Digital Locations, Inc. - Quarter Report: 2012 June (Form 10-Q)

SUPPLEMENTAL DISCLOSURES OF NON CASH ACTIVITIES

From inception on August 25, 2006 through June 30, 2012, the Company issued 69,737 shares of common stock for converted debt in the amount of $265,000, at fair value of $3.80 per share; issued 6,098 shares of common stock at a fair value of $8,110 for an accounts payable with a loss of $610.

The accompanying notes are an integral part of these financial statements

CARBON SCIENCES, INC.

(A Development Stage Company)

NOTES TO FINANCIAL STATEMENTS-UNAUDITED

JUNE 30, 2012

1.     Basis of Presentation

The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all normal recurring adjustments considered necessary for a fair presentation have been included. Operating results for the six months ended June 30, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012. For further information refer to the financial statements and footnotes thereto included in the Company's Form 10-K for the year ended December 31, 2011.

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 any revenues, 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. The Company has obtained funds from its shareholders since its inception, and 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. However, there can be no assurance the Company will be able to raise additional funds, or if any funding will be available to us upon such terms that are acceptable to us.

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 is in its initial stages of formation and has 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 Equivalents

The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.

CARBON SCIENCES, INC.

(A Development Stage Company)

NOTES TO FINANCIAL STATEMENTS-UNAUDITED

JUNE 30, 2012

2.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Loss per Share Calculations

The Company adopted the accounting pronouncement for loss per share, which dictates the calculation of basic earnings per share and diluted earnings per share. Basic 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. The Company’s diluted loss per share is the same as the basic loss per share for the six months ended June 30, 2012 as the inclusion of any potential shares would have had an anti-dilutive effect due to the Company generating a loss.

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.

Recently Issued Accounting Pronouncements

Management reviewed accounting pronouncements issued during the six months ended June 30, 2012, and no pronouncements were adopted during the period, which would have a material effect on the accompanying financial statements.

3.     CAPITAL STOCK 

During the six months ended June 30, 2012, the Company issued 166,150 shares of common stock at a price of $0.50 per share for cash of $83,075; issued 78,571 shares of common stock at a price of $0.70 per share for cash of $55,000; issued 50,000 shares of common stock for services at a fair value of $76,000; issued 6,098 shares of common stock at fair value of $8,110 for an accounts payable of $7,500 and recognized a loss of $610; issued 423,943 shares of common stock through a cashless exercise of 900,001 purchase warrants. Also, the Company issued 500,000 shares of common stock at a fair value of $779,800 for a stock incentive fee.

During the six months ended June 30, 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 to purchase 3,200,000 shares of common stock over a period of five years.

4.     STOCK OPTIONS

As of June 30, 2012, the Board of Directors of the Company granted non-qualified stock options to its employees to purchase 1,437,500 shares of common stock. Each Option is exercisable to the nearest whole share, in installments or otherwise, as the respective Option agreements provide. Notwithstanding any other provisions of the Option agreement, each Option expires on the date specified in the Option agreement, which date shall not be later than the seventh (7^th) 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 $1.48 and $4.31 per share, the market value of the Company’s common stock on the date of grant.

CARBON SCIENCES, INC.

(A Development Stage Company)

NOTES TO FINANCIAL STATEMENTS-UNAUDITED

JUNE 30, 2012

4.     STOCK OPTIONS AND WARRANTS (Continued)

A summary of the Company’s stock option activity and related information follows:

Stock-based compensation expense recognized during the period is based on the value of the portion of stock-based payment awards that is ultimately expected to vest. Stock-based compensation expense recognized in the financial statements of operations during the six months ended June 30, 2012, included compensation expense for the stock-based payment awards granted prior to, but not yet vested, as of March 31, 2012 based on the grant date fair value estimated, and compensation expense for the stock-based payment awards granted subsequent to March 31, 2012, based on the grant date fair value estimated. We account for forfeitures as they occur. The stock-based compensation expense recognized in the statement of income during the six months ended June 30, 2012 and 2011 is $379,748 and $12,844, respectively.

Warrants

During the six months ended June 30, 2012, the Company granted warrants to purchase 900,001 shares of the Company’s common stock. On April 4, 2012, through a cashless exercise, the Company issued 423,943 shares of common stock for the 900,001 purchase warrants. As of June 30, 2012, there were no warrants outstanding.

5.     RELATED PARTY TRANSACTION

During the six months ending June 30, 2012, the Company issued promissory notes to various investors for funds received in the amount of $171,000 for operating expenses. The notes bear interest at 5% per annum, and are due within one year from the date of issuance. As of June 30, 2012, the Company has an aggregate principal amount of $271,000 in notes. On July 3, 2012, one of the promissory notes in the amount of $10,000, including interest of $240 was repaid.

CARBON SCIENCES, INC.

(A Development Stage Company)

NOTES TO FINANCIAL STATEMENTS-UNAUDITED

JUNE 30, 2012

6.     SUBSEQUENT EVENTS

Management has evaluated subsequent events according to the requirements of ASC TOPIC 855, and has reported the following:

On July 3, 2012, the Company issued two promissory notes to two investors and received funds in the amount of $25,000 for operating expenses, which were paid off in the same month. Also, one of the outstanding promissory notes payable in the amount of $10,000, including interest of $240 was repaid.

On July 16, 2012, the Company sold 180,000 shares of common stock at $0.50 per share, with warrants attached to purchase 360,000 shares of common stock for gross proceeds of $90,000.

On July 24, 2012, the Company issued 375,000 shares of common stock at a fair value of $300,000 as consideration in connection with certain agreements reached by the Company with certain existing shareholders.. Also, the Company issued 9,494 shares of common stock in exchange for an accounts payable in the amount of $7,500.

ITEM 2: 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” in our annual report on Form 10-K filed with the SEC on March 30, 2012 and other filings made with the SEC.

OVERVIEW

Innovating at the forefront of chemical engineering, Carbon Sciences is developing a breakthrough technology to make cleaner and greener transportation fuels, hydrogen and other valuable, large volume products from natural gas. We believe, our highly scalable, 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 this process is a breakthrough catalyst that can reduce the cost of reforming natural gas into synthetic gas (syngas), the most costly step in making products from natural gas.

Our goal is to help reduce the world’s dependence on petroleum by developing technology to enable the cost effective use of natural gas as a feedstock to produce clean and green liquid fuels for use in the existing transportation infrastructure.

We believe that natural gas is the world’s next primary source of fuel. While found in abundant supply at affordable prices in the U.S. and throughout the world, natural gas cannot be used directly in cars, trucks, trains and planes without a massive overhaul of the existing liquid fuels infrastructure. We intend to address this problem by developing an industrial clean-tech process to enable the transformation of natural gas into liquid transportation fuels such as gasoline, diesel, jet fuel and other valuable products. Our competitive advantage over other natural gas reforming technologies is that our processes can significantly lower the cost of reforming natural gas into synthetic gas (syngas), the most costly step in the gas-to-liquids (GTL) process for making liquid transportation fuels from natural gas. As part of our business plan, we intend to demonstrate and prove this point. Based on original laboratory testing results and validated in commercial testing facilities, we believe that we have a very robust reforming catalyst to enable cost effective syngas production.

We have not yet generated revenues. We currently have negative working capital and, in connection with our December 31, 2011 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, 2011, we obtained $138,075 in funding through private placement offerings. We believe that the financings received by us after December 31, 2011 will fully address such concern and enable us to complete development of our catalyst and commercially deploy our technology, and 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.

Corporate Overview

We were incorporated in the State of Nevada on August 25, 2006, as Zingerang, Inc. Our name was changed to Carbon Sciences, Inc. on April 9, 2007. Our principal executive offices are located at 5511-C Ekwill Street, Santa Barbara, California 93111, and our telephone number is (805) 456-7000. Our fiscal year end is December 31.

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 June 30, 2012, and no pronouncements were adopted during the period, which would have a material effect on the accompanying financial statements.

RESULTS OF OPERATIONS – THREE MONTHS ENDED JUNE 30, 2012 COMPARED TO THE THREE MONTHS ENDED JUNE 30, 2011

General and Administrative Expenses

General and administrative, or G&A, expenses increased by $258,082 to $501,348 for the three months ended June 30, 2012, compared to $243,266 for the prior period ended June 30, 2011 The increase in G&A for the three months ended June 30, 2012 was due primarily to an increase in non- cash stock compensation of $210,945, and an increase in professional fees of $26,615, with an overall increase in other expenses.

Research and Development

Research and Development or R&D costs decreased by $(87,514) to $27,798 for the three months ended June 30, 2012, compared to $115,312 for the prior period June 30, 2011. The overall decrease in R&D was the result of a decrease in consulting and lab fees.

Net Loss

Net Loss for the three months ended June 30, 2012 was $(961,871) compared to $(363,367) for the prior period June 30, 2011. The overall net increase of $(598,504) in net loss was due to an increase in non-cash stock compensation cost of $210,945 and forgiveness of debt in the amount of $(102,000), an incentive fee of $521,400, and an overall decrease in operating expenses of $(31,841) for the current period. Currently the Company is in its development stage and has no revenues.

RESULTS OF OPERATIONS – SIX MONTHS ENDED JUNE 30, 2012 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2011

General and Administrative Expenses

G&A, expenses increased by $537,667 to $1,023,090 for the six months ended June 30, 2012, compared to $485,423 for the prior period June 30, 2011. The increase in G&A for the six months ended June 30, 2012 was due primarily to an increase in non- cash stock compensation of $366,904, and an increase in professional fees of $90,000, with an overall increase in other expenses of $80,763.

Research and Development

R&D costs decreased by $(72,252) to $126,544 for the six months ended June 30, 2012, compared to $200,045 for the prior period June 30, 2011. The overall decrease in R&D was the result of a decrease in consulting and lab fees. 

Net Loss

Net Loss for the six months ended June 30, 2012 was $(1,850,309) compared to $(694,634) for the prior period June 30, 2011. The overall net increase of $(1,155,675) in net loss was due to an increase in non-cash stock compensation cost of $366,904 and forgiveness of debt in the amount of $(102,000), an incentive fees of $779,800, and an overall increase in operating expenses of $110,971 for the current period. Currently the Company is in its development stage and had no revenues.

Liquidity and Capital Resources

As of June 30, 2012, we had a working deficit of $(705,518) compared to a working deficit of $(230,854) for the year ended December 31, 2011. The increase of $(474,664) in working deficit was due primarily to less equity financing and an increase in accounts payable and investor loans.

During the six months ended June 30, 2012, the Company used $(271,013) of cash for operating activities, as compared to $(642,872) for the prior period June 30, 2011. The decrease of $(371,859) in the use of cash for operating activities was primarily due to an increase in operating net loss, an increase in prepaid expenses, and an increase in accounts payable and accrued expenses.

Cash used by investing activities was $(19,034) the six months ended June 30, 2012, as compared to $(4,664) for the prior period June 30, 2011. The increase of cash used in investing activities was due to an increase in patent expenditures.

Cash provided from financing activities during the six months ended June 30, 2012 was $309,075 as compared to $775,000 for the prior period ended June 30, 2011. Our capital needs have primarily been met from the proceeds of equity financing, and investor loans, as we are currently in the development stage and have no revenues.

Our financial statements as of June 30, 2012 have been prepared under the assumption that we will continue as a going concern. Our independent registered public accounting firm has issued their report dated March 30, 2012 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 have 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.

During the six months ended June 30, 2012, we issued 244,721 shares of our common stock at a prices ranging from $0.50 to $0.70 per share for aggregate gross cash proceeds of $138,075. The net proceeds of the sales were used for working capital purposes.

PLAN OF OPERATION AND FINANCING NEEDS

We are engaged in developing a technology to reform natural gas into syngas, the first step in making transportation fuels, hydrogen and other valuable products. We plan to develop our technology and focus our efforts on licensing this technology to solutions providers in the energy and industrial sectors.

Our plan of operation within the next twelve months is to utilize our cash balances to continue research and development of our methane reforming catalyst technology. We believe that our current cash and investment balances will be sufficient to support development activity and general and administrative expenses for the next twelve months. Management estimates that it will require additional cash resources during 2012, based upon our current operating plan and condition. We will be investigating additional financing alternatives, including equity and/or debt financing. There is no assurance that capital in any form would be available to us, and if available, on terms and conditions that are acceptable. If we are unable to obtain sufficient funds during the next twelve months, we may be forced to reduce the size of our organization, which could have a material adverse impact on, or cause us to curtail and/or cease the development of our products.

Off-Balance Sheet Arrangements

We do not have any off balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition, revenues, and results of operations, liquidity or capital expenditures.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

n/a

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this report, we conducted an evaluation, under the supervision and with the participation of our chief executive officer and chief financial officer of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act). Based upon this evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is: (i) recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms, and (ii) accumulated and communicated to our management, including our chief executive officer and chief financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

There was no change to our internal controls or in other factors that could affect these controls during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We are not a party to any pending legal proceeding, nor is our property the subject of a pending legal proceeding, that is not in the ordinary course of business or otherwise material to the financial condition of our business. None of our directors, officers or affiliates is involved in a proceeding adverse to our business or has a material interest adverse to our business.

ITEM 1A. RISK FACTORS

There are no material changes from the risk factors previously disclosed in the Registrant’s Form 10-K filed March 30, 2012.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

During the three months ended June 30, 2012, The Company issued 166,150 shares of common stock at a price of $0.50 per share for cash of $83,075.

During the three months ended June 30, 2012, The Company also issued 423,943 shares of common stock, through a cashless exercise of warrants; issued 330,000 shares of common stock at fair value of $521,400 as consideration in connection with certain agreements reached by the Company with certain existing shareholders: and 6,098 shares of common stock at fair value of $8,110 for conversion of an accounts payable in the amount of $7,500.

The Company relied on an exemption pursuant to Rule 506 of Regulation d and/or Section 4(2) of the Securities Act of 1933, as amended in connection with the foregoing issuances.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4. MINE SAFETY DISCLOSURES

ITEM 5. OTHER INFORMATION

None

ITEM 6. EXHIBITS

SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Los Angeles, State of California, on August 13, 2012.