adopt our technology as a viable alternative at this time.
We may not be able to generate revenues from licensing our technology.
Our business plan includes, as our main revenue stream, the collection of royalties through licensing our technology intellectual property portfolio that we currently have and will build in the course of our business. Companies to which we grant licenses may not be able to produce, market and sell enough products to pay us royalty fees or they may default on the payment of royalties. We may not be able to achieve profitable operations from collecting royalties from the licensing of our proprietary technology.
We do not maintain theft or casualty insurance, and only maintain modest liability and property insurance coverage and therefore we could incur losses as a result of an uninsured loss.
If we lose key employees and consultants or are unable to attract or retain qualified personnel, our business could suffer.
Our success is highly dependent on our ability to attract and retain qualified scientific, engineering and management personnel. Competition for these qualified personnel is intense. We are highly dependent on our management, including Mr. Byron Elton, who has been critical to the development of our business. The loss of the services of Mr. Elton could have a material adverse effect on our operations. We do not have an employment agreement with Mr. Elton. Accordingly, there can be no assurance that he will remain associated with us. His efforts will be critical to us as we continue to develop our technology and as we attempt to transition from a development stage company to a company with commercialized products and services. If we were to lose Mr. Elton or any other key employees or consultants, we may experience difficulties in competing effectively, developing our technology and implementing our business strategies.
The strategic relationships upon which we may rely are subject to change.
Our ability to successfully test our technology and identify and enter into commercial arrangements with licensees will depend on developing and maintaining close working relationships with industry participants. These relationships will need to change and evolve over time, as we enter different phases of development. Our strategic relationships most often are not yet reflected in definitive agreements, or the agreements we have do not cover all aspects of the relationship. Our success in this area also will depend on our ability to select and evaluate new strategic relationships and to consummate transactions. To test our technology, we will be dependent on strategic partners for the use or construction of demonstration systems. Our inability to identify suitable companies or enter into and maintain strategic relationships may affect our ability to commercialize our technology and impair our ability to grow. The terms of relationships with strategic partners may require us to incur expenses or undertake activities we would not otherwise be inclined to incur or undertake in order to maintain these relationships.
Failure to obtain the patents for our applications could prevent us from securing royalty payments in the future, if appropriate.
In addition to our license to the patented UOS catalyst, we intend to file new patent applications and build a global patent portfolio related to the methods of catalyst preparation, commercial form of the catalyst, application of the catalyst, process design and optimizations, in the normal course of our business. We cannot be certain that patents will be granted nor can we be certain that other companies will not file for patent protection for the similar technology before us. Even if we are granted patent protection for our technology, there is no assurance that we will be in a position to enforce our patent rights. Failure to be granted patent protection for our technology could result in greater competition or in limited royalty payments. This could result in inadequate revenue and cause us to cease operations.
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We may never fully realize the value of our technology license agreement, which presently is the principal asset reflected on our balance sheet.
We may not be successful in realizing the expected benefits from our Exclusive License Agreement with the UOS. We intend to incorporate the licensed technology in our development of a high performance catalyst for the dry reforming of methane with carbon dioxide for the production of synthesis gas. To date, we have incurred approximately $1,245,369 in research and development costs separate from our license payments, and we are continuing to incur additional research and development costs to commercialize the catalyst and optimize the process.
If we do not obtain protection for our intellectual property rights, our competitors may be able to take advantage of our research and development efforts to develop competing technology.
Our success, competitive position and future revenues will depend in part on our ability to obtain and maintain patent protection for our methods, processes and other technologies, to preserve our trade secrets, to prevent third parties from infringing on our proprietary rights and to operate without infringing the proprietary rights of third parties.
We have yet to complete an infringement analysis and, even if such an analysis were available at the current time, we could not be certain that no infringement exists, particularly as our products have not yet been fully developed. We may need to acquire additional licenses from third parties in order to avoid infringement claims, and any required licenses may not be available to us on acceptable terms, or at all. To the extent infringement claims are made, we could incur substantial costs in the resulting litigation, and the existence of this type of litigation could impede the development of our business.
We anticipate filing patent applications both in the U.S. and in other countries, as appropriate. However, the patent process is subject to numerous risks and uncertainties, and there can be no assurance that we will be successful in protecting our technology by obtaining and defending patents. These risks and uncertainties include but are not limited to the following:
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Patents that may be issued or licensed may be challenged, invalidated, or circumvented, or otherwise may not provide any competitive advantage.
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Our competitors, many of which have substantially greater resources than us and many of which have made significant investments in competing technologies, may seek, or may already have obtained, patents that will limit, interfere with, or eliminate our ability to make, use, and sell our potential products either in the United States or in international markets.
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Countries other than the United States may have less restrictive patent laws than those upheld by United States courts, allowing foreign competitors the ability to exploit these laws to create, develop, and market competing products.
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In addition to patents, we also intend to rely on trade secrets and proprietary know-how. Although we take measures to protect this information by entering into confidentiality and inventions agreements with our employees, scientific advisors, consultants, and collaborators, we cannot provide any assurances that these agreements will not be breached, that we will be able to protect ourselves from the harmful effects of disclosure if they are breached, or that our trade secrets will not otherwise become known or be independently discovered by competitors. If any of these events occurs, or we otherwise lose protection for our trade secrets or proprietary know-how, the value of this information may be greatly reduced.
Patent protection and other intellectual property protection are important to the success of our business and prospects, and there is a substantial risk that such protections will prove inadequate.
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Intellectual property disputes could require us to spend time and money to address such disputes and could limit our intellectual property rights.
We may become subject to infringement claims or litigation arising out of patents and pending applications of competitors, or additional proceedings initiated by third parties or the United States Patent and Trademark Office, or PTO, to reexamine the patentability of our licensed patents. The defense and prosecution of intellectual property suits, PTO proceedings, and related legal and administrative proceedings are costly and time-consuming to pursue, and their outcome is uncertain. Litigation may be necessary to enforce our intellectual property rights, to protect our trade secrets and know-how, or to determine the enforceability, scope, and validity of the proprietary rights of others. An adverse determination in litigation or PTO proceedings to which we may become a party could subject us to significant liabilities, require us to obtain licenses from third parties, restrict or prevent us from selling our technology in certain markets, or invalidate or render unenforceable our licensed or owned patents. Although patent and intellectual property disputes might be settled through licensing or similar arrangements, the costs associated with such arrangements may be substantial and could include our paying large fixed payments and ongoing royalties. Furthermore, the necessary licenses may not be available on satisfactory terms or at all.
If we infringe the rights of third parties we could be prevented from licensing our technologies and forced to pay damages, and defend against litigation.
If our methods, processes and other technologies infringe the proprietary rights of other parties, we could incur substantial costs and we may have to do one or more of the following:
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·
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obtain licenses, which may not be available on commercially reasonable terms, if at all;
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·
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redesign our processes to avoid infringement;
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·
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stop using the subject matter claimed in the patents held by others;
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·
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pay damages; or
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·
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defend litigation or administrative proceedings, which may be costly whether we win or lose, and which could result in a substantial diversion of our financial and management resources.
|
Any of these events could substantially harm our financial condition and operations.
Our technology may become ineffective or obsolete.
To be competitive in the industry, we may be required to continually enhance and update our technology. The costs of doing so may be substantial, and if we are unable to maintain the efficacy of our technology, our ability to compete may be impaired. In addition, interest in our technology may wane as alternative fuels and other energy sources gain market acceptance. If competitors develop, obtain or license technology that is superior to ours, we may lose our competitive edge which may have a material adverse effect on our business, financial condition, results of operations and prospects.
Competition resulting from advances in alternative fuels may reduce the demand for our technology.
Alternative fuels and other energy sources are continually under development. A wide array of entities, including automotive, industrial and power generation manufacturers, the federal government, academic institutions and small private concerns are seeking to develop alternative clean-power systems. These technologies include using fuel cells or clean-burning gaseous fuels that, like biodiesel, may address increasing worldwide energy costs, the long-term availability of petroleum reserves and environmental concerns. Additionally, there is significant research and development being undertaken regarding the production of ethanol from cellulosic biomass, the production of methane from anaerobic digestors, and the production of electricity from wind and tidal energy systems, among other potential sources of renewable energy. If these alternative fuels continue to expand and gain broad acceptance, there may not be sufficient interest in our technology.
If we breach or default under our license agreement with the UOS, the licensor will have the right to terminate the license agreement, which termination may materially harm our business.
12
The success of our business will depend in part on the maintenance of our license agreement with UOS. Pursuant to the terms of the license agreement, we are required to pay UOS an additional $20,000 in cash per year until the expiration date of the last of the licensed patents. In addition, we are required to pay an aggregate of $100,000 if we hit certain commercialization milestones. The license agreement also provides that UOS may terminate the agreement if we file an assignment in bankruptcy or apply for reorganization or other similar proceedings. To the extent we default on any of the required payments or breach any other material provisions of the license agreement, UOS could terminate the agreement and pursue any remedy available to it in law or in equity, in which event we would lose our rights to commercialize our technology covered by the license, which loss may materially harm our business.
Our current and potential competitors, some of whom have greater resources than we do, may develop products and technologies that may cause demand for, and the prices of, our products to decline.
While we are not aware of any direct competitors offering commercial dry reforming technology to produce liquid fuels from natural gas, our potential customers may choose to buy or build their own systems instead of licensing our technology. Furthermore, our competitors may combine with each other, and other companies may enter our markets by acquiring or entering into strategic relationships with our competitors. Current and potential competitors have established, or may establish, cooperative relationships among themselves or with third parties to increase the abilities of their products to address the needs of our prospective customers.
Many of our current and potential competitors have longer operating histories, significantly greater financial, technical, product development and marketing resources, greater name recognition and larger customer bases than we do. Our present or future competitors may be able to develop technology comparable or superior to those we offer, adapt more quickly than we do to new technologies, evolving industry trends and standards or customer requirements, or devote greater resources to the development, promotion and sale of their technology than we do. Accordingly, we may not be able to compete effectively in our markets, competition may intensify and future competition may harm our business.
RISKS RELATING TO OUR COMMON STOCK
Our common stock is subject to volatility.
There can be no assurance that the market price for our common stock will remain at its current level and a decrease in the market price could result in substantial losses for investors. The market price of our common stock may be significantly affected by one or more of the following factors:
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·
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announcements or press releases relating to the industry or to our own business or prospects;
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|
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·
|
regulatory, legislative, or other developments affecting us or the industry generally;
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|
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·
|
sales by holders of restricted securities pursuant to effective registration statements or exemptions from registration; and
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|
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·
|
market conditions specific to biopharmaceutical companies, the healthcare industry and the stock market generally.
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If our common stock remains subject to the SEC’s penny stock rules, broker-dealers may experience difficulty in completing customer transactions and trading activity in our securities may be adversely affected.
Unless our common stock is listed on a national securities exchange, including the Nasdaq Capital Market or we have stockholders’ equity of $5,000,000 or less and our common stock has a market price per share of less than $4.00, transactions in our common stock will be subject to the SEC’s “penny stock” rules. If our common stock remains subject to the “penny stock” rules promulgated under the Securities Exchange Act of 1934, broker-dealers may find it difficult to effectuate customer transactions and trading activity in our securities may be adversely affected.
In accordance with these rules, broker-dealers participating in transactions in low-priced securities must first deliver a risk disclosure document that describes the risks associated with such stocks, the broker-dealer's duties in selling the stock, the customer's rights and remedies and certain market and other information. Furthermore, the broker-dealer must make a suitability determination approving the customer for low-priced stock transactions based on the customer's financial situation, investment experience and objectives. Broker-dealers must also disclose these restrictions in writing to the customer, obtain specific written consent from the customer, and provide monthly account statements to the customer. The effect of these restrictions will probably decrease the willingness of broker-dealers to make a market in our common stock, decrease liquidity of our common stock and increase transaction costs for sales and purchases of our common stock as compared to other securities. Our management is aware of the abuses that have occurred historically in the penny stock market.
13
As a result, if our common stock becomes subject to the penny stock rules, the market price of our securities may be depressed, and you may find it more difficult to sell our securities.
If we fail to maintain effective internal controls over financial reporting, the price of our common stock may be adversely affected.
Our internal control over financial reporting may have weaknesses and conditions that could require correction or remediation, the disclosure of which may have an adverse impact on the price of our common stock. We are required to establish and maintain appropriate internal controls over financial reporting. Failure to establish those controls, or any failure of those controls once established, could adversely affect our public disclosures regarding our business, prospects, financial condition or results of operations.
Rules adopted by the SEC pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 require an annual assessment of internal controls over financial reporting, and for certain issuers an attestation of this assessment by the issuer’s independent registered public accounting firm. The standards that must be met for management to assess the internal controls over financial reporting as effective are evolving and complex, and require significant documentation, testing, and possible remediation to meet the detailed standards. We expect to incur significant expenses and to devote resources to Section 404 compliance on an ongoing basis. It is difficult for us to predict how long it will take or costly it will be to complete the assessment of the effectiveness of our internal control over financial reporting for each year and to remediate any deficiencies in our internal control over financial reporting. As a result, we may not be able to complete the assessment and remediation process on a timely basis. In addition, management’s assessment of internal controls over financial reporting may identify weaknesses and conditions that need to be addressed in our internal controls over financial reporting or other matters that may raise concerns for investors. Any actual or perceived weaknesses and conditions that need to be addressed in our internal control over financial reporting or disclosure of management’s assessment of our internal controls over financial reporting may have an adverse impact on the price of our common stock.
We are authorized to issue "blank check" preferred stock without stockholder approval, which could adversely impact the rights of holders of our common stock.
Our Articles of Incorporation authorize our Company to issue up to 20,000,000 shares of blank check preferred stock. Currently no preferred shares are issued; however, we can issue shares of our preferred stock in one or more series and can set the terms of the preferred stock without seeking any further approval from our common stockholders. Any preferred stock that we issue may rank ahead of our common stock in terms of dividend priority or liquidation premiums and may have greater voting rights than our common stock. In addition, such preferred stock may contain provisions allowing those shares to be converted into shares of common stock, which could dilute the value of common stock to current stockholders and could adversely affect the market price, if any, of our common stock. In addition, the preferred stock could be utilized, under certain circumstances, as a method of discouraging, delaying or preventing a change in control of the Company. Although we have no present intention to issue any shares of authorized preferred stock, there can be no assurance that we will not do so in the future.
Shares eligible for future sale may adversely affect the market.
From time to time, certain of our stockholders may be eligible to sell all or some of their shares of common stock by means of ordinary brokerage transactions in the open market pursuant to Rule 144 promulgated under the Securities Act, subject to certain limitations. In general, pursuant to amended Rule 144, non-affiliate stockholders may sell freely after six months subject only to the current public information requirement. Affiliates may sell after six months subject to the Rule 144 volume, manner of sale (for equity securities), current public information and notice requirements. Of the approximately 11,576,680 shares of our common stock outstanding as of December 31, 2012, approximately 4,708,120 shares are freely tradable without restriction, as of December 31, 2012. Any substantial sales of our common stock pursuant to Rule 144 may have a material adverse effect on the market price of our common stock.
14
We do not expect to pay dividends in the future and any return on investment may be limited to the value of our common stock.
We do not currently anticipate paying cash dividends in the foreseeable future. The payment of dividends on our common stock will depend on earnings, financial condition and other business and economic factors affecting it at such time as the board of directors may consider relevant. Our current intention is to apply net earnings, if any, in the foreseeable future to increasing our capital base and development and marketing efforts. There can be no assurance that we will ever have sufficient earnings to declare and pay dividends to the holders of our common stock, and in any event, a decision to declare and pay dividends is at the sole discretion of the our Board of Directors. If we do not pay dividends, our common stock may be less valuable because a return on your investment will only occur if its stock price appreciates.
Our management will have broad discretion over the use of the net proceeds from this offering and we may use the net proceeds in ways with which you disagree.
We currently intend to use the net proceeds from this offering for general corporate purposes and working capital. We have not allocated specific amounts of the net proceeds from this offering for any of the foregoing purposes. Accordingly, our management will have significant discretion and flexibility in applying the net proceeds of this offering. You will be relying on the judgment of our management with regard to the use of these net proceeds, and you will not have the opportunity, as part of your investment decision, to assess whether the proceeds are being used appropriately. It is possible that the net proceeds will be invested in a way that does not yield a favorable, or any, return for us or our stockholders. The failure of our management to use such funds effectively could have a material adverse effect on our business, prospects, financial condition, and results of operation.
We are controlled by our current officers, directors and principal stockholders.
Our directors, executive officers and principal stockholders and their affiliates beneficially own approximately 7.53% of outstanding shares of common stock. Accordingly, our executive officers, directors, principal stockholders and certain of their affiliates will have the ability to control matters requiring shareholder approval, including the election of our Board of Directors and approval of significant corporate transactions, such as merger or other sale of our company or assets. Thus, actions might be taken even if other stockholders, including those who purchase shares in this offering, oppose them. This concentration of ownership might also have the effect of delaying or preventing a change of control of our company, which could cause our stock price to decline.
Our principal office is located at 5511C Ekwill Street, Santa Barbara, California 93111. We lease approximately 2,800 square feet. Our lease provides for a monthly base rent of $2,884 per commencing on October 1, 2012 and shall increase annually thereafter by 3%. The current term of the lease expires September 30, 2014. We sublease approximately 1,400 square feet to a short-term subtenant, which reduces our occupancy expense to approximately 50% of our lease amount.
ITEM 3. LEGAL PROCEEDINGS.
ITEM 4. MINE SAFETY DISCLOSURES
N/A
15
PART II
ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Our common stock has been quoted on the OTC Bulletin Board under the symbol “CABN” since September 28, 2007. The following table provides, for the periods indicated, the range of high and low bid prices for our common stock. These over-the-counter market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not represent actual transactions. Where applicable, the prices set forth below give retroactive effect to our one-for-forty reverse stock split which was effected on May 9, 2011.
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Fiscal Year 2010
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High
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Low
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||||||
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First Quarter
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$
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6.16
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$
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3.28
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||||
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Second Quarter
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4.60
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2.00
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||||||
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Third Quarter
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4.40
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2.84
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||||||
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Fourth Quarter
|
3.80
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1.84
|
||||||
|
Fiscal Year 2011
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High
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Low
|
||||||
|
First Quarter
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$
|
3.60
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$
|
2.40
|
||||
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Second Quarter
|
6.50
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2.40
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||||||
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Third Quarter
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6.30
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2.12
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||||||
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Fourth Quarter
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3.35
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1.40
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||||||
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Fiscal Year 2012
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High
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Low
|
||||||
|
First Quarter
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$
|
2.00
|
$
|
1.01
|
||||
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Second Quarter
|
1.48
|
0.66
|
||||||
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Third Quarter
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1.20
|
0.62
|
||||||
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Fourth Quarter
|
0.90
|
0.16
|
||||||
Dividend Policy
We have not declared or paid any cash dividends on our common stock and do not anticipate declaring or paying any cash dividends in the foreseeable future. We currently expect to retain future earnings, if any, for the development of our business.
16
Common Stock
Our Articles of Incorporation, as amended, authorize the issuance of 100,000,000 shares of common stock, $.001 par value per share. Holders of shares of common stock are entitled to one vote for each share on all matters to be voted on by the stockholders. Holders of common stock have cumulative voting rights. Holders of shares of common stock are entitled to share ratably in dividends, if any, as may be declared, from time to time by the Board of Directors in its discretion, from funds legally available therefor. In the event of a liquidation, dissolution, or winding up of our company, the holders of shares of common stock are entitled to share pro rata all assets remaining after payment in full of all liabilities. Holders of common stock have no preemptive or other subscription rights, and there are no conversion rights or redemption or sinking fund provisions with respect to such shares.
As of March 30, 2013, our common stock was held by 83 stockholders of record and we had 11,576,680 shares of common stock issued and outstanding. We believe that the number of beneficial owners is substantially greater than the number of record holders because a significant portion of our outstanding common stock is held of record in broker street names for the benefit of individual investors. The transfer agent of our common stock is Computershare Investor Services, 250 Royall Street Canton, MA 02021.
Equity Compensation Plan Information
The following table shows information with respect to each equity compensation plan under which our common stock is authorized for issuance as from inception (April 24, 2006) through December 31, 2012.
EQUITY COMPENSATION PLAN INFORMATION
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Plan category
|
Number of securities
to be issued upon
exercise of
outstanding options,
warrants and rights
|
Weighted average
exercise price of
outstanding options,
warrants and rights
|
Number of securities
remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)
|
||||||
|
(a)
|
(b)
|
(c)
|
|||||||
|
Equity compensation plans approved by security holders
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-0-
|
-0-
|
2,000,000
|
||||||
|
Equity compensation plans not approved by security holders
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-0-
|
-0-
|
-0-
|
||||||
|
Total
|
-0-
|
-0-
|
2,000,000
|
||||||
Recent Sales of Unregistered Securities
None.
Issuer Purchases of Equity Securities
None.
Not applicable.
17
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OR FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion and analysis should be read together with our financial statements and the related notes appearing elsewhere in this filing. This discussion contains forward-looking statements reflecting our current expectations that involve risks and uncertainties. See “Forward-Looking Statements” for a discussion of the uncertainties, risks and assumptions associated with these statements. Actual results and the timing of events could differ materially from those discussed in our forward-looking statements as a result of many factors, including those set forth under “Risk Factors” and elsewhere in this prospectus.
Our Company
Carbon Sciences is in the early stages of developing a complete small-scale natural gas-to-liquids (“GTL”) fuel production plant (the “miniGTL plant” or the “Plant”). The miniGTL plant will be based on integrating and optimizing existing GTL technology components and processes into a modular diesel or gasoline production facility. Developing the Plant will require bringing together natural gas resource holders, engineering firms, and technology firms. Based on our internal economic analysis and conversations with prospective partners, we believe that the miniGTL A modular Plant producing approximately 1,000 barrels per day of diesel or gasoline may be economically viable in the United States, given the low price and abundance of natural gas. A modular Plant would be mobile and could be moved from one gas field to another, amortizing the capital cost of the plant over several small gas fields, which are more plentiful than large gas fields.
With respect to catalyst development activities, Carbon Sciences is developing a proprietary catalyst technology to facilitate the production of cleaner and greener transportation fuels, hydrogen and other valuable, large volume products from natural gas. We believe our clean-tech process will enable the world to reduce its dependence on petroleum by transforming abundant and affordable natural gas into gasoline, diesel and jet fuel, and other products, such as hydrogen, methanol, ammonia, solvents, plastics and detergent alcohols. The key to our process is a chemical catalyst that can reduce the cost of reforming natural gas into synthetic gas (syngas), the most costly step in making liquid fuel and other products from natural gas.
Our patented catalyst has been proven in laboratory conditions to be very robust with over 2,000 hours of uninterrupted run time with high efficiency in converting natural gas to syngas. Initial testing of the catalyst under industrial conditions, such as high temperature and high pressure, confirmed our belief that some variation of our base catalyst may be developed to outperform existing natural gas reforming catalysts by (a) lowering the amount of steam required in the reaction chamber, which decreases the energy required and increases the natural gas throughput rate, and (b) consuming carbon dioxide, which reduces the carbon footprint of the process. Our research and development efforts are based on developing a commercial form of this catalyst for use in existing natural gas reforming processes. Our development activities are primarily performed by outside catalyst development firms and we are also seeking a strategic partner to help accelerate the commercial development of our catalyst.
18
We have not yet generated revenues. We currently have negative working capital and, in connection with our December 31, 2012 financial statements, we received an opinion from our auditors that expressed substantial doubt about our ability to continue as a going concern without additional financing. Subsequent to December 31, 2012, we obtained $100,000 in funding through private placement offerings. We believe that the financings received by us after December 31, 2012 will fully address such concern and enable us to implement our business plan through such time as revenues support our operations. If additional funds are required because our plans, expectations or assumptions change, we may also seek funding through additional equity or debt financing. There can be no assurance that such financing will be available or upon such terms that are acceptable to us, if at all.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America or GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to impairment of property, plant and equipment, intangible assets, deferred tax assets and fair value computation using the Black Scholes option pricing model. We base our estimates on historical experience and on various other assumptions, such as the trading value of our common stock and estimated future undiscounted cash flows, that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions; however, we believe that our estimates, including those for the above-described items, are reasonable.
Use of Estimates
In accordance with GAAP, management utilizes 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 as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. These estimates and assumptions relate to recording net revenue, collectability of accounts receivable, useful lives and impairment of tangible and intangible assets, accruals, income taxes, inventory realization, stock-based compensation expense and other factors. Management believes it has exercised reasonable judgment in deriving these estimates. Consequently, a change in conditions could affect these estimates.
Fair Value of Financial Instruments
The Company's cash, cash equivalents, investments, accounts receivable and accounts payable are stated at cost which approximates fair value due to the short-term nature of these instruments.
Recently Issued Accounting Pronouncements
Management reviewed accounting pronouncements issued during the three months ended September 30, 2012, and no pronouncements were adopted during the period.
Results of Operations
Year ended December 31, 2012 compared to the year ended December 31, 2011
General and Administrative Expenses
G&A expenses increased by $392,971 to $1,829,698 for the year ended December 31, 2012, compared to $1,436,727 for the year ended December 31, 2011. This increase in G&A expenses was primarily due to the increase in non-cash stock compensation of $464,053, which was partially offset by the decrease in other G&A expenses of $(71,082) compared to the prior year.
Research and Development
19
R&D costs decreased by $(262,454) to $139,706 for the year ended December 31, 2012 compared to $402,160 for the year ended December 31, 2011. This decrease in R&D costs was the result of a decrease in outside consulting and lab fees, and supplies for testing and research of product development.
Net Loss
Net loss increased by $(1,411,668) to $(3,273,158) for the year ended December 31, 2012, compared to $(1,861,490) for the year ended December 31, 2011. This increase in net loss was the result of an increase in non-cash stock compensation expense of $464,053, common stock issued for incentive fees of $1,079,800, amortization of debt discount of $44,942, loss on derivative of $73,259, impairment of intangible assets of $88,147, loss on sale of asset $74,978, and offset by decreases in expenses of $413,511. Currently the Company is in its development stage and has no revenues.
As of December 31, 2012, we had a working deficit of $(1,131,145) compared to a working deficit of $(230,854) for the year ended December 31, 2011. The decrease of $(900,291) in working capital was due primarily to the non-cash derivative liability, plus an increase in accounts payable and debt financing.
During the year ended December 31, 2012, we used $(609,437) of cash for operating activities, as compared to $(1,509,968) for the prior period December 31, 2011. The decrease of $(900,531) in the use of cash for operating activities was primarily due to an increase in operating net loss associated with an increase in non-cash expenses, and a decrease in prepaid expenses with an increase in accounts payable, and accrued expenses.
Cash used by investing activities was $(19,146) for the year ended December 31, 2012, as compared to cash used of $(78,189) for the prior period ended December 31, 2011. The net decrease of $(59,043) in cash used by investing activities in the current period was due to fewer purchases of tangible and intangible assets as compared to the prior period ended December 31, 2011.
Cash provided from financing activities during the year ended December 31, 2012 was $635,575 as compared to $1,557,000 for the prior period ended December 31, 2011. Our capital needs have primarily been met from the proceeds of equity financings, and investor loans, as we are currently in the development stage and had no revenues.
Our financial statements as of December 31, 2012 have been prepared under the assumption that we would continue as a going concern. Our independent registered public accounting firm issued their report dated March 30, 2013 that included an explanatory paragraph expressing substantial doubt in our ability to continue as a going concern as the Company does not generate significant revenue and has negative cash flows from operations. Our ability to continue as a going concern ultimately is dependent on our ability to generate a profit which is dependent upon our ability to obtain additional equity or debt financing, attain further operating efficiencies and, ultimately, to achieve profitable operations. Our financial statements do not include any adjustments that might result from the outcome of this uncertainty.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
All financial information required by this Item is attached hereto at the end of this report beginning on page F-1 and is hereby incorporated by reference.
ITEM 9A. CONTROLS AND PROCEDURES.
20
(a) Evaluation of Disclosure Controls and Procedures. Based on an evaluation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended) required by paragraph (b) of Rule 13a-15 or Rule 15d-15, as of December 31, 2012, our Chief Executive Officer and Acting Chief Financial Officer has concluded that our disclosure controls and procedures were effective in ensuring that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms. Our Chief Executive Officer and Acting Chief Financial Officer also concluded that, as of December 31, 2012, our disclosure controls and procedures were effective in ensuring that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Acting Chief Financial Officer, to allow timely decisions regarding required disclosure.
(b) Changes in Internal Controls. During the three months ended December 31, 2012, there were no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 or Rule 15d-15 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Management’s Report on Internal Control over Financial Reporting.
We are responsible for establishing and maintaining adequate internal control over financial reporting in accordance with Exchange Act Rule 13a-15. With the participation of our Chief Executive Officer and Acting Chief Financial Officer, our management conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2012 based on the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that our internal control over financial reporting was effective as of December 31, 2012, based on those criteria. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.
The annual report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the Company's independent registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission.
ITEM 9B. OTHER INFORMATION.
None.
PART III
The following table sets forth information about our executive officers, key employees and directors:
|
Name
|
Age
|
Position
|
||
|
Byron Elton
|
58
|
Chairman, Chief Executive Officer, President and Acting Chief Financial Officer
|
||
|
Lee A. Daniels
|
55
|
Director
|
||
|
Daniel Nethercott
|
51
|
Director
|
21
Directors serve until the next annual meeting and until their successors are elected and qualified. The Directors of our company are elected by the vote of a majority in interest of the holders of the voting stock of our company and hold office until the expiration of the term for which he or she was elected and until a successor has been elected and qualified.
A majority of the authorized number of directors constitutes a quorum of the Board for the transaction of business. The directors must be present at the meeting to constitute a quorum. However, any action required or permitted to be taken by the Board may be taken without a meeting if all members of the Board individually or collectively consent in writing to the action.
Directors may receive compensation for their services and reimbursement for their expenses as shall be determined from time to time by resolution of the Board. Our directors currently do not receive monetary compensation for their service on the Board of Directors.
Officers are appointed to serve for one year until the meeting of the board of directors following the annual meeting of stockholders and until their successors have been elected and qualified.
The principal occupations for the past five years (and, in some instances, for prior years) of each of our executive officers and directors, followed by our key employees, are as follows:
Byron Elton— Chief Executive Officer, President, Acting Chief Financial Officer and Chairman of the Board. Mr. Elton has been President and Chief Operating Officer of the Company since January 5, 2009 and a director of the Company since March 16, 2009. Mr. Elton is an experienced media and marketing executive with a proven record in pioneering new business development strategies and building top-flight marketing organizations. He previously served as Senior Vice President of Sales for Univision Online from 2007 to 2008. Mr. Elton also served for eight years as an executive at AOL Media Networks from 2000 to 2007, where his assignments included Regional Vice President of Sales for AOL and Senior Vice President of E-Commerce for AOL Canada. His broadcast media experience includes leading the ABC affiliate in Santa Barbara, California in 1995 to 2000 and the CBS affiliate in Monterrey, California, from 1998 to 1999, in addition to serving as President of the Alaskan Television Network from 1995 to 1999. Mr. Elton’s extensive senior level management experience specifically in new business development and partnership strategies made him qualified to serve on the Board of Directors.
Daniel Nethercott – Director. Mr. Nethercott has been a real estate professional for more than two decades. He is currently the President of Redfern Development and acts as the principal liaison to investors, partnerships and directing boards, both public and private. Before forming Redfern Development in 2004 he spent the majority of his career in executive management positions, including over 10 years as a Senior Vice President and Partner for the Grupe Company from 1995 to 2004, one of the largest commercial and residential developers in Northern California. His extensive entrepreneurial experience also includes being a founding partner of NEKO Industries and an investor and founding board member of InMotx Robotics, a world leader in automated handling of natural products. Mr. Nethercott received his BA in Finance from Brigham Young University prior to attending graduate school at the Arizona State University School of Business. Mr. Nethercott’s experience as board member and board consultant to technology companies combined with his executive management experience in strategic and financial planning made him qualified to serve on the Board of Directors.
Lee A. Daniels – Director. Lee A. Daniels was appointed to the Board on September 6, 2012. Mr. Daniels has been an International Business Professor at the Marriott School of Management at Brigham Young University since 2005. Prior to joining the faculty at BYU, Mr. Daniels worked as the Managing Director/Partner from 2000 to 2005 in one of the world’s largest private equity funds, Texas Pacific Group. Prior to joining Texas Pacific Group Asia, Mr. Daniels was President and Representative Director of Jupiter Telecommunications Corp. (“Jupiter”) from 1998 to 2000. In September of 2000, Jupiter merged with Titus Communications (“Titus”) where Mr. Daniels held the position of President and CEO through 2000. Titus was the leader in providing video, voice and Internet services over a common network infrastructure in Japan. Mr. Daniels spent the majority of his career at AT&T working in sales, marketing, and product management roles in California, New Jersey and Japan. Mr. Daniels was the President
22
and CEO of AT&T Japan from 1994 to 1998 and concurrently served as the Chairman of Jens, one of the first internet service providers in Japan. Mr. Daniels has had extensive board of directors experience and performed significant community service. From 2008 to 2011, Mr. Daniels served as the Mission President of the Japan Sapporo Mission of The Church of Jesus Christ of Latter Day Saints. He also served for five years as the Chairman of the Board of Directors of the American School in Japan - the largest international school in Japan. He was active with the American Chamber of Commerce in Japan and served as a Sports Commissioner for the Tokyo American Club. He is also a member of the National Advisory Council of the Marriott School of Management at Brigham Young University and the President’s Leadership Council. Mr. Daniels is the only non-Japanese member to have served on three Japanese government special advisory boards for Internet, telecommunications, and digital broadcasting. Mr. Daniels graduated from Brigham Young University with a Bachelor of Science Degree in Business Management and was awarded a Master of Arts degree in International Business from Sophia University in Tokyo. He also completed the Executive Development Program at the J.L. Kellogg School of Management at Northwestern University.
Family Relationships
There are no family relationships among our executive officers and directors.
Board Leadership Structure and Role in Risk Oversight
Although we have not adopted a formal policy on whether the Chairman and Chief Executive Officer positions should be separate or combined, we have traditionally determined that it is in the best interests of the Company and its shareholders to combine these roles. Due to the small size and early stage of the Company, we believe it is currently most effective to have the Chairman and Chief Executive Officer positions partially combined.
Our Board of Directors focuses on the most significant risks facing our company and our company’s general risk management strategy, and also ensure that risks undertaken by our Company are consistent with the Board’s appetite for risk. While the Board oversees our company’s risk management, management is responsible for day-to-day risk management processes. We believe this division of responsibilities is the most effective approach for addressing the risks facing our company and that our Board leadership structure supports this approach.
To our knowledge, during the past ten years, none of our directors, executive officers, promoters, control persons, or nominees has been:
|
·
|
the subject of 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;
|
|
·
|
convicted in a criminal proceeding or is subject to a pending criminal proceeding (excluding traffic violations and other minor offenses);
|
|
·
|
subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction or any Federal or State authority, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities;
|
|
·
|
found by a court of competent jurisdiction (in a civil action), the Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law.
|
|
·
|
the subject of, or a party to, any Federal or State judicial or administrative order, judgment, decree, or finding, not subsequently reversed, suspended or vacated, relating to an alleged violation of (a) any Federal or State securities or commodities law or regulation; (b) any law or regulation respecting financial institutions or insurance companies including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease-and-desist order, or removal or prohibition order; or (c) any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or
|
|
·
|
the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of the Exchange Act (15 U.S.C. 78c(a)(26))), any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act (7 U.S.C. 1(a)(29))), or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member.
|
23
COMMITTEES OF THE BOARD
Committees of the Board
Audit Committee. Our audit committee is comprised of Daniel Nethercott. Mr. Nethercott of the audit committee qualifies as independent under Nasdaq Marketplace Rules. Our audit committee is authorized to:
|
•
|
appoint, compensate, and oversee the work of any registered public accounting firm employed by us;
|
||||||||||||||||
|
•
|
resolve any disagreements between management and the auditor regarding financial reporting;
|
||||||||||||||||
|
•
|
pre-approve all auditing and non-audit services;
|
||||||||||||||||
|
•
|
retain independent counsel, accountants, or others to advise the audit committee or assist in the conduct of an investigation;
|
||||||||||||||||
|
•
|
meet with our officers, external auditors, or outside counsel, as necessary; and
|
||||||||||||||||
|
•
|
oversee that management has established and maintained processes to assure our compliance with all applicable laws, regulations and corporate policy.
|
||||||||||||||||
Compensation Committee. Our compensation committee is comprised of Daniel Nethercott, and is authorized to:
|
•
|
discharge the responsibilities of the board of directors relating to compensation of the our directors, executive officers and key employees;
|
||||||||||||||||
|
•
|
assist the board of directors in establishing appropriate incentive compensation and equity-based plans and to administer such plans;
|
||||||||||||||||
|
•
|
oversee the annual process of evaluation of the performance of our management; and
|
||||||||||||||||
|
•
|
perform such other duties and responsibilities as enumerated in and consistent with compensation committee’s charter.
|
||||||||||||||||
Nominating Committee. Our nominating committee is comprised of Daniel Nethercott and is authorized to:
|
•
|
assist the board of directors by identifying qualified candidates for director nominees, and to recommend to the board of directors the director nominees for the next annual meeting of shareholders;
|
||||||||||||||||
|
•
|
lead the board of directors in its annual review of its performance;
|
||||||||||||||||
|
•
|
recommend to the board director nominees for each committee of the board of directors; and
|
||||||||||||||||
|
•
|
develop and recommend to the board of directors corporate governance guidelines applicable to us.
|
||||||||||||||||
24
INDEBTEDNESS OF EXECUTIVE OFFICERS AND DIRECTORS
No executive officer, director or any member of these individuals' immediate families or any corporation or organization with whom any of these individuals is an affiliate is or has been indebted to us since the beginning of our last fiscal year.
CODE OF ETHICS
We have adopted a Code of Ethics that applies to all of our directors, officers and employees. The text of the Code of Ethics has been posted on Carbon Science’s Internet website and can be viewed at www.carbonscience.com. A copy of the Code of Ethics has also been filed as an exhibit to our Annual Report for the year ending December 31, 2007, filed with the SEC on March 26, 2008, and incorporated herein by reference. Any waiver of the provisions of the Code of Ethics for executive officers and directors may be made only by the Audit Committee and, in the case of a waiver for members of the Audit Committee, by the Board of Directors. Any such waivers will be promptly disclosed to our shareholders.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires the Company's directors, executive officers and persons who own more than 10% of the Company's stock (collectively, "Reporting Persons") to file with the SEC initial reports of ownership and changes in ownership of the Company's common stock. Reporting Persons are required by SEC regulations to furnish the Company with copies of all Section 16(a) reports they file. To the Company's knowledge, based solely on its review of the copies of such reports received or written representations from certain Reporting Persons that no other reports were required, the Company believes that during its fiscal year ended December 31, 2012 all Reporting Persons timely complied with all applicable filing requirements.
ITEM 11. EXECUTIVE COMPENSATION.
The following table sets forth the annual compensation for years ended December 31, 2012 and 2011 to our Chief Executive Officer and our most highly compensated officers other than the Chief Executive Officer at December 31, 2012 whose total compensation exceeded $100,000, which we refer to as our named executive officers.
|
Name and
Principal Position
|
Year
|
Salary ($)
|
Bonus ($)
|
Stock Awards ($)
|
Option Awards ($)
|
Non-Equity Incentive Plan Compensation ($)
|
Change in Pension Value and Non-Qualified Deferred Compensation Earnings ($)
|
All Other Compensation ($)
|
Total ($)
|
||||||||||||||||||||||||
|
Byron Elton, CEO,
|
2012
|
293,100
|
0
|
0
|
645,000
|
0
|
0
|
0
|
938,100
|
||||||||||||||||||||||||
|
President and Acting CFO*
|
2011
|
300,000
|
30,000
|
0
|
575,250
|
0
|
0
|
0
|
905,250
|
||||||||||||||||||||||||
25
|
*
|
Mr. Elton was appointed President and Chief Operating Officer on January 5, 2009 and as Chief Executive Officer and Chairman on May 20, 2009. The fair value of the stock option award to Mr. Elton was estimated using the Black-Scholes option pricing model. The estimated fair value was determined based on the market price of the Company’s stock on the date of grant.
|
Outstanding Equity Awards at Fiscal Year-End Table.
The following table sets forth information with respect to grants of options to purchase our common stock to the named executive officers at December 31, 2012.
|
Option 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
|
||||||
|
Byron Elton CEO,
President and Acting CFO
|
162,500
375,000
500,000
|
0
0
0
|
0
0
0
|
$4.31
$2.92
$1.48
|
7/11/2018
4/23/2017
3/30/2022
|
||||||
|
Lee A Daniels,
Director
|
50,000
|
0
|
0
|
$0.95
|
9/1/2019
|
||||||
Director Compensation
Non-employee directors may receive compensation for their services and reimbursement for their expenses as shall be determined from time to time by resolution of the Board. No compensation was paid to non-employee directors during the fiscal year ended December 31, 2012. Our employee directors currently do not receive cash compensation for their service on the Board of Directors.
Stock Option and Other Long-term Incentive Plan
On November 2, 2011, our Board of Directors adopted the 2011 Equity Incentive Plan, or the 2011 Plan. Under the 2011 Plan, options may be granted which are intended to qualify as Incentive Stock Options under Section 422 of the Internal Revenue Code of 1986,as amended, or the Code, or which are not intended to qualify as Incentive Stock Options thereunder. In addition, direct grants of stock or restricted stock may be awarded. There are 2,000,000 shares of common stock reserved for issuance under the 2011 Plan. A summary of the terms and provisions of the 2011 Plan are described below.
The primary purpose of the 2011 Plan is to attract and retain the best available personnel in order to promote the success of our business and to facilitate the ownership of our stock by employees and others who provide services to us. Under the 2011 Plan, options may be granted to employees, officers, directors or consultants of ours. The term of each option granted under the 2011 Plan will be contained in a stock option agreement between the optionee and us and such terms shall be determined by a committee of the board of directors consistent with the provisions of the 2011 Plan, including the following:
26
• The purchase price of the common stock subject to each incentive stock option will not be less than the fair market value (as set forth in the 2011 Plan), or in the case of the grant of an incentive stock option to a principal stockholder, not less than 110% of fair market value of such common stock at the time such option is granted.
• The dates on which each option (or portion thereof) will be exercisable and the conditions precedent to such exercise, if any, shall be fixed by the committee delegated by the board of directors, in its discretion, at the time such option is granted. Unless otherwise provided in the grant agreement, in the event of a change of control (as set forth in the Incentive Stock Plan), the committee delegated by the board may accelerate the vesting and exercisability of outstanding options all unvested shares shall immediately become vested;
• Any option granted to an employee of ours will become exercisable over a period of no longer than five years. No option will in any event be exercisable after ten years from, and no Incentive Stock Option granted to a ten percent stockholder will become exercisable after the expiration of five years from, the date of the option;
• No option will be transferable, except by will or the laws of descent and distribution, and any option may be exercised during the lifetime of the optionee only by such optionee. No option granted under the 2011 Plan will be subject to execution, attachment or other process;
• In the event of any change in our outstanding common stock by reason of a stock split, stock dividend, combination or reclassification of shares, recapitalization, merger, or similar event, the board of directors or the committee delegated by the board may adjust proportionally (a) the number of shares of common stock (i) reserved under the 2011 Plan, (ii) available for Incentive Stock Options and Non-statutory Options and (iii) covered by outstanding stock awards or restricted stock purchase offers; (b) the exercise prices related to outstanding grants so that each optionee’s proportionate interest is maintained as immediately before such event; and (c) the appropriate fair market value and other price determinations for such grants. In the event of a corporate merger, consolidation, acquisition of property or stock, separation, reorganization or liquidation, the board of directors or the committee delegated by the board of directors will be authorized to issue or assume stock options, whether or not in a transaction to which Section 424(a) of the Code, applies, and other grants by means of substitution of new grant agreements for previously issued grants or an assumption of previously issued grants.
The board of directors may, insofar as permitted by law, from time to time, suspend or terminate the 2011 Plan or revise or amend it in any respect whatsoever, except that without the approval of our stockholders, no such revision or amendment will (i) increase the number of shares subject to the 2011 Plan, (ii) reduce the exercise price of outstanding options or effect repricing through cancellations and re-grants of new options, (iii) materially increase the benefits to participants, (iv) materially change the class of persons eligible to receive grants under the 2011 Plan; (v) decrease the exercise price of any grant to below 100% of the fair market value on the date of grant; or (vi) extend the term of any options beyond that provided in the 2011 Plan; provided, however, no such action will alter or impair the rights and obligations under any option, or stock award, or restricted stock purchase offer outstanding as of the date thereof without the written consent of the participant thereunder.
Employment Agreements
We currently have no employment agreements with our executive officers.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth, as of March 30, 2013, the number of and percent of our common stock beneficially owned by:
|
·
|
each of our directors,
|
|
·
|
each of our named executive officers,
|
|
·
|
our directors and executive officers as a group, and persons or groups known by us to own beneficially 5% or more of our common stock:
|
27
Unless otherwise specified, we believe that all persons named in the table have sole voting and investment power with respect to all shares of common stock beneficially owned by them.
A person is deemed to be the beneficial owner of securities that can be acquired by him within 60 days from March 30, 2013 upon the exercise of options, warrants or convertible securities. Each beneficial owner's percentage ownership is determined by assuming that options, warrants or convertible securities that are held by him, but not those held by any other person, and which are exercisable within 60 days of March 30, 2013 have been exercised and converted.
The address for our executive officers and directors is the same as our address.
|
Name of Beneficial Owner
|
Number of Shares Beneficially Owned
|
Percentage of Common Stock Beneficially Owned (1)
|
||||||
|
Byron Elton
|
865,000
|
7.47
|
%
|
|||||
|
Daniel Nethercott
|
6,250
|
*
|
%
|
|||||
|
Lee A. Daniels
|
0
|
%
|
||||||
|
All Executive Officers and Directors as a Group (3 persons)
|
871,250
|
7.53
|
%
|
|||||
|
Bountiful Capital, LLC (2)
3905 State Street, Suite 7-187
Santa Barbara, CA 93105
|
830,001
|
7.17
|
%
|
|||||
|
New Quest Ventures, LLC (3)
195 Highway 50, #104
PO Box 7172-189
Stateline, NV 89449
|
1,071,095
|
9.25
|
%
|
|||||
|
Wings Fund, Inc. (4)
5662 Calle Real #115
Santa Barbara, CA 93117
|
1,119,068
|
9.67
|
%
|
|||||
|
William E. Beifuss, Jr.
|
1,107,659
|
9.57
|
%
|
|||||
|
Mark J. Richardson
|
700,000
|
6.05
|
%
|
|||||
*Less than one percent.
|
(1)
|
Based upon 11,576,680 shares issued and outstanding as of March 30, 2012.
|
|
(2)
|
Gregory Boden has the voting and dispositive power over the shares held by Bountiful Capital, LLC.
|
|
(3)
|
Jonathan Lei has the voting and dispositive power over the shares held by NewQuest Ventures, LLC.
|
|
(4)
|
Karen M. Graham has the voting and dispositive power over the shares held by Wings Fund, Inc.
|
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
Certain Relationships and Related Transactions
During the past three fiscal years, there have been no transactions and there are no currently proposed transactions in which the Company is a participant in which any related person has or will have a direct or indirect material interest which exceeds the lesser of $120,000 or one percent of the Company’s total assets at year end for the last two completed fiscal years.
28
Daniel Nethercott and Lee A. Daniels are independent as that term is defined under the Nasdaq Marketplace Rules.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
Audit Fees
Audit-Related Fees
We incurred assurance and audit-related fees during 2012 and 2011 of $0 and $0 respectively, to HJ Associates & Consultants, LLP in connection with the audit of the financial statements of the Company for the years ended December 31, 2012 and December 31, 2011.
Tax Fees
We incurred fees of $595 and $1,177 billed to us by HJ Associates & Consultants, LLP for services rendered to us for tax compliance, tax advice, or tax planning for the fiscal year ended December 31, 2012 and December 31, 2011, respectively.
All Other Fees
There were no fees billed to us by HJ Associates & Consultants, LLP for services rendered to us during the last two fiscal years, other than the services described above under “Audit Fees” and “Audit-Related Fees.”
As of the date of this filing, our current policy is to not engage HJ Associates & Consultants, LLP to provide, among other things, bookkeeping services, appraisal or valuation services, or international audit services. The policy provides that we engage HJ Associates & Consultants, LLP to provide audit, tax, and other assurance services, such as review of SEC reports or filings.
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULES.
EXHIBIT INDEX
|
3.1
|
Articles of Incorporation of Carbon Sciences, Inc. filed with the Nevada Secretary of State on August 25, 2007. (Incorporated by reference to the Company’s Registration Statement on Form SB-2 filed on July 27, 2007).
|
|
3.2
|
Articles of Amendment of Articles of Incorporation of Carbon Sciences, Inc. filed with the Nevada Secretary of State on April 9, 2007 (Incorporated by reference to the Company’s Registration Statement on Form SB-2 filed on July 27, 2007).
|
|
3.3
|
Certificate of Amendment to Articles of Incorporation, filed with the Nevada Secretary of State on May 9, 2011 (Incorporated by reference to the Company’s Current Report on Form 8-K filed on May 16, 2011).
|
29
|
3.4
|
Certificate of Amendment to Articles of Incorporation, filed with the Nevada Secretary of State on August 1, 2011 (Incorporated by reference to the Company’s Current Report on Form 8-K filed on August 4, 2011).
|
|
3.5
|
Bylaws of Carbon Sciences, Inc. (Incorporated by reference to the Company’s Registration Statement on Form SB-2 filed on July 27, 2007).
|
|
4.3
|
Form of Warrant issued in connection with Stock Purchase Agreement entered into between the Company and the Purchasers, signatory thereto. (Incorporated by reference to the Company’s Registration Statement on S-1 filed on November 7, 2011)
|
|
10.1
|
Lease agreement with Ekwill Street, L.P. (as amended). (Incorporated by reference to the Company’s Registration Statement on S-1 filed on November 7, 2011)
|
|
10.2
|
Exclusive License Agreement between Carbon Sciences, Inc. and the University of Saskatchewan dated December 23, 2010. (Incorporated by reference to the Company’s Registration Statement on S-1 filed on November 7, 2011)
|
|
10.3
|
Consulting Agreement dated as of March 30, 2011 between Carbon Sciences, Inc. and Emerging Fuels, Technology, Inc. (Incorporated by reference to the Company’s Registration Statement on S-1 filed on November 7, 2011)
|
|
10.4
|
Form of Stock Purchase Agreement entered into between the Company and the Purchasers, signatory thereto. (Incorporated by reference to the Company’s Registration Statement on S-1 filed on November 7, 2011)
|
|
10.5
|
Stock Option Agreement between Carbon Sciences, Inc. and Byron Elton. (Incorporated by reference to the Company’s Registration Statement on S-1 filed on November 7, 2011)
|
|
10.6
|
Carbon Sciences, Inc. 2011 Equity Incentive Plan. (Incorporated by reference to the Company’s Registration Statement on S-1 filed on November 7, 2011)
|
|
10.7
|
Consulting Agreement between Carbon Sciences, Inc. and Howard Fong, dated December 8, 2011. (Incorporated by reference to the Company’s Registration Statement on S-1 filed on January 9, 2012)
|
|
10.8
|
Form of Subscription Agreement dated as of September 18, 2006 (Incorporated by reference to the Company’s Registration Statement on Form SB-2 filed on July 27, 2007)
|
|
10.9
|
Form of Subscription Agreement dated as of October 2, 2006(Incorporated by reference to the Company’s Registration Statement on Form SB-2 filed on July 27, 2007)
|
|
10.10
|
Form of Subscription Agreement dated as of March 1, 2007(Incorporated by reference to the Company’s Registration Statement on Form SB-2 filed on July 27, 2007)
|
|
10.11
|
Form of Subscription Agreement dated as of April 16, 2007(Incorporated by reference to the Company’s Registration Statement on Form SB-2 filed on July 27, 2007)
|
|
14.1
|
Code of Ethics (Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2007 filed on March 26, 2008).
|
|
31.1*
|
Certification by Chief Executive Officer and Acting Chief Financial Officer pursuant to Sarbanes-Oxley Section 302
|
|
32.1*
|
Certification by Chief Executive Officer and Acting Chief Financial Officer pursuant to 18 U.S.C. Section 1350
|
30
|
EX-101.INS
|
XBRL INSTANCE DOCUMENT
|
|
EX-101.SCH
|
XBRL TAXONOMY EXTENSION SCHEMA DOCUMENT
|
|
EX-101.CAL
|
XBRL TAXONOMY EXTENSION CALCULATION LINKBASE
|
|
EX-101.DEF
|
XBRL TAXONOMY EXTENSION DEFINITION LINKBASE
|
|
EX-101.LAB
|
XBRL TAXONOMY EXTENSION LABELS LINKBASE
|
|
EX-101.PRE
|
XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE
|
*Filed herewith
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
Carbon Sciences, Inc.
|
|||||
|
Date: April 2, 2013
|
By:
|
/s/ Byron Elton
|
|||
|
CHIEF EXECUTIVE OFFICER (PRINCIPAL EXECUTIVE OFFICER) AND ACTING CHIEF FINANCIAL OFFICER (PRINCIPAL ACCOUNTING AND FINANCIAL OFFICER)
|
|||||
31
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated:
|
SIGNATURE
|
TITLE
|
DATE
|
||
|
/s/ Byron Elton
|
CHIEF EXECUTIVE OFFICER, PRESIDENT (PRINCIPAL EXECUTIVE OFFICER),
|
April 2, 2013
|
||
|
Byron Elton
|
ACTING CHIEF FINANCIAL OFFICER (PRINCIPAL ACCOUNTING
|
|||
|
AND FINANCIAL OFFICER) AND CHAIRMAN OF THE BOARD
|
||||
|
/s/ Lee A. Daniels
|
DIRECTOR
|
April 2, 2013
|
||
|
Lee A. Daniels
|
|
/s/ Daniel Nethercott
|
DIRECTOR
|
April 2, 2013
|
||
|
Daniel Nethercott
|
32
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders
Carbon Sciences, Inc.
(A Development Stage Company)
Santa Barbara, California
We have audited the accompanying balance sheets of Carbon Sciences, Inc. as of December 31, 2012 and 2011, and the related statements of operations, shareholders' deficit, and cash flows for the years then ended, and from inception on August 25, 2006 through December 31, 2012. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Carbon Sciences, Inc. as of December 31, 2012 and 2011, and the results of its operations and its cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As disclosed in Note 1 to the financial statements, the Company does not generate significant revenue, and has negative cash flows from operations. This raises substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/c/ HJ Associates & Consultants, LLP
HJ Associates & Consultants, LLP
Salt Lake City, Utah
April 2, 2013
F-1
CARBON SCIENCES, INC.
(A Development Stage Company)
BALANCE SHEETS
|
December 31, 2012
|
December 31, 2011
|
|||||||
|
ASSETS
|
||||||||
|
CURRENT ASSETS
|
||||||||
|
Cash
|
$ | 14,257 | $ | 7,265 | ||||
|
Prepaid expenses
|
12,888 | 17,719 | ||||||
|
TOTAL CURRENT ASSETS
|
27,145 | 24,984 | ||||||
|
PROPERTY & EQUIPMENT, at cost
|
||||||||
|
Machinery & equipment
|
- | 133,344 | ||||||
|
Computer equipment
|
9,740 | 31,434 | ||||||
|
Furniture & fixtures
|
1,459 | 1,459 | ||||||
| 11,199 | 166,237 | |||||||
|
Less accumulated depreciation
|
(7,663 | ) | (65,229 | ) | ||||
|
NET PROPERTY AND EQUIPMENT
|
3,536 | 101,008 | ||||||
|
OTHER ASSETS
|
||||||||
|
Patents
|
1,584 | 70,585 | ||||||
|
TOTAL ASSETS
|
$ | 32,265 | $ | 196,577 | ||||
|
LIABILITIES AND SHAREHOLDERS' DEFICIT
|
||||||||
|
CURRENT LIABILITIES
|
||||||||
|
Accounts payable
|
$ | 274,485 | $ | 141,361 | ||||
|
Accrued expenses
|
16,244 | 6,763 | ||||||
|
Accrued interest, notes payable
|
22,408 | 7,714 | ||||||
|
Promissory notes payable, shareholders
|
5,000 | 100,000 | ||||||
|
Derivative liability
|
753,971 | - | ||||||
|
Convertible promissory notes, net of discount of $644,520
|
86,182 | - | ||||||
|
TOTAL CURRENT LIABILITIES
|
1,158,290 | 255,838 | ||||||
|
SHAREHOLDERS' DEFICIT
|
||||||||
|
Preferred Stock, $0.001 par value,
|
||||||||
|
20,000,000 authorized common shares
|
- | - | ||||||
|
Common Stock, $0.001 par value;
|
||||||||
|
100,000,000 authorized common shares
|
||||||||
|
11,576,680 and 9,594,567 shares issued and outstanding, respectively
|
11,578 | 9,595 | ||||||
|
Additional paid in capital
|
9,814,227 | 7,609,816 | ||||||
|
Accumulated deficit during the development stage
|
(10,951,830 | ) | (7,678,672 | ) | ||||
|
TOTAL SHAREHOLDERS' DEFICIT
|
(1,126,025 | ) | (59,261 | ) | ||||
|
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT
|
$ | 32,265 | $ | 196,577 | ||||
The accompanying notes are an integral part of these financial statements
F-2
CARBON SCIENCES, INC.
(A Development Stage Company)
STATEMENTS OF OPERATIONS
|
From Inception on
|
||||||||||||
|
August 25,2006
|
||||||||||||
|
Years Ended
|
through
|
|||||||||||
|
December 31, 2012
|
December 31, 2011
|
December 31, 2012
|
||||||||||
|
REVENUE
|
$ | - | $ | - | $ | - | ||||||
|
OPERATING EXPENSES
|
||||||||||||
|
General and administrative expenses
|
1,829,698 | 1,436,727 | 8,347,921 | |||||||||
|
Research and development
|
139,706 | 402,160 | 1,245,369 | |||||||||
|
Depreciation and amortization expense
|
23,394 | 19,429 | 109,420 | |||||||||
|
TOTAL OPERATING EXPENSES
|
1,992,798 | 1,858,316 | 9,702,710 | |||||||||
|
LOSS FROM OPERATIONS BEFORE OTHER INCOME/(EXPENSES)
|
(1,992,798 | ) | (1,858,316 | ) | (9,702,710 | ) | ||||||
|
OTHER INCOME/(EXPENSE)
|
||||||||||||
|
Interest income
|
- | - | 39,521 | |||||||||
|
Loss on sale of asset
|
(74,078 | ) | - | (69,033 | ) | |||||||
|
Loss on foreign exchange
|
- | (2,327 | ) | (2,327 | ) | |||||||
|
Impairment of intangible assets
|
(88,147 | ) | - | (88,147 | ) | |||||||
|
Loss on shares issued for debt
|
(705 | ) | - | (705 | ) | |||||||
|
Gain on forgiveness of debt
|
102,000 | - | 102,000 | |||||||||
|
Common stock issued for incentive fees
|
(1,079,800 | ) | - | (1,079,800 | ) | |||||||
|
Loss on change in derivative
|
(73,259 | ) | - | (73,259 | ) | |||||||
|
Penalties
|
(288 | ) | (44 | ) | (382 | ) | ||||||
|
Interest expense
|
(66,083 | ) | (803 | ) | (76,988 | ) | ||||||
|
TOTAL OTHER INCOME/(EXPENSES)
|
(1,280,360 | ) | (3,174 | ) | (1,249,120 | ) | ||||||
|
NET LOSS
|
$ | (3,273,158 | ) | $ | (1,861,490 | ) | $ | (10,951,830 | ) | |||
|
BASIC AND DILUTED LOSS PER SHARE
|
$ | (0.30 | ) | $ | (0.29 | ) | ||||||
|
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING
|
||||||||||||
|
BASIC AND DILUTED
|
10,772,767 | 6,531,228 | ||||||||||
The accompanying notes are an integral part of these financial statements
F-3
CARBON SCIENCES, INC.
(A Development Stage Company)
STATEMENTS OF SHAREHOLDERS' DEFICIT
| Deficit |
|
|||||||||||||||||||||||||||||||
| Accumulated |
|
|||||||||||||||||||||||||||||||
| Additional | Stock | during the |
|
|||||||||||||||||||||||||||||
|
Preferred stock
|
Common stock
|
Paid-in |
Subscriptions
|
Development |
|
|||||||||||||||||||||||||||
|
Shares
|
Amount
|
Shares
|
Amount |
Capital
|
Payable
|
Stage
|
Total
|
|||||||||||||||||||||||||
|
Inception August 25, 2006
|
- | $ | - | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||||||||
|
Issuance of common stock for cash to founders in September 2006
|
||||||||||||||||||||||||||||||||
|
(2,487,500 shares issued at $0.01 for cash)
|
- | - | 2,487,500 | 2,487 | 22,388 | - | - | 24,875 | ||||||||||||||||||||||||
|
Issuance of common stock for cash in September 2006
|
||||||||||||||||||||||||||||||||
|
(175,000 shares issued at $0.60 for cash)
|
- | - | 175,000 | 175 | 104,825 | - | - | 105,000 | ||||||||||||||||||||||||
|
Issuance of common stock for cash in October 2006
|
||||||||||||||||||||||||||||||||
|
(525,000 shares issued at $0.60 for cash)
|
- | - | 525,000 | 525 | 314,475 | - | - | 315,000 | ||||||||||||||||||||||||
|
Issuance of common stock for cash in November 2006
|
||||||||||||||||||||||||||||||||
|
(9,750 shares issued at $4.00 for cash)
|
- | - | 9,750 | 10 | 38,990 | - | - | 39,000 | ||||||||||||||||||||||||
|
Issuance of common stock for cash in December 2006
|
||||||||||||||||||||||||||||||||
|
(13,875 shares issued at $4.0 for cash)
|
- | - | 13,875 | 14 | 55,486 | - | - | 55,500 | ||||||||||||||||||||||||
|
Net Loss from Inception through December 31, 2006
|
- | - | (413,641 | ) | (413,641 | ) | ||||||||||||||||||||||||||
|
Balance at December 31, 2006
|
- | - | 3,211,125 | 3,211 | 536,164 | - | (413,641 | ) | 125,734 | |||||||||||||||||||||||
|
Issuance of common stock for cash in January 2007
|
||||||||||||||||||||||||||||||||
|
(6,375 shares issued at $4.00 for cash)
|
- | - | 6,375 | 6 | 25,494 | - | - | 25,500 | ||||||||||||||||||||||||
|
Issuance of common stock for cash in March 2007
|
||||||||||||||||||||||||||||||||
|
(72,500 shares issued at $4.00 for cash)
|
- | - | 72,500 | 73 | 289,927 | - | - | 290,000 | ||||||||||||||||||||||||
|
Issuance of common stock for cash in May 2007
|
||||||||||||||||||||||||||||||||
|
(44,250 shares issued at $4.00 for cash)
|
- | - | 44,250 | 44 | 176,956 | - | - | 177,000 | ||||||||||||||||||||||||
|
Issuance of common stock for cash in May 2007
|
||||||||||||||||||||||||||||||||
|
(36,250 shares issued at $4.00 for cash)
|
- | - | 36,250 | 36 | 144,964 | - | - | 145,000 | ||||||||||||||||||||||||
|
Issuance of common stock for cash in July 2007
|
||||||||||||||||||||||||||||||||
|
(281,250 shares issued at $4.00 for cash)
|
- | - | 281,250 | 281 | 1,124,719 | - | - | 1,125,000 | ||||||||||||||||||||||||
|
Issuance of common stock for services in July 2007
|
||||||||||||||||||||||||||||||||
|
(36,800 shares issued at $4.00 per share)
|
- | - | 36,800 | 37 | 147,163 | - | - | 147,200 | ||||||||||||||||||||||||
|
Issuance of common stock for services in September 2007
|
||||||||||||||||||||||||||||||||
|
(12,500 shares issued at $6.00 per share)
|
- | - | 12,500 | 13 | 74,987 | - | - | 75,000 | ||||||||||||||||||||||||
|
Stock issuance cost
|
- | - | - | - | (265,200 | ) | - | - | (265,200 | ) | ||||||||||||||||||||||
|
Issuance of common stock for cash in December 2007
|
||||||||||||||||||||||||||||||||
|
(7,500 shares issued at $6.00 per share)
|
- | - | 7,500 | 8 | 44,992 | - | - | 45,000 | ||||||||||||||||||||||||
|
Net Loss for the year ended December 31, 2007
|
- | - | - | - | - | - | (878,679 | ) | (878,679 | ) | ||||||||||||||||||||||
|
Balance at December 31, 2007
|
- | - | 3,708,550 | 3,709 | 2,300,166 | - | (1,292,320 | ) | 1,011,555 | |||||||||||||||||||||||
|
Stock subscriptions payable
|
- | - | - | - | - | 62,000 | - | 62,000 | ||||||||||||||||||||||||
|
Net Loss (unaudited)
|
- | - | - | - | - | - | (1,041,721 | ) | (1,041,721 | ) | ||||||||||||||||||||||
|
Balance at December 31, 2008
|
- | - | 3,708,550 | 3,709 | 2,300,166 | 62,000 | (2,334,041 | ) | 31,834 | |||||||||||||||||||||||
|
Stock subscriptions payable
|
- | - | - | - | - | 213,650 | - | 213,650 | ||||||||||||||||||||||||
|
Issuance of common stock for services in April 2009
|
||||||||||||||||||||||||||||||||
|
(4,312 shares issued at fair value for $4.00 per share)
|
- | - | 4,312 | 4 | 17,246 | - | - | 17,250 | ||||||||||||||||||||||||
|
Issuance of common stock for services in April 2009
|
||||||||||||||||||||||||||||||||
|
(6,250 shares issued at fair value at $4.00 per share)
|
- | - | 6,250 | 6 | 24,994 | - | - | 25,000 | ||||||||||||||||||||||||
|
Issuance of common stock for cash in May 2009
|
||||||||||||||||||||||||||||||||
|
(68,912 shares issued at $4.00 per share)
|
- | - | 68,912 | 69 | 275,581 | (275,650 | ) | - | - | |||||||||||||||||||||||
|
Issuance of common stock for cash in May 2009
|
||||||||||||||||||||||||||||||||
|
(37,500 shares issued at $4.00 per share)
|
- | - | 37,500 | 38 | 149,962 | - | - | 150,000 | ||||||||||||||||||||||||
|
Issuance of common stock for services in May 2009
|
||||||||||||||||||||||||||||||||
|
(25,000 shares issued at fair value at $4.00 per share)
|
- | - | 25,000 | 25 | 99,975 | - | - | 100,000 | ||||||||||||||||||||||||
|
Issuance of common stock for services in September 2009
|
||||||||||||||||||||||||||||||||
|
(8,447 shares issued at fair value at $4.00 per share)
|
- | - | 8,447 | 8 | 33,780 | - | - | 33,788 | ||||||||||||||||||||||||
|
Issuance of common stock for conversion of debt in September 2009
|
||||||||||||||||||||||||||||||||
|
(69,737 shares issued at fair value at $3.80 per share)
|
- | - | 69,737 | 70 | 264,930 | - | - | 265,000 | ||||||||||||||||||||||||
|
Issuance of common stock for cash in September 2009
|
||||||||||||||||||||||||||||||||
|
(280,263 shares issued $1.052584 per share)
|
- | - | 280,263 | 280 | 294,720 | - | - | 295,000 | ||||||||||||||||||||||||
|
Stock subscriptions payable
|
- | - | - | - | - | 149,125 | - | 149,125 | ||||||||||||||||||||||||
|
Stock issuance cost
|
- | - | - | - | (51,038 | ) | - | - | (51,038 | ) | ||||||||||||||||||||||
|
Issuance of common stock for subscription payable
|
||||||||||||||||||||||||||||||||
|
(37,281 shares issued $4.00 per share)
|
- | - | 37,281 | 37 | 149,088 | (149,125 | ) | - | - | |||||||||||||||||||||||
|
Issuance of common stock for cash in December 2009
|
||||||||||||||||||||||||||||||||
|
(187,500 shares issued $1.60 per share)
|
- | - | 187,500 | 188 | 299,812 | - | - | 300,000 | ||||||||||||||||||||||||
|
Net Loss for the year ended December 31, 2009
|
- | - | - | - | - | - | (1,180,558 | ) | (1,180,558 | ) | ||||||||||||||||||||||
|
Balance at December 31, 2009
|
- | - | 4,433,752 | 4,434 | 3,859,216 | - | (3,514,599 | ) | 349,051 | |||||||||||||||||||||||
|
Issuance of common stock for cash in April 2010
|
||||||||||||||||||||||||||||||||
|
(71,429 shares issued $1.40 per share)
|
- | - | 71,429 | 72 | 99,928 | - | - | 100,000 | ||||||||||||||||||||||||
|
Issuance of common stock for cash in May 2010
|
||||||||||||||||||||||||||||||||
|
(50,000 shares issued $1.04 per share)
|
- | - | 50,000 | 50 | 51,950 | - | - | 52,000 | ||||||||||||||||||||||||
|
Issuance of common stock for cash in June 2010
|
||||||||||||||||||||||||||||||||
|
(100,000 shares issued $1.04 per share)
|
- | - | 100,000 | 100 | 103,900 | - | - | 104,000 | ||||||||||||||||||||||||
|
Stock compensation expense for stock options granted and fully vested
|
- | - | - | - | 1,230,000 | - | - | 1,230,000 | ||||||||||||||||||||||||
|
Issuance of common stock for cash in July 2010
|
||||||||||||||||||||||||||||||||
|
(50,000 shares issued $1.40 per share)
|
- | - | 50,000 | 50 | 69,950 | - | - | 70,000 | ||||||||||||||||||||||||
|
Issuance of common stock for cash in August 2010
|
||||||||||||||||||||||||||||||||
|
(8,571,429 shares issued $0.035 per share)
|
- | - | 214,286 | 214 | 299,786 | - | - | 300,000 | ||||||||||||||||||||||||
|
Issuance of common stock for cash in November 2010
|
||||||||||||||||||||||||||||||||
|
(100,000 shares issued $1.00 per share)
|
- | - | 100,000 | 100 | 99,900 | - | - | 100,000 | ||||||||||||||||||||||||
|
Issuance of common stock for cash in December 2010
|
||||||||||||||||||||||||||||||||
|
(100,000 shares issued $1.00 per share)
|
- | - | 100,000 | 100 | 99,900 | - | - | 100,000 | ||||||||||||||||||||||||
|
Net Loss for the year ended December 31, 2010
|
- | - | - | - | - | - | (2,302,583 | ) | (2,302,583 | ) | ||||||||||||||||||||||
|
Balance at December 31, 2010
|
- | - | 5,120,229 | 5,120 | 5,914,530 | - | (5,817,182 | ) | 102,468 | |||||||||||||||||||||||
|
Issuance of common stock for cash
|
||||||||||||||||||||||||||||||||
|
(price per share between $1.00 - $2.00)
|
- | - | 1,141,000 | 1,141 | 1,480,859 | - | - | 1,482,000 | ||||||||||||||||||||||||
|
Cashless issuance of common stock warrants
|
- | - | 3,333,338 | 3,334 | (3,334 | ) | - | - | - | |||||||||||||||||||||||
|
Stock compensation cost
|
- | - | - | - | 217,761 | - | - | 217,761 | ||||||||||||||||||||||||
|
Net Loss for the year ended December 31, 2011
|
- | - | - | - | - | - | (1,861,490 | ) | (1,861,490 | ) | ||||||||||||||||||||||
|
Balance at December 31, 2011
|
- | - | 9,594,567 | 9,595 | 7,609,816 | - | (7,678,672 | ) | (59,261 | ) | ||||||||||||||||||||||
|
Issuance of common stock for cash
|
||||||||||||||||||||||||||||||||
|
(prices ranging from $0.50 to $0.70 per share)
|
- | - | 474,721 | 475 | 252,600 | - | - | 253,075 | ||||||||||||||||||||||||
|
Issuance of common stock for cashless exercise of warrants
|
- | - | 423,943 | 424 | (424 | ) | - | - | ||||||||||||||||||||||||
|
Issuance of common stock for services at fair value
|
- | - | 192,857 | 193 | 165,807 | - | - | 166,000 | ||||||||||||||||||||||||
|
Issuance of common stock at fair value for an incentive fee
|
- | - | 875,000 | 875 | 1,078,925 | - | - | 1,079,800 | ||||||||||||||||||||||||
|
Issuance of common stock at fair value for acccounts payable
|
- | - | 15,592 | 16 | 15,689 | - | - | 15,705 | ||||||||||||||||||||||||
|
Stock compensation cost
|
- | - | - | - | 691,814 | - | - | 691,814 | ||||||||||||||||||||||||
|
Net Loss for the year ended December 31, 2012
|
- | - | - | - | - | - | (3,273,158 | ) | (3,273,158 | ) | ||||||||||||||||||||||
|
Balance at December 31, 2012
|
- | $ | - | 11,576,680 | $ | 11,578 | $ | 9,814,227 | $ | - | $ | (10,951,830 | ) | $ | (1,126,025 | ) | ||||||||||||||||
The accompanying notes are an integral part of these financial statements
F-4
CARBON SCIENCES, INC.
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
|
From Inception on
|
||||||||||||
|
August 25, 2006
|
||||||||||||
|
Years Ended
|
through
|
|||||||||||
|
December 31, 2012
|
December 31, 2011
|
December 31, 2012
|
||||||||||
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
||||||||||||
|
Net loss
|
$ | (3,273,158 | ) | $ | (1,861,490 | ) | $ | (10,951,830 | ) | |||
|
Adjustment to reconcile net loss to net cash
|
||||||||||||
|
used in operating activities
|
||||||||||||
|
Depreciation expense
|
23,394 | 19,429 | 109,420 | |||||||||
|
Common stock issuance for services
|
166,000 | - | 417,038 | |||||||||
|
Common stock issuance for incentive fees
|
1,079,800 | - | 1,079,800 | |||||||||
|
Stock compensation cost
|
691,814 | 217,761 | 2,139,575 | |||||||||
|
Impairment of intangible assets
|
88,147 | 88,147 | ||||||||||
|
Loss on sale of asset
|
74,078 | - | 69,033 | |||||||||
|
Loss on shares issued for debt
|
705 | - | 705 | |||||||||
|
Gain on forgiveness of debt
|
(102,000 | ) | - | (102,000 | ) | |||||||
|
Amortization of debt discount recorded as interest expense
|
44,942 | - | 44,942 | |||||||||
|
Loss on change in derivative liability
|
73,259 | - | 73,259 | |||||||||
|
Changes in Assets and Liabilities
|
||||||||||||
|
(Increase) Decrease in:
|
||||||||||||
|
Prepaid expenses
|
4,831 | (10,156 | ) | (12,888 | ) | |||||||
|
Increase (Decrease) in:
|
||||||||||||
|
Accounts payable
|
250,124 | 128,726 | 391,485 | |||||||||
|
Accrued expenses
|
268,627 | (4,238 | ) | 283,104 | ||||||||
| . | ||||||||||||
|
NET CASH USED IN OPERATING ACTIVITIES
|
(609,437 | ) | (1,509,968 | ) | (6,370,210 | ) | ||||||
|
CASH FLOWS USED IN INVESTING ACTIVITIES:
|
||||||||||||
|
Proceeds from sale of vehicle
|
- | - | 24,500 | |||||||||
|
Patent expenditures
|
(19,146 | ) | (33,471 | ) | (89,731 | ) | ||||||
|
Purchase of equipment
|
- | (44,718 | ) | (206,489 | ) | |||||||
|
NET CASH USED IN INVESTING ACTIVITIES
|
(19,146 | ) | (78,189 | ) | (271,720 | ) | ||||||
|
CASH FLOWS IN FINANCING ACTIVITIES:
|
||||||||||||
|
Advances from officer
|
- | - | 113,000 | |||||||||
|
Loans from investors
|
- | 100,000 | 625,000 | |||||||||
|
Proceeds received for convertible promissory notes
|
417,500 | - | 392,500 | |||||||||
|
Repayment of advances and loans
|
(35,000 | ) | (25,000 | ) | (383,000 | ) | ||||||
|
Proceeds from subscriptions payable
|
- | - | 362,775 | |||||||||
|
Proceeds from issuance of common stock, net
|
253,075 | 1,482,000 | 5,545,912 | |||||||||
|
NET CASH PROVIDED BY FINANCING ACTIVITIES
|
635,575 | 1,557,000 | 6,656,187 | |||||||||
|
NET INCREASE/(DECREASE) IN CASH
|
6,992 | (31,157 | ) | 14,257 | ||||||||
|
CASH, BEGINNING OF PERIOD
|
7,265 | 38,422 | - | |||||||||
|
CASH, END OF PERIOD
|
$ | 14,257 | $ | 7,265 | $ | 14,257 | ||||||
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
|
||||||||||||
|
Interest paid
|
$ | 6,208 | $ | 435 | $ | 9,530 | ||||||
|
Taxes paid
|
$ | - | $ | - | $ | - | ||||||
| . | ||||||||||||
|
SUPPLEMENTAL DISCLOSURES OF NON CASH ACTIVITIES
|
||||||||||||
|
During the year ended December 31, 2012, the Company issued 15,592 shares of common stock at fair value of $15,705 for accounts
|
||||||||||||
|
payable with a loss of $705. Also the Company issued 423,943 shares of common stock through a cashless exercise of 900,001 common
|
||||||||||||
|
stock purchase warrants. During the year ended December 31, 2011, the Company issued 3,333,338 shares of common stock for a cashless
|
||||||||||||
|
exercise of 4,000,000 common stock purchase warrants.
|
||||||||||||
The accompanying notes are an integral part of these financial statements
F-5
CARBON SCIENCES, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2012 and 2011
1. ORGANIZATION AND LINE OF BUSINESS
Organizational History
The Company was incorporated in the State of Nevada on August 25, 2006, as Zingerang, Inc. On April 2, 2007 the Company changed its name to Carbon Sciences, Inc.
Overview of Business
The Company was initially in the business of offering a real-time and interactive mobile communication services to businesses and consumers under the Zingerang trade name. The Company is now pursuing a new line of business. The company is developing a technology to convert earth destroying carbon dioxide (CO2) into a useful form that will not contribute to green house gases. This technology is based on a patent filed by the company and developed under the brand name, GreenCarbon™ Technology. By eliminating harmful CO2 from human created sources, such as power plants and industrial factories, the technology will provide a partial solution to the problem of global warming. GreenCarbon™ Technology is initially targeted at electrical power plants. CO2 makes up nearly 80% of all greenhouse gases. More than a quarter of that CO2 comes from electrical power plants.
Going Concern
The accompanying financial statements have been prepared on a going concern basis of accounting, which contemplates continuity of operations, realization of assets and liabilities, and commitments in the normal course of business. The accompanying financial statements do not reflect any adjustments that might result if the Company is unable to continue as a going concern. The Company does not generate significant revenue, and has negative cash flows from operations, which raise substantial doubt about the Company’s ability to continue as a going concern. The ability of the Company to continue as a going concern and appropriateness of using the going concern basis is dependent upon, among other things, additional cash infusion. As discussed in Note 3, the Company has obtained funds from its shareholders since it’s’ inception through December 31, 2012. Management believes this funding will continue, and is also actively seeking new investors. Management believes the existing shareholders and the prospective new investors will provide the additional cash needed to meet the Company’s obligations as they become due, and will allow the development of its core of business.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This summary of significant accounting policies of Carbon Sciences, Inc. is presented to assist in understanding the Company’s financial statements. The financial statements and notes are representations of the Company’s management, which is responsible for their integrity and objectivity. These accounting policies conform to accounting principles generally accepted in the United States of America and have been consistently applied in the preparation of the financial statements.
Development Stage Activities and Operations
The Company has been in its initial stages of formation and for the year ended December 31, 2012, had no revenues. A development stage activity is one in which all efforts are devoted substantially to establishing a new business and even if planned principal operations have commenced, revenues are insignificant.
Revenue Recognition
The Company will recognize revenue when services are performed, and at the time of shipment of products, provided that evidence of an arrangement exists, title and risk of loss have passed to the customer, fees are fixed or determinable, and collection of the related receivable is reasonably assured. To date, the Company has had no revenues and is in the development stage.
Cash and Cash Equivalent
The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the accompanying financial statements. Significant estimates made in preparing these financial statements include the estimate of useful lives of property and equipment, the deferred tax valuation allowance, and the fair value of stock options. Actual results could differ from those estimates.
F-6
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Property and Equipment
Property and equipment are stated at cost, and are depreciated using the straight line method over its estimated useful lives:
|
Computer equipment
|
3 Years
|
|
Machinery & Equipment
|
7 Years
|
|
Mobile vehicle
|
5 Years
|
During the year ended December 31, 2012, the Company abandoned equipment in the amount of $155,837, and recognized a loss of $74,078. Depreciation expense as of December 31, 2012 and 2011 was $23,394 and $19,429 respectively.
Fair Value of Financial Instruments
Disclosures about fair value of financial instruments, requires disclosure of the fair value information, whether or not recognized in the balance sheet, where it is practicable to estimate that value. As of December 31, 2012, the amounts reported for cash, accrued interest and other expenses, and notes payable approximate the fair value because of their short maturities.
We adopted ASC Topic 820 (originally issued as SFAS 157, “Fair Value Measurements”) as of January 1, 2008 for financial instruments measured as fair value on a recurring basis. ASC Topic 820 defines fair value, established a framework for measuring fair value in accordance with accounting principles generally accepted in the United States and expands disclosures about fair value measurements.
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC Topic 820 established a three-tier fair value hierarchy which prioritizes the inputs used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1measurements) and the lowest priority to unobservable inputs (level 3 measurements). These tiers include:
|
·
|
Level 1, defined as observable inputs such as quoted prices for identical instruments in active markets;
|
|
·
|
Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable such as quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active; and
|
|
·
|
Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions, such as valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.
|
We measure certain financial instruments at fair value on a recurring basis. Assets and liabilities measured at fair value on a recurring basis are as follows at December 31, 2012:
|
Total
|
(Level 1)
|
(Level 2)
|
(Level 3)
|
|||||||||||||
|
Assets
|
$ | - | $ | - | $ | - | $ | - | ||||||||
|
Total assets measured at fair value
|
- | - | - | - | ||||||||||||
|
Liabilities
|
||||||||||||||||
|
Derivative liability
|
753,971 | - | - | 753,971 | ||||||||||||
|
Convertible promissory note
|
86,182 | - | - | 86,182 | ||||||||||||
|
Total liabilities measured at fair value
|
$ | 840,153 | $ | - | $ | - | $ | 840,153 | ||||||||
Loss per Share Calculations
Loss per Share dictates the calculation of basic earnings per share and diluted earnings per share are computed by dividing income available to common shareholders by the weighted-average number of common shares available. Diluted earnings per share is computed similar to basic earnings per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. No shares for employee options or warrants were used in the calculation of the loss per share as they were all anti-dilutive. The Company’s diluted loss per share is the same as the basic loss per share for the years ended December 31, 2012 and 2011.
|
For the years ended
|
||||||||
|
December 31,
|
||||||||
|
2012
|
2011
|
|||||||
|
(Loss) to common shareholders (Numerator)
|
$ | (3,273,158 | ) | $ | (1,861,490 | ) | ||
|
Basic and diluted weighted average number of common shares outstanding (Denominator)
|
10,772,767 | 6,531,228 | ||||||
F-7
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income Taxes
The Company uses the liability method of accounting for income taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to financial statements carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry-forwards. The measurement of deferred tax assets and liabilities is based on provisions of applicable tax law. The measurement of deferred tax assets is reduced, if necessary, by a valuation allowance based on the amount of tax benefits that, based on available evidence, is not expected to be realized.
Research and Development
Research and development costs are expensed as incurred. Total research and development costs were $139,706 and $402,160 for the years ended December 31, 2012 and 2011, respectively.
Advertising Costs
The Company expenses the cost of advertising and promotional materials when incurred. Total advertising costs were $0 for the years ended December 31, 2012 and 2011, respectively.
Stock-Based Compensation
Share based payments applies to transactions in which an entity exchanges its equity instruments for goods or services, and also applies to liabilities an entity may incur for goods or services that are to follow a fair value of those equity instruments. We will be required to follow a fair value approach using an option-pricing model, such as the Black Scholes option valuation model, at the date of a stock option grant. The deferred compensation calculated under the fair value method would then be amortized over the respective vesting period of the stock option. The adoption of share based compensation has no material impact on our results of operations.
During the year ended December 31, 2012, the Company reviewed the capitalized patents for impairment in accordance with ASC 350, and determined that due to know technological advances, and economic conditions the carrying amount exceeded its fair value. The Company adjusted the carrying amount of $89,731 to $1,584, and recognized an impairment loss of $88,147 during the period ended December 31, 2012. As of December 31, 2012 and 2011, no amortization has been expensed for the patents, since approval of the patents were pending.
Recently Issued Accounting Pronouncements
Management reviewed accounting pronouncements issued during the year ended December 31, 2012, and the following pronouncements were adopted during the period.
The Company adopted ASC 815 “Accounting for Derivative Instruments and Hedging Activities”. This pronouncement addresses the accounting for derivative instruments including certain derivative instruments embedded in other contracts, and hedging activities. Derivative instruments that meet the definition of assets and liabilities should be reported in the financial statements at fair value, and any gain or loss should be recognized in current earnings. The adoption of this pronouncement did not have a material effect on the financial statements of the Company.
The Company adopted ASC 835 "Accounting for Interest". This pronouncement addresses the appropriate accounting when the face amount of a note does not reasonably represent the present value of the consideration given or received in the exchange. A note issued solely for cash equal to its face amount is presumed to earn the stated rate of interest, however, in some cases the parties may also exchange unstated or stated rights or privileges, which are given accounting recognition by establishing a note discount or premium account. In such instances, the effective interest rate differs from the stated rate. The note discount shall be amortized as interest expense over the life of the note. The adoption of this pronouncement had a material effect on the financial statements of the Company.
3. CAPITAL STOCK
At December 31, 2012, the Company’s authorized stock consisted of 100,000,000 shares of common stock, with a par value of $0.001. The Company is also authorized to issue 20,000,000 shares of preferred stock with a par value of $0.001 per share. The rights, preferences and privileges of the holders of the preferred stock will be determined by the Board of Directors prior to issuance of such shares.
During the year ended December 31, 2012, the Company issued 230,000 shares of common stock with 460,000 common stock purchase warrants at a price of $0.50 for cash of $115,000; 166,150 shares of common stock at a price of $0.50 per share for cash of $83,075; 78,571 shares of common stock at a price of $0.70 per share for cash of $55,000; 192,857 shares of common stock for services at a fair value of $166,000; 15,592 shares of common stock at fair value of $8,110 for accounts payable of $7,405 and recognized a loss of $705; 423,943 shares of common stock through a cashless exercise of 900,001 purchase warrants. Also, the Company issued 875,000 shares of common stock at a fair value of $1,079,800 as an incentive to certain shareholders to defer removal of the standard restrictive legend on certain shares of the Company’s common stock.
F-8
3. CAPITAL STOCK ( Continued)
During the year ended December 31, 2011, the Company issued 800,000 shares of common stock at a price of $1.00 per share for cash of $800,000, with warrants attached with the option to purchase 3,200,000 shares of common stock over a period of five years; 341,000 shares of common stock at a price of $2.00 for cash of $682,000; 3,333,338 shares of common stock upon cashless exercise of warrants to purchases 4,000,000 shares of common stock.
4. STOCK OPTIONS AND WARRANTS
As of December 31, 2012, the Board of Directors of the Company granted non-qualified stock options for 762,500 shares of common stock to its employees and consultants. Each Option shall be exercisable to the nearest whole share, in installments or otherwise, as the respective Option agreements may provide. Notwithstanding any other provisions of the Option agreement, each Option expires on the date specified in the Option agreement, which dates vary between not later than the seventh (7th) or tenth (10th) anniversary from the grant date of the options. The stock options vested immediately, and are exercisable for a period of seven years from the date of grant at exercise prices between $0.95 and $4.31 per share, and for a period of ten years from the date of grant at an exercise price of $1.48 per share, the market value of the Company’s common stock on the date of grant.
|
12/31/2012
|
12/31/2011
|
|||||||
|
Risk free interest rate
|
1.18%-2.23% | .67%-3.3% | ||||||
|
Stock volatility factor
|
92.47% -280.23% | 92.21% -98.23% | ||||||
|
Weighted average expected option life
|
7-10 years
|
2-7 years
|
||||||
|
Expected dividend yield
|
None
|
None
|
||||||
A summary of the Company’s stock option activity and related information follows:
|
12/31/2012
|
12/31/2011
|
||||||||||||||
|
Weighted
|
Weighted
|
||||||||||||||
|
Number
|
average
|
Number
|
average
|
||||||||||||
|
of
|
exercise
|
of
|
exercise
|
||||||||||||
|
Options
|
price
|
Options
|
price
|
||||||||||||
|
Outstanding, beginning of period
|
725,000 | $ | 3.38 | 387,500 | $ | 2.92 | |||||||||
|
Granted
|
762,500 | 1.45 | 337,500 | 3.91 | |||||||||||
|
Exercised
|
- | - | - | - | |||||||||||
|
Expired/forfeited
|
(350,000 | ) | 2.37 | - | - | ||||||||||
|
Outstanding, end of period
|
1,137,500 | $ | 2.39 | 725,000 | $ | 3.38 | |||||||||
|
Exercisable at the end of period
|
715,500 | $ | 2.25 | 471,375 | $ | 2.47 | |||||||||
|
Weighted average fair value of
|
|||||||||||||||
|
options granted during the period
|
$ | 1.45 | $ | 3.91 | |||||||||||
The weighted average remaining contractual life of options outstanding as of December 31, 2012 was as follows:
|
Weighted
|
|||||||||||
|
Average
|
|||||||||||
|
Stock
|
Stock
|
Remaining
|
|||||||||
|
Exercisable
|
Options
|
Options
|
Contractual
|
||||||||
|
Prices
|
Outstanding
|
Exercisable
|
Life (years)
|
||||||||
| $ | 2.92 | 387,500 | 387,500 | 4.31 | |||||||
| $ | 4.31 | 162,500 | 110,500 | 5.53 | |||||||
| $ | 3.40 | 25,000 | 16,000 | 5.72 | |||||||
| $ | 1.48 | 512,500 | 164,000 | 6.25 | |||||||
| $ | 0.95 | 50,000 | 37,500 | 6.72 | |||||||
| 1,137,500 | 715,500 | ||||||||||
The stock-based compensation expense recognized in the statement of operations during the years ended December 31, 2012 and 2011, related to the granting of these options is $691,814 and $217,761, respectively.
Warrants
During the year ended December 31, 2012, the Company granted 460,000 common stock purchase warrants with the purchase of 230,000 shares of common stock at a price of $0.50 per share, and 900,001 common stock purchase warrants issued with notes payable for $210,000. On April 4, 2012, through a cashless exercise, the Company issued 423,943 shares of common stock for the 900,001 stock purchase warrants. As of December 31, 2012, there were 460,000 common stock purchase warrants outstanding.
During the years ended December 31, 2012 and 2011, the Company issued warrants for services. A summary of the Company’s warrant activity and related information follows:
F-9
4. STOCK OPTIONS AND WARRANTS (Continued)
|
Year End
|
Year End
|
|||||||||||||||
|
December 31, 2012
|
December 31, 2011
|
|||||||||||||||
|
Weighted
|
Weighted
|
|||||||||||||||
|
average
|
average
|
|||||||||||||||
|
exercise
|
exercise
|
|||||||||||||||
|
Warrants
|
price
|
Warrants
|
price
|
|||||||||||||
|
Outstanding -beginning of year
|
- | $ | - | 800,000 | $ | 1.00 | ||||||||||
|
Granted
|
1,360,001 | 0.63 | 3,200,000 | 1.00 | ||||||||||||
|
Exercised
|
(900,001 | ) | 0.70 | (4,000,000 | ) | 1.00 | ||||||||||
|
Forfeited
|
- | - | - | - | ||||||||||||
|
Outstanding - end of year
|
460,000 | $ | 0.50 | - | $ | - | ||||||||||
5. RENTAL LEASE
|
|
The Company extended its facility lease for a period of five years expiring on September 30, 2017. The base rent for the period of October 1, 2012 to September 30, 2013, is $2,884 per month, and for the remaining period commencing on October 1, 2013 to September 30, 2017, the base rent will be $2,971. The rent paid for the years ended December 31, 2012 and 2011 were $46,089 and $44,424.
|
6. INTANGIBLE ASSETS
|
|
Intangible assets that have finite useful lives continue to be amortized over their useful lives, and are reviewed for impairment when warranted
|
|
|
by economic condition.
|
|
|
|
Useful Lives
|
2012
|
2011
|
|||||||
|
Patents-gross
|
$ | 1,584 | $ | 70,585 | |||||
|
Less accumulated amortization
|
15 years
|
- | - | ||||||
| $ | 1,584 | $ | 70,585 | ||||||
7. INCOME TAXES
|
|
The Company files income tax returns in the U.S. Federal jurisdiction, and the state of California. With few exceptions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 2010.
|
|
|
Deferred income taxes have been provided by temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for tax purposes. To the extent allowed by GAAP, we provide valuation allowances against the deferred tax assets for amounts when the realization is uncertain.Included in the balances at December 31, 2012 and 2011, are no tax positions for which the ultimate deductibility is highly certain, but for which there is uncertainty about the timing of such deductibility. Because of the impact of deferred tax accounting, other than interest and penalties, the disallowance of the shorter deductibility period would not affect the annual effective tax rate but would accelerate the payment of cash to the taxing authority to an earlier period.
|
|
|
The Company's policy is to recognize interest accrued related to unrecognized tax benefits in interest expense and penalties in operating expenses. During the periods ended December 31, 2012 and 2011, the Company did not recognize interest and penalties.
|
|
8.
|
DEFERRED TAX BENEFIT
|
|
|
At December 31, 2012, the Company had net operating loss carry-forwards of approximately $7,148,300, which begins to expire at dates that have not been determined. No tax benefit has been reported in the December 31, 2012 financial statements since the potential tax benefit is offset by a valuation allowance of the same amount.
|
|
|
A reconciliation of income tax expense that would result from applying the U.S. Federal and State rate of 40% to pretax income from continuing operations for the period ended December 31, 2012 and 2011, with federal income tax expense presented in the financial statements is as follows:
|
F-10
|
8.
|
DEFERRED TAX BENEFIT (Continued)
|
|
2012
|
2011
|
|||||||
|
Income tax benefit computed at U.S. Federal
|
||||||||
|
statutory rate of 34%
|
$ | (1,406,900 | ) | $ | (744,600 | ) | ||
|
State Income taxes, net of benefit of federal taxes
|
300 | - | ||||||
|
Depreciation
|
8,600 | (13,400 | ) | |||||
|
R&D
|
4,100 | 12,300 | ||||||
|
Accrued compensated absences
|
1,800 | (2,700 | ) | |||||
|
Other
|
400 | 1,300 | ||||||
|
Related party payable
|
- | 100 | ||||||
|
Penalty
|
100 | 20 | ||||||
|
Loss on disposal of asset
|
28,700 | - | ||||||
|
Non deductible stock deductions
|
883,700 | 87,100 | ||||||
|
Valuation Allowance
|
479,200 | 659,880 | ||||||
|
Income tax expense
|
$ | - | $ | - | ||||
|
|
Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible differences and operating loss and tax credit carry-forwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the difference between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
|
The items as of December 31, 2012 and 2011, which comprise a significant portion of deferred tax assets and liabilities are approximately as follows:
|
2012
|
2011
|
|||||||
|
Deferred tax assets:
|
||||||||
|
NOL carryover
|
$ | 3,073,800 | $ | 2,414,200 | ||||
|
Contribution carryover
|
- | 200 | ||||||
|
R & D credit carryover
|
100,000 | 90,500 | ||||||
|
Related party payable
|
3,300 | 3,100 | ||||||
|
Accrued compensated absences
|
3,800 | 1,800 | ||||||
|
Deferred tax liabilites:
|
||||||||
|
Depreciation
|
(1,000 | ) | (35,700 | ) | ||||
|
Less Valuation Allowance
|
(3,179,900 | ) | (2,474,100 | ) | ||||
|
Net deferred tax asset
|
$ | - | $ | - | ||||
|
|
Due to the change in ownership provisions of the Tax Reform Act of 1986, net operating loss carry-forwards for Federal income tax reporting purposes are subject to annual limitations. Should a change in ownership occur, net operating loss carryforwards may be limited as to use in future years.
|
|
|
9. RELATED PARTY TRANSACTION
|
|
|
During the year ended December 31, 2012, the Company signed additional promissory notes with various investors for funds received in the amount of $267,500 for operating expenses. The Company repaid $35,000 of principal, including interest of $240 during the period. The notes bear interest at 5% per annum, and are due within one year from their effective dates. On December 12, 2012, the Company exchanged the notes for convertible notes, leaving an outstanding balance of $5,000 as of December 31, 2012.
|
|
|
10. CONVERTIBLE PROMISSORY NOTES
|
|
|
On September 19, 2012, the Company entered into a securities purchase agreement for the sale of a 8% convertible promissory note in the aggregate principal amount of $42,500, which includes a deferred debt issuance cost of $2,500. The funds were received on October 3, 2012, and the note is convertible into shares of common stock of the Company at a price equal to a variable conversion price of 58% multiplied by the market price representing a discount of 42%. The market price means the average of the lowest three (3) trading prices for the common stock during a ten (10) trading day period ending on the latest complete trading day prior to the conversion date. The note matures on June 21, 2013.
|
|
|
On October 8, 2012, the Company received in consideration upon execution of a note in the sum of $75,000 on a securities purchase agreement for the sale of 10% convertible promissory notes in the aggregate principal amount of $335,000 with a 10% Original Issue Discount (OID) of $35,000. The funds were received on October 10, 2012. The principal amount of $81,784 outstanding on the note as of December 31, 2012, includes the payment of $75,000 plus the unamortized original issued discount of $6,784. If the note is repaid before 90 days, the interest rate will be zero percent (0%), otherwise a one time interest rate of five percent (5%) will be applied to the principal sum outstanding. The note is convertible into shares of common stock of the Company at a price equal to the lesser of $0.72 or 70% of the lowest trade price in the 25 trading days previous to the conversion. The notes mature one (1) year from the effective date of each payment.
|
F-11
|
|
10. CONVERTIBLE PROMISSORY NOTES (Continued)
|
On December 12, 2012, the Company exchanged certain promissory notes in the aggregate amount of $327,500 to convertible promissory notes. The Company entered into securities purchase agreements for the sale of 10% convertible promissory notes in the aggregate principal amount of $327,500, which are convertible into shares of common stock of the Company at a conversion price equal to (a) the lesser of $0.54 per share or (b) 50% of the lowest trade price recorded on any trade date after the effective date, or (c) the lowest effective price per share granted to any person after the effective date. The notes mature one (1) year from the effective date of the note.
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On December 21, 2012, the Company entered into a securities purchase agreement for the sale of a 8% convertible promissory note in the aggregate principal amount of $32,500, which includes a deferred debt issuance cost of $2,500. The funds were received on December 21, 2012, and the note is convertible into shares of common stock of the Company at a price equal to a variable conversion price of 58% multiplied by the market price representing a discount of 42%. The market price means the average of the lowest three (3) trading prices for the common stock during a ten (10) trading day period ending on the latest complete trading day prior to the conversion date. The note matures on September 14, 2013.
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On December 31, 2012, the Company entered into promissory notes in exchange for services rendered in the aggregate amount of $244,452 for convertible promissory notes. The Company entered into securities purchase agreements for the sale of 5% convertible promissory notes in the aggregate principal amount of $244,452, which are convertible into shares of common stock of the Company at a conversion price equal to the lesser of $0.20 per share or the closing price per share of common stock recorded on the trading day immediately preceding the date of conversion. The notes mature two (2) years from their effective dates.
ASC Topic 815 provides guidance applicable to convertible debt issued by the Company in instances where the number into which the debt can be converted is not fixed. For example, when a convertible debt converts at a discount to market based on the stock price on the date of conversion, ASC Topic 815 requires that the embedded conversion option of the convertible debt be bifurcated from the host contract and recorded at their fair value. In accounting for derivatives under accounting standards, the Company recorded a liability of $1,014,055 representing the estimated present value of the conversion feature considering the historic volatility of the Company’s stock, and a discount of $680,712 representing the imputed interest associated with the embedded derivative, plus $8,750 of the original issue discount. The discount is amortized over the life of the convertible debt, which resulted in the recognition of $44,942 in interest expense for the year ended December 31, 2012, and the derivative liability is adjusted periodically according to stock price fluctuations. At the time of conversion, any remaining derivative liability will be charged to additional paid-in capital.
For purpose of determining the fair market value of the derivative liability, the Company used Black Scholes option valuation model. The significant assumptions used in the Black Scholes valuation of the derivative are as follows:
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Stock price on the valuation dates
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$ | 0.20 - $0.77 | |
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Conversion price for the debt
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$ | 0.10 - $0.50 | |
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Dividend yield
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0.00% | ||
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Years to Maturity
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1 - 2 | ||
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Risk free rate
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.11% - .25% | ||
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Expected volatility
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90.93% - 313.78% | ||
The value of the derivative liability balance at December 31, 2012 was $753,971.
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11.
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SUBSEQUENT EVENT
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Management evaluated subsequent events as of the date of the financial statements pursuant to ASC TOPIC 855.
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On February 22, 2013, the Company entered into a securities purchase agreement for the sale of a 10% convertible promissory note for $10,000 with an aggregate principal amount of $100,000. The note is convertible into shares of common stock of the Company at a price equal to the lesser of $0.09 per share of common stock or fifty percent (50%) of the lowest trade price of common stock recorded on any trade day after the effective date. The note matures one (1) year from the effective date of each payment.
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F-12