Digital Locations, Inc. - Quarter Report: 2015 June (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
x QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2015
¨ TRANSITION REPORT UNDER SECTION13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________
COMMISSION FILE NUMBER: 000-54817
CARBON SCIENCES, INC.
(Name of registrant in its charter)
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Nevada
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20-5451302
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(State or other jurisdiction of incorporation or
organization)
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(I.R.S. Employer Identification No.)
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5511C Ekwill Street, Santa Barbara, California 93111
(Address of principal executive offices) (Zip Code)
Issuer’s telephone Number: (805) 456-7000
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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” 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 number of shares of registrant’s common stock outstanding, as of August 12, 2015 was 306,249,680.
1
INDEX
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CARBON SCIENCES, INC.
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||||||||
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June 30,
2015
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December 31,
2014
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|||||||
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ASSETS
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(Unaudited)
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|||||||
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CURRENT ASSETS:
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||||||||
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Cash
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$ | 34,065 | $ | 15,447 | ||||
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Prepaid expenses
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16,210 | 70,593 | ||||||
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Total current assets
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50,275 | 86,040 | ||||||
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PROPERTY AND EQUIPMENT, NET
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443 | 547 | ||||||
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Total assets
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$ | 50,718 | $ | 86,587 | ||||
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LIABILITIES AND STOCKHOLDERS' DEFICIT
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||||||||
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CURRENT LIABILITIES:
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||||||||
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Accounts payable
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$ | 162,311 | $ | 160,270 | ||||
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Accrued expenses and other current liabilities
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4,609 | 5,223 | ||||||
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Accrued interest, notes payable
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203,804 | 141,434 | ||||||
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Derivative liability
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32,199,005 | 9,476,605 | ||||||
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Convertible notes payable
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191,500 | 166,500 | ||||||
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Convertible notes payable, net of discount of $240,411 and
$191,265, respectively
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896,253 | 654,199 | ||||||
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Total current liabilities
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33,657,482 | 10,604,231 | ||||||
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LONG-TERM LIABILITIES:
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Convertible notes payable, net of discount of $298,367 and
$253,883, respectively
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58,633 | 61,117 | ||||||
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Convertible note payable
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- | 25,000 | ||||||
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Total long-term liabilities
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58,633 | 86,117 | ||||||
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Total liabilities
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33,716,115 | 10,690,348 | ||||||
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STOCKHOLDERS’ DEFICIT:
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||||||||
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Preferred stock, $0.001 par value; 20,000,000 shares authorized,
no shares issued and outstanding
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- | - | ||||||
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Common stock, $0.001 par value; 1,000,000,000 shares
authorized, 306,249,680 and 241,186,179 shares issued and
outstanding, respectively
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306,251 | 241,186 | ||||||
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Additional paid-in capital
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11,891,861 | 11,309,228 | ||||||
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Deficit accumulated during the development stage
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(45,863,509 | ) | (22,154,175 | ) | ||||
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Total stockholders’ deficit
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(33,665,397 | ) | (10,603,761 | ) | ||||
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Total liabilities and stockholders’ deficit
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$ | 50,718 | $ | 86,587 | ||||
See notes to condensed financial statements
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CARBON SCIENCES, INC.
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(Unaudited)
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Three Months Ended
June 30,
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Six Months Ended
June 30,
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2015
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2014
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2015
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2014
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REVENUE
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$ | - | $ | - | $ | - | $ | - | ||||||||
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OPERATING EXPENSES:
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General and administrative
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114,592 | 81,704 | 230,861 | 253,454 | ||||||||||||
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Research and development
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96,933 | - | 193,865 | - | ||||||||||||
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Depreciation and amortization
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52 | 235 | 104 | 514 | ||||||||||||
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Total operating expenses
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211,577 | 81,939 | 424,830 | 253,968 | ||||||||||||
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LOSS FROM OPERATIONS
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(211,577 | ) | (81,939 | ) | (424,830 | ) | (253,968 | ) | ||||||||
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OTHER INCOME (EXPENSE):
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||||||||||||||||
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Rental income
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5,368 | 4,500 | 13,733 | 10,500 | ||||||||||||
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Gain on settlement of debt
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2,518 | 5,396 | 5,118 | 20,112 | ||||||||||||
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Gain (loss) on change in derivative liability
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(2,071,702 | ) | 495,027 | (22,972,137 | ) | 1,654,390 | ||||||||||
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Interest expense
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(181,201 | ) | (108,445 | ) | (331,218 | ) | (243,886 | ) | ||||||||
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Total other income (expense)
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(2,245,017 | ) | 396,478 | (23,284,504 | ) | 1,441,116 | ||||||||||
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INCOME (LOSS) BEFORE INCOME TAXES
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(2,456,594 | ) | 314,539 | (23,709,334 | ) | 1,187,148 | ||||||||||
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PROVISION FOR INCOME TAXES
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- | - | - | - | ||||||||||||
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NET INCOME (LOSS)
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$ | (2,456,594 | ) | $ | 314,539 | $ | (23,709,334 | ) | $ | 1,187,148 | ||||||
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NET INCOME (LOSS) PER SHARE, BASIC
AND DILUTED
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$ | (0.01 | ) | $ | 0.00 | $ | (0.09 | ) | $ | 0.01 | ||||||
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WEIGHTED AVERAGE SHARES
OUTSTANDING, BASIC AND DILUTED
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286,955,504 | 130,028,041 | 273,198,177 | 112,376,592 | ||||||||||||
See notes to condensed financial statements
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CARBON SCIENCES, INC.
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||||||||
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(Unaudited)
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Six Months Ended
June 30,
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2015
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2014
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CASH FLOWS FROM OPERATING ACTIVITIES:
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Net income (loss)
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$ | (23,709,334 | ) | $ | 1,187,148 | |||
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Adjustments to reconcile net income (loss) to net cash
used in operating activities:
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||||||||
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Depreciation and amortization
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104 | 514 | ||||||
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Stock compensation cost
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16,800 | 18,735 | ||||||
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(Gain) loss on settlement of debt
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(5,118 | ) | (20,112 | ) | ||||
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Amortization of debt discount and beneficial
conversion feature recorded to interest expense
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263,370 | 204,123 | ||||||
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(Gain) loss on change in derivative liability
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22,972,137 | (1,654,390 | ) | |||||
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Changes in assets and liabilities:
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||||||||
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(Increase) decrease in prepaid expenses
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54,383 | (12,562 | ) | |||||
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Increase (decrease) in:
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Accounts payable
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2,042 | (23,606 | ) | |||||
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Accrued expenses and other current liabilities
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67,234 | 80,839 | ||||||
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NET CASH USED IN OPERATING ACTIVITIES
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(338,382 | ) | (219,311 | ) | ||||
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CASH FLOWS FROM INVESTING ACTIVITIES
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- | - | ||||||
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CASH FLOWS FROM FINANCING ACTIVITIES:
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Proceeds from convertible notes payable
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357,000 | 423,000 | ||||||
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NET CASH PROVIDED BY FINANCING ACTIVITIES
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357,000 | 423,000 | ||||||
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NET INCREASE IN CASH
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18,618 | 203,689 | ||||||
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CASH, BEGINNING OF THE PERIOD
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15,447 | 11,382 | ||||||
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CASH, END OF THE PERIOD
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$ | 34,065 | $ | 215,071 | ||||
See notes to condensed financial statements
CARBON SCIENCES, INC.
Six Months Ended June 30, 2015
(Unaudited)
1. BASIS OF PRESENTATION AND GOING CONCERN
Basis of Presentation
The accompanying unaudited condensed financial statements of Carbon Sciences, Inc. (the “Company”) 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 three and six months ended June 30, 2015 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015. For further information refer to the financial statements and notes thereto included in the Company's Form 10-K for the year ended December 31, 2014.
In January 2015, we formed Transphene, Inc. to hold 50% ownership in the technology developed through a research agreement (Note 8). Through June 30, 2015, there have been no financial transactions in Transphene and no impact on our financial statements.
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 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, raising additional capital. 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.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This summary of significant accounting policies of the Company 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.
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 operating revenues.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.
Income (Loss) per Share Calculations
The Company adopted the accounting pronouncement for income (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 or loss available to common shareholders by the weighted-average number of common shares outstanding during the reporting period. 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 three months and six months ended June 30, 2015 and 2014.
Research and Development
Research and development costs are expensed as incurred.
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 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.
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 June 30, 2015 and December 31, 2014, 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 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). These tiers include:
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·
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Level 1, defined as observable inputs such as quoted prices for identical instruments in active markets;
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·
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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
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·
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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.
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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 June 30, 2015 and 2014:
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Total
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Level 1
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Level 2
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Level 3
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June 30, 2015:
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Derivative liability
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$ | 32,199,005 | $ | - | $ | - | $ | 32,199,005 | ||||||||
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Convertible notes payable, net - current
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896,253 | - | - | 896,253 | ||||||||||||
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Convertible notes payable, net – long-term
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58,633 | - | - | 58,633 | ||||||||||||
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Total liabilities measured at fair value
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$ | 33,153,891 | $ | - | $ | - | $ | 33,153,891 | ||||||||
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December 31, 2014:
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Derivative liability
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$ | 9,476,605 | $ | - | $ | - | $ | 9,476,605 | ||||||||
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Convertible notes payable, net - current
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654,199 | 654,199 | ||||||||||||||
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Convertible notes payable, net - long term
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61,117 | - | - | 61,117 | ||||||||||||
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Total liabilities measured at fair value
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$ | 10,191,921 | $ | - | $ | - | $ | 10,191,921 | ||||||||
Derivative Liability
We estimate the fair value of the derivative for the conversion feature of our convertible notes payable using the Black-Scholes pricing model at the inception of the debt, at the date of conversions to equity and at each reporting date, recording a derivative liability, debt discount and a gain or loss on change in derivative liability as applicable. These estimates are based on multiple inputs, including the market price of our stock, interest rates, our stock price volatility, and variable conversion prices based on market prices as defined in the respective loan agreements. These inputs are subject to significant changes from period to period; therefore, the estimated fair value of the derivative liability will fluctuate from period to period, and the fluctuation may be material.
Recently Issued Accounting Pronouncements
Management reviewed new accounting pronouncements issued during the six months ended June 30, 2015 and through the date of filing this report, and believes no pronouncements are applicable to or would have a material impact on the financial statements of the Company.
Reclassifications
Certain amounts in the condensed financial statements for the three months and six months ended June 30, 2014 have been reclassified to conform to the presentation for the three months and six months ended June 30, 2015.
3. CAPITAL STOCK
At June 30, 2015, the Company’s authorized stock consisted of 1,000,000,000 shares of common stock, with a par value of $0.001 per share. 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 six months ended June 30, 2015, the Company issued a total of 65,063,501 shares of common stock at fair value in conversion of $23,800 of convertible promissory notes and accrued interest payable of $5,478. In connection with the debt conversion, the Company increased common stock by $65,065 and additional paid-in capital by $565,833, reduced the derivative liability by $606,737 and recognized a gain of $5,118 on conversion of the notes.
4. STOCK OPTIONS AND WARRANTS
Stock Options
As of June 30, 2015, the Board of Directors of the Company had granted non-qualified stock options exercisable for a total of 14,100,000 shares of common stock to its employees, officers, and consultants. Stock-based compensation cost is measured at the grant date based on the value of the award granted using the Black-Scholes option pricing model, and recognized over the period in which the award vests, which is generally 25 months. Stock-based compensation expense included in general and administrative expense was $8,400 for each of the three months ended June 30, 2015 and 2014, and $16,800 and $18,735 for the six months ended June 30, 2015 and 2014, respectively. As of June 30, 2015, unrecognized stock-based compensation expense was approximately $11,200.
A summary of the Company’s stock option awards as of June 30, 2015, and changes during the six months then ended is as follows:
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Shares
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Weighted
Average
Exercise Price
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Weighted Average
Remaining
Contract Term
(Years)
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Aggregate
Intrinsic
Value
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|||||||||||||
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Outstanding at December 31, 2014
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14,100,000 | $ | 0.019 | |||||||||||||
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Granted
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- | $ | - | |||||||||||||
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Exercised
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- | $ | - | |||||||||||||
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Forfeited or expired
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- | $ | - | |||||||||||||
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Outstanding at June 30, 2015
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14,100,000 | $ | 0.019 | 5.23 | $ | 67,200 | ||||||||||
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Exercisable at June 30, 2015
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11,860,000 | $ | 0.022 | 5.22 | $ | 56,448 | ||||||||||
The aggregate intrinsic value in the preceding table represents the total pretax intrinsic value, based on the closing price of our common stock of $0.0108 as of June 30, 2015, which would have been received by the holders of in-the-money options had the option holders exercised their options as of that date.
Warrants
As of June 30, 2015 and December 31, 2014, the Company had 460,000 common stock purchase warrants outstanding, with an exercise price of $0.50 per share and expiring on various dates in 2017 and 2018.
5. CONVERTIBLE NOTES PAYABLE
Securities Purchase Agreement - $299,212
On December 12, 2012, we exchanged certain promissory notes in the aggregate amount of $327,500 for convertible promissory notes. We entered into securities purchase agreements for the sale of 10% convertible promissory notes in the aggregate principal amount of $327,500, which were convertible into shares of our common stock 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 were to mature one year from the effective date of the note. We recorded a debt discount of $327,500 related to the conversion feature of the note, which has been fully amortized to interest expense, along with a derivative liability at inception. During 2013, the principal sum of $62,000, plus accrued interest was transferred to another investor.
Effective October 24, 2013, the remaining principal balance of the notes discussed in the preceding paragraph totaling $291,443 and accrued interest of $7,769 were combined in a new 10% convertible promissory note in the aggregate amount of $299,212, which matured on October 24, 2014. The new note is convertible into shares of our common stock at a conversion price equal to (a) the lesser of $0.006 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 through the issuance of securities after the effective date. After conversions to our common stock during 2013 and 2014, the note had a principal balance of $233,012 payable at December 31, 2014. During the six months ended June 30, 2015, a total of $23,800 principal and $5,478 accrued interest were converted into shares of our common stock, resulting in a principal balance of $209,212 payable at June 30, 2015. The maturity date of the note was extended to June 30, 2016.
Securities Purchase Agreements - Services of $244,452
On December 31, 2012, we entered into convertible promissory notes with three individuals in exchange for services rendered in the aggregate amount of $244,452, including $185,852 with the Chairman of our Board of Directors and our former Chief Executive Officer. We entered into securities purchase agreements for the sale of 5% convertible promissory notes in the principal amount of $244,452, which are convertible into shares of our common stock 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. One of the notes with a principal balance of $25,980 at June 30, 2015 matured on December 31, 2014 and is currently in default. The other two notes mature on December 31, 2015. We recorded a debt discount of $237,742 related to the conversion feature of the notes, which has been fully amortized to interest expense, along with a derivative liability at inception.
Securities Purchase Agreement - $100,000
During 2013, we received total proceeds of $40,000 pursuant to a securities purchase agreement for the sale of 10% convertible promissory notes in the aggregate principal amount of $100,000. The notes are convertible into shares of our common stock at a price equal to a variable conversion price of the lesser of $0.09 per share or fifty percent (50%) of the lowest trade price recorded after the effective date. The notes were to mature one year from their effective date. The maturity dates have been extended to June 30, 2016. We recorded a debt discount of $40,000 related to the beneficial conversion feature of the notes, which has been fully amortized to interest expense.
Securities Purchase Agreement – Accounts Payable of $29,500
On March 14, 2013, we entered into a convertible promissory note in exchange for accounts payable in the amount of $29,500. We entered into securities purchase agreements for the sale of a 5% convertible promissory note in the principal amount of $29,500, which is convertible into shares of our common stock at a conversion price equal to the lesser of $0.15 per share or the closing price per share of common stock recorded on the trading day immediately preceding the date of conversion. The note matured two years from its effective date, or March 14, 2015, and is currently in default.
Securities Purchase Agreement - $97,000
On May 29, 2013, we exchanged $97,000 in demand promissory notes for convertible promissory notes pursuant to a securities purchase agreement for the sale of a 10% convertible promissory note in the aggregate principal amount of $97,000. The note is convertible into shares of our common stock at a price equal to a conversion price of the lesser of $0.028 per share or fifty percent (50%) of the lowest trade price recorded after the effective date. The maturity date of the note was extended to June 30, 2016. We recorded a debt discount of $97,000 related to the beneficial conversion feature of the note, which has been fully amortized to interest expense.
Securities Purchase Agreement – Services of $25,000
On June 4, 2013, we entered into a convertible promissory note with a former member of our Board of Directors in exchange for services rendered in the amount of $25,000. We entered into securities purchase agreements for the sale of a 5% convertible promissory note in the principal amount of $25,000, which is convertible into shares of common stock of the Company at a conversion price equal to the lesser of $0.035 per share or the closing price per share of common stock recorded on the trading day immediately preceding the date of conversion. The note matures three years from its effective date, or June 4, 2016.
Securities Purchase Agreement - $5,000 Exchanged Note
On September 6, 2013, we exchanged a $5,000 promissory note for a convertible promissory note pursuant to a securities purchase agreement for the sale of a 10% convertible promissory note in the aggregate principal amount of $5,000. The note is convertible into shares of our common stock at a price equal to a conversion price of the lesser of $0.0042 per share or fifty percent (50%) of the lowest trade price recorded after the effective date. The note matures on June 30, 2016. We recorded a debt discount of $2,536 related to the beneficial conversion feature of the note, which has been fully amortized to interest expense, along with a derivative liability at inception.
Securities Purchase Agreement - $250,000
On October 8, 2012, we entered into to a securities purchase agreement for the sale of 10% convertible promissory notes in the aggregate principal amount of $250,000. The notes are convertible into shares of common stock of the Company at a price equal to the lesser of $0.006 or 50% of the lowest trade price subsequent to the effective date of the note and prior to the conversion. The maturity dates of the notes were extended to June 30, 2016.
The lender previously advanced a total of $11,000 in August and September 2013 that was transferred to this agreement. We recorded a debt discount of $11,000, which has been fully amortized to interest expense, along with a derivative liability upon transfer.
On October 21, 2013, we received additional proceeds of $22,000 on this securities purchase agreement. We recorded a debt discount of $22,000, which has been fully amortized to interest expense, along with a derivative liability at inception.
On November 22, 2013, we received additional proceeds of $25,000 on this securities purchase agreement. We recorded a debt discount of $25,000, which has been fully amortized to interest expense, along with a derivative liability at inception.
April 2014 Securities Purchase Agreement - $500,000
On April 18, 2014, we entered into a securities purchase agreement for the sale of 10% convertible promissory notes in aggregate principal amount of $500,000 (the “April 2014 $500,000 SPA”). The advance amounts received are at the lender’s discretion. The notes are convertible into shares of our common stock at a price per share equal to the lesser of: $0.003; or 50% of the lowest trade price subsequent to the effective date of the note and prior to the conversion; or the lowest effective price per share granted to any person or entity to acquire common stock subsequent to the effective date of the note. The notes mature eighteen months from the effective date of each advance.
On April 18, 2014, we received proceeds of $60,000 pursuant to the April 2014 $500,000 SPA. We recorded a debt discount of $60,000 related to the conversion feature of the note, along with a derivative liability at inception. During the six months ended June 30, 2015 and the year ended December 31, 2014, amortization of debt discount was recorded to interest expense in the amount of $19,817 and $28,139, respectively, resulting in a remaining discount of $12,044 at June 30, 2015.
On May 20, 2014, we received proceeds of $45,000 pursuant to the April 2014 $500,000 SPA. We recorded a debt discount of $45,000 related to the conversion feature of the note, along with a derivative liability at inception. During the six months ended June 30, 2015 and the year ended December 31, 2014, amortization of debt discount was recorded to interest expense in the amount of $14,836 and $18,443, respectively, resulting in a remaining discount of $11,721 at June 30, 2015.
On June 30, 2014, we received proceeds of $200,000 pursuant to the April 2014 $500,000 SPA. We recorded a debt discount of $200,000 related to the conversion feature of the note, along with a derivative liability at inception. During the six months ended June 30, 2015 and the year ended December 31, 2014, amortization of debt discount was recorded to interest expense in the amount of $66,059 and $67,153, respectively, resulting in a remaining discount of $66,788 at June 30, 2015.
On July 18, 2014, we received proceeds of $25,000 pursuant to the April 2014 $500,000 SPA. We recorded a debt discount of $25,000 related to the conversion feature of the note, along with a derivative liability at inception. During the six months ended June 30, 2015 and the year ended December 31, 2014, amortization of debt discount was recorded to interest expense in the amount of $8,242 and $7,559, respectively, resulting in a remaining discount of $9,199 at June 30, 2015.
On August 6, 2014, we received proceeds of $65,000 pursuant to the April 2014 $500,000 SPA. We recorded a debt discount of $65,000 related to the conversion feature of the note, along with a derivative liability at inception. During the six months ended June 30, 2015 and the year ended December 31, 2014, amortization of debt discount was recorded to interest expense in the amount of $21,430 and $17,404, respectively, resulting in a remaining discount of $26,166 at June 30, 2015.
On August 18, 2014, we received proceeds of $25,000 pursuant to the April 2014 $500,000 SPA. We recorded a debt discount of $25,000 related to the conversion feature of the note, along with a derivative liability at inception. During the six months ended June 30, 2015 and the year ended December 31, 2014, amortization of debt discount was recorded to interest expense in the amount of $8,242 and $6,148, respectively, resulting in a remaining discount of $10,610 at June 30, 2015.
On September 9, 2014, we received proceeds of $56,000 pursuant to the April 2014 $500,000 SPA. We recorded a debt discount of $56,000 related to the conversion feature of the note, along with a derivative liability at inception. During the six months ended June 30, 2015 and the year ended December 31, 2014, amortization of debt discount was recorded to interest expense in the amount of $18,530 and $11,569, respectively, resulting in a remaining discount of $25,901 at June 30, 2015.
On October 8, 2014, we received proceeds of $24,000 pursuant to the April 2014 $500,000 SPA. We recorded a debt discount of $24,000 related to the conversion feature of the note, along with a derivative liability at inception. During the six months ended June 30, 2015 and the year ended December 31, 2014, amortization of debt discount was recorded to interest expense in the amount of $7,927 and $3,679, respectively, resulting in a remaining discount of $12,394 at June 30, 2015.
October 2014 Securities Purchase Agreement - $500,000
On October 1, 2014, we entered into a securities purchase agreement for the sale of 10% convertible promissory notes in aggregate principal amount of $500,000 (the “October 2014 $500,000 SPA”). The advance amounts received are at the lender’s discretion. The notes are convertible into shares of our common stock at a price per share equal to the lesser of: $0.003; or 50% of the lowest trade price subsequent to the effective date of the note and prior to the conversion; or the lowest effective price per share granted to any person or entity to acquire common stock subsequent to the effective date of the note. The notes mature eighteen months from the effective date of each advance.
On October 1, 2014, we received proceeds of $65,000 pursuant to the October 2014 $500,000 SPA. We recorded a debt discount of $65,000 related to the conversion feature of the note, along with a derivative liability at inception. During the six months ended June 30, 2015 and the year ended December 31, 2014, amortization of debt discount was recorded to interest expense in the amount of $21,469 and $10,794, respectively, resulting in a remaining discount of $32,737 at June 30, 2015.
On November 7, 2014, we received proceeds of $30,000 pursuant to the October 2014 $500,000 SPA. We recorded a debt discount of $30,000 related to the conversion feature of the note, along with a derivative liability at inception. During the six months ended June 30, 2015 and the year ended December 31, 2014, amortization of debt discount was recorded to interest expense in the amount of $9,927 and $2,962, respectively, resulting in a remaining discount of $17,111 at June 30, 2015.
On December 9, 2014, we received proceeds of $25,000 pursuant to the October 2014 $500,000 SPA. We recorded a debt discount of $25,000 related to the conversion feature of the note, along with a derivative liability at inception. During the six months ended June 30, 2015 and the year ended December 31, 2014, amortization of debt discount was recorded to interest expense in the amount of $8,257 and $1,004, respectively, resulting in a remaining discount of $15,739 at June 30, 2015.
On January 14, 2015, we received proceeds of $92,000 pursuant to the October 2014 $500,000 SPA. We recorded a debt discount of $92,000 related to the conversion feature of the note, along with a derivative liability at inception. During the six months ended June 30, 2015, amortization of debt discount was recorded to interest expense in the amount of $28,088, resulting in a remaining discount of $63,912 at June 30, 2015.
On February 10, 2015, we received proceeds of $30,000 pursuant to the October 2014 $500,000 SPA. We recorded a debt discount of $30,000 related to the conversion feature of the note, along with a derivative liability at inception. During the six months ended June 30, 2015, amortization of debt discount was recorded to interest expense in the amount of $7,678, resulting in a remaining discount of $22,322 at June 30, 2015.
On March 16, 2015, we received proceeds of $30,000 pursuant to the October 2014 $500,000 SPA. We recorded a debt discount of $30,000 related to the conversion feature of the note, along with a derivative liability at inception. During the six months ended June 30, 2015, amortization of debt discount was recorded to interest expense in the amount of $5,782, resulting in a remaining discount of $24,218 at June 30, 2015.
On April 17, 2015, we received proceeds of $45,000 pursuant to the October 2014 $500,000 SPA. We recorded a debt discount of $45,000 related to the conversion feature of the note, along with a derivative liability at inception. During the six months ended June 30, 2015, amortization of debt discount was recorded to interest expense in the amount of $6,066, resulting in a remaining discount of $38,934 at June 30, 2015.
On May 5, 2015, we received proceeds of $65,000 pursuant to the October 2014 $500,000 SPA. We recorded a debt discount of $65,000 related to the conversion feature of the note, along with a derivative liability at inception. During the six months ended June 30, 2015, amortization of debt discount was recorded to interest expense in the amount of $6,618, resulting in a remaining discount of $58,382 at June 30, 2015.
On May 11, 2015, we received proceeds of $40,000 pursuant to the October 2014 $500,000 SPA. We recorded a debt discount of $40,000 related to the conversion feature of the note, along with a derivative liability at inception. During the six months ended June 30, 2015, amortization of debt discount was recorded to interest expense in the amount of $3,636, resulting in a remaining discount of $36,364 at June 30, 2015.
On June 22, 2015, we received proceeds of $35,000 pursuant to the October 2014 $500,000 SPA. We recorded a debt discount of $35,000 related to the conversion feature of the note, along with a derivative liability at inception. During the six months ended June 30, 2015, amortization of debt discount was recorded to interest expense in the amount of $510, resulting in a remaining discount of $34,490 at June 30, 2015.
On June 23, 2015, we received proceeds of $20,000 pursuant to the October 2014 $500,000 SPA. We recorded a debt discount of $20,000 related to the conversion feature of the note, along with a derivative liability at inception. During the six months ended June 30, 2015, amortization of debt discount was recorded to interest expense in the amount of $255, resulting in a remaining discount of $19,745 at June 30, 2015.
For purpose of determining the fair market value of the derivative liability, we used the Black Scholes option valuation model. The significant assumptions used in the Black Scholes valuation of the derivative liability at June 30, 2015 are as follows:
|
|
|
|
|
Stock price on the valuation date
|
$0.0108 | |
|
Conversion price for the debt
|
$0.0045 - $0.0122 | |
|
Dividend yield
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0.00 | % |
|
Years to maturity
|
0.30 – 1.48 | |
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Risk free rate
|
.01% - .46 | % |
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Expected volatility
|
113.42% - 180.29 | % |
The value of the derivative liability balance at June 30, 2015 and December 31, 2014 was $32,199,005 and $9,476,605, respectively. These assumptions are subject to significant changes and market fluctuations from period to period; therefore, the estimated fair value of the derivative liability will fluctuate from period to period and the fluctuation may be material. Based on the assumptions used to estimate the fair value of the derivative liability at June 30, 2015 and assuming all lenders convert the notes payable at the June 30, 2015 conversion prices, the Company would have insufficient authorized shares of common stock to complete the debt conversions.
During the six months ended June 30, 2015, the Company had the following activity in its derivative liability account:
|
Derivative liability at December 31, 2014
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$ | 9,476,605 | ||
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Addition to liability for new debt issued
|
357,000 | |||
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Elimination of liability on conversion
|
(606,737 | ) | ||
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Change in fair value
|
22,972,137 | |||
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Derivative liability at June 30, 2015
|
$ | 32,199,005 | ||
The total gain on settlement of debt related to the conversion of notes payable into shares of our common stock was $5,118 for the six months ended June 30, 2015.
6. SUPPLEMENTAL STATEMENT OF CASH FLOWS INFORMATION
During the six months ended June 30, 2015 and 2014, the Company paid no amounts for income taxes.
During the six months ended June 30, 2015 and 2014, the Company paid interest of $0 and $301, respectively.
During the six months ended June 30, 2015, the Company had the following non-cash investing and financing activities:
The Company issued a total of 65,063,501 shares of common stock in conversion of $23,800 in convertible notes payable, plus $5,478 of accrued interest payable, increasing common stock by $65,065, increasing additional paid-in capital by $565,833, decreasing derivative liability by $606,737 and recording a gain on settlement of debt of $5,118.
The Company increased debt discount and derivative liability by $357,000 for the issuance of new convertible debt.
During the six months ended June 30, 2014, the Company had the following non-cash investing and financing activities:
The Company issued a total of 71,869,539 shares of common stock in conversion of $152,823 in convertible notes payable, plus $7,153 of accrued interest payable, increasing common stock by $71,871, increasing additional paid-in capital by $336,077, decreasing debt discount by $27,478, decreasing derivative liability by $295,562 and recording a gain on settlement of debt of $20,112.
The Company increased debt discount and derivative liability by $390,347 for the issuance of new convertible debt.
7. RELATED PARTY TRANSACTIONS
See Note 5 for discussion of convertible notes payable to related parties, including many lenders who are also shareholders of the Company.
On December 12, 2012, we entered into a convertible note with the Chairman of our Board of Directors and our former Chief Executive Officer in exchange for services valued at $185,852. The principal balance of this related party note was $185,852 as of June 30, 2015 and December 31, 2014, with accrued interest payable of $23,193 and $18,585 as of June 30, 2015 and December 31, 2014, respectively.
On June 4, 2013, we entered into a convertible note with a member of our Board of Directors in exchange for services valued at $25,000. As of June 30, 2015 and December 31, 2014, the principal balance of this related party note was $25,000, with accrued interest payable of $2,589 and $1,969 as of June 30, 2015 and December 31, 2014, respectively.
8. RESEARCH AGREEMENT AND FORMATION OF SUBSIDIARY
On June 18, 2014, the Company entered into a Sponsored Research Agreement (the “SRA”) with the University of California, Santa Barbara campus (“UCSB”), pursuant to which UCSB will perform research work for the mutual benefit of UCSB and the Company. The purpose of the SRA includes the development of a low-cost and scalable method to produce large-area graphene for transparent electrode applications. The term of the SRA commenced on July 1, 2014 and expired on June 30, 2015. The total cost to the Company was $387,730, as determined on a cost-reimbursement basis. Payment of the total cost was made in installments as follows:
$200,000 in July 2014
$62,577 in October 2014
$62,577 in January 2015
$62,576 in April 2015
The Company amortized the payments over the life of the contract. Research and development expenses included $96,933 and 193,865 related to the contract for the three months and six months ended June 30, 2015, respectively.
In January 2015, we assigned our rights under the SRA to a newly formed 50% owned subsidiary, Transphene, Inc. (“Transphene”), the other 50% of which is owned by Professor Kaustav Banjeree, a Professor at UCSB.
9. SUBSEQUENT EVENTS
Management has evaluated subsequent events according to the requirements of ASC TOPIC 855, and has reported the following:
We received an advance under the October 2014 $500,000 SPA of $23,000 on July 9, 2015.
On July 13, 2015, we entered into a securities purchase agreement for the sale of 10% convertible promissory notes in aggregate principal amount of $500,000 (the “July 2015 $500,000 SPA”). The advance amounts received are at the lender’s discretion. The notes are convertible into shares of our common stock at a price per share equal to the lesser of: $0.003; or 50% of the lowest trade price subsequent to the effective date of the note and prior to the conversion; or the lowest effective price per share granted to any person or entity to acquire common stock subsequent to the effective date of the note. The notes mature eighteen months from the effective date of each advance.
We received advances under the July 2015 $500,000 SPA of $12,000 on July 13, 2015 and $65,000 on August 7, 2015.
Certain statements in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” below, and elsewhere in this report, are not related to historical results, and are forward-looking statements. Forward-looking statements present our expectations or forecasts of future events. You can identify these statements by the fact that they do not relate strictly to historical or current facts. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. Forward-looking statements frequently are accompanied by such words such as “may,” “will,” “should,” “could,” “expects,” “plans,” “intends,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” or “continue,” or the negative of such terms or other words and terms of similar meaning. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, achievements, or timeliness of such results. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of such forward-looking statements. We are under no duty to update any of the forward-looking statements contained herein after the date of this report. Subsequent written and oral forward looking statements attributable to us or to persons acting in our behalf are expressly qualified in their entirety by the cautionary statements and risk factors set forth in our annual report on Form 10-K filed with the SEC on March 31, 2015, and in other reports filed by us with the SEC
You should read the following description of our financial condition and results of operations in conjunction with the financial statements and accompanying notes included in this report.
OVERVIEW
We are currently developing a technology to mass-produce graphene. Graphene is a naturally occurring sheet of pure carbon that is only one atom thick. It is flexible, transparent, impermeable to moisture, strong, and highly conductive. A Nobel Prize was awarded to the scientists who isolated graphene from graphite in 2010. Experts believe that graphene is a very versatile material that can enable new applications such as bendable touchscreen displays, rapid charge batteries, super-capacitors, low cost solar cells, extreme high-speed semiconductors, biosensors, as well as water purification.
While the raw materials to make graphene are readily available, the lack of an industrial scale manufacturing process has hindered its commercial use. We are currently researching and developing a cost-efficient process to manufacture commercial size sheets of graphene that can be fine-tuned with application-specific electrical and materials properties. This research is being done through a sponsored research agreement with the University of California, Santa Barbara (“UCSB”).
On June 18, 2014, we entered into a Sponsored Research Agreement (the “SRA”) with UCSB, pursuant to which UCSB will perform research work for the mutual benefit of UCSB and the Company. The purpose of the SRA includes the development of a low-cost and scalable method to produce large-area graphene for transparent electrode applications. The term of the SRA commenced on July 1, 2014 and expired on June 30, 2015. The total cost to the Company was $387,730, as determined on a cost-reimbursement basis. Payment of the total cost was made in installments as follows:
$200,000 in July 2014
$62,577 in October 2014
$62,577 in January 2015
$62,576 in April 2015
In January 2015, we assigned our rights under the SRA to a newly formed 50% owned subsidiary, Transphene, Inc. (“Transphene”), the other 50% of which is owned by Professor Kaustav Banjeree, a Professor at UCSB. Through June 30, 2015, there have been no financial transactions in Transphene and no impact on our financial statements.
We have not yet generated revenues. We currently have negative working capital and received an opinion from our independent auditors on our financial statements that expressed substantial doubt about our ability to continue as a 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 ability of the Company to continue as a going concern is dependent upon, among other things, raising additional capital. Since our inception through June 30, 2015, the Company has obtained funds primarily from the issuance of common stock and debt. Management believes this funding will continue, and is continually seeking new investors. Management believes the existing shareholders and lenders and prospective new investors will provide the additional cash needed to meet our obligations as they become due, and will allow the development of our core of business. However, there can be no assurance that such financing will be available upon 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
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 June 30, 2015, the amounts reported for cash, accrued interest, accrued expenses and other current liabilities, and notes payable approximate 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:
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·
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Level 1, defined as observable inputs such as quoted prices for identical instruments in active markets;
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·
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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
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·
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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.
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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 June 30, 2015:
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Total
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Level 1
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Level 2
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Level 3
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Juen 30, 2015:
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Derivative liability
|
$ | 32,199,005 | $ | - | $ | - | $ | 32,199,005 | ||||||||
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Convertible notes payable, net - current
|
896,253 | - | - | 896,253 | ||||||||||||
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Convertible notes payable, net – long-term
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58,633 | - | - | 58,633 | ||||||||||||
|
Total liabilities measured at fair value
|
$ | 33,153,891 | $ | - | $ | - | $ | 33,153,891 | ||||||||
Derivative Liability
We estimate the fair value of the derivative for the conversion feature of our convertible notes payable using the Black-Scholes pricing model at the inception of the debt, at the date of conversions to equity and at each reporting date, recording a derivative liability, debt discount and a gain or loss on change in derivative liability as applicable. These estimates are based on multiple inputs, including the market price of our stock, interest rates, our stock price volatility, and variable conversion prices based on market prices as defined in the respective loan agreements. These inputs are subject to significant changes from period to period; therefore, the estimated fair value of the derivative liability will fluctuate from period to period and the fluctuation may be material.
Income Taxes
We account for income taxes using the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
Stock-Based Compensation
Stock-based compensation is measured at the grant date based on the value of the award granted using the Black-Scholes option pricing model, and recognized over the period in which the award vests. For stock awards no longer expected to vest, any previously recognized stock compensation expense is reversed in the period of termination. The stock-based compensation expense is included in general and administrative expenses.
Recently Issued Accounting Pronouncements
Management reviewed new accounting pronouncements issued during the six months ended June 30, 2015 and through the date of filing this report, and believes no pronouncements are applicable to or would have a material impact on the financial statements of the Company.
Results of Operations
General and Administrative Expenses
General and administrative expenses increased by $32,888 to $114,592 in the three months ended June 30, 2015 from $81,704 in the three months ended June 30, 2014. The increase in general and administrative expenses in the second quarter of the current year is due primarily to an increase in consulting fees. General and administrative expenses decreased by $22,593 to $230,861 in the six months ended June 30, 2015 from $253,454 in the six months ended June 30, 2014. The decrease in general and administrative expenses on a year-to-date basis in the current year is due primarily to a decrease in professional fees and stock option compensation expense, partially offset by an increase in consulting fees.
Research and Development Expenses
During the three months and six months ended June 30, 2015, we incurred research and development expenses of $96,933 and $193,865, respectively, consisting of the amortization for the respective periods of the payments made for the SRA. We incurred no research and development expenses during the three months and six months ended June 30, 2014.
Depreciation and Amortization Expense
Depreciation and amortization expense decreased by $183 to $52 in the three months ended June 30, 2015 from $235 in the three months ended June 30, 2014, and decreased by $410 to $104 in the six months ended June 30, 2014 from $514 in the six months ended June 30, 2014. Our investment in property and equipment currently is not material to our operations, and substantially all of our property and equipment is fully depreciated at June 30, 2015.
Other Income (Expense)
Total other expense was $2,245,017 for the three months ended June 30, 2015, compared to total other income of $396,478 for the three months ended June 30, 2014. Total other expense was $23,284,504 for the six months ended June 30, 2015, compared to total other income of $1,441,116 for the six months ended June 30, 2014. The increase in total other expense is primarily the result of the non-cash loss on change in derivative liability related to our convertible debt of $2,071,702 in the three months ended June 30, 2015, compared to the gain on change in derivative liability of $495,027 in the three months ended June 30, 2014 and the loss on change in derivative liability of $22,972,137 in the six months ended June 30, 2015, compared to the gain on change in derivative liability of $1,654,390 in the six months ended June 30, 2014. Our estimate of the fair value of the derivative liability for the conversion feature of our convertible notes payable is based on multiple inputs, including the market price of our stock, interest rates, our stock price volatility, and variable conversion prices based on market prices as defined in the respective loan agreements. These inputs are subject to significant changes from period to period; therefore, the estimated fair value of the derivative liability will fluctuate from period to period and the fluctuation may be material. In addition, as our convertible debt increases we also generally incur an increase in our derivative liability and losses on change in derivative liability.
Our interest expense increased by $72,756 to $181,201 in the three months ended June 30, 2015 from $108,445 in the three months ended June 30, 2014, and increased by 87,332 to $331,218 in the six months ended June 30, 2015 from $243,886 in the six months ended June 30, 2014. These increases are the result of new debt incurred to finance our operations.
We also recognized a gain on settlement of debt resulting from the conversion of debt to equity of $2,518 and $5,396 in the three months ended June 30, 2015 and 2014, respectively, and $5,118 and $20,112 in the six months ended June 30, 2015 and 2014, respectively.
We have also reported rental income from the sublease of our office space that is not material to our operations.
Net Loss
As a result, we incurred a net loss in the three months ended June 30, 2015 of $2,456,594 compared to net income of $314,539 in the three months ended June 30, 2014, and a net loss of $23,709,334 in the six months ended June 30, 2015 compared to net income of $1,187,148 in the six months ended June 30, 2014.
Liquidity and Capital Resources
As of June 30, 2015, we had a working capital deficit of $33,607,207, compared to a working capital deficit of $10,518,191 as of December 31, 2014. The increase in the working capital deficit was due primarily to the increase in our non-cash derivative liability, which had a balance of $32,199,005 at June 30, 2015. Our cash balance at June 30, 2015 was $34,065.
During the six months ended June 30, 2015, we used net cash of $338,382 in operating activities as a result of our net loss of $23,709,334 and non-cash gain on settlement of debt of $5,117, partially offset by non-cash expenses totaling $23,252,411, decrease in prepaid expenses of $54,383 and increases in accounts payable of $2,041 and accrued expenses and other current liabilities of $67,234.
By comparison, during the six months ended June 30, 2014, we used net cash of $219,311 in operating activities as a result of our net income of $1,187,148, non-cash expenses totaling $223,372, and increase in accrued expenses and other current liabilities of $80,839, offset by non-cash gains totaling $1,674,502, increase in prepaid expenses of $12,562 and decrease in accounts payable of $23,606.
We had no net cash provided by or used in investing activities during the six months ended June 30, 2015 and 2014.
Net cash provided by financing activities during the six months ended June 30, 2015 and 2014 was $357,000 and $423,000, respectively, comprised of proceeds from convertible notes payable. Our capital needs have primarily been met from the proceeds of investor loans, as we currently have no revenues.
Although most recently, proceeds received from the issuance of debt are sufficient to fund our current operating expenses, we will need to raise additional funds in the future to continue our operations and emerge from the development stage. Therefore, our future operations are dependent on our ability to secure additional financing. Financing transactions may include the issuance of equity or debt securities, obtaining credit facilities, or other financing mechanisms. However, the trading price of our common stock and a downturn in the U.S. equity and debt markets could make it more difficult to obtain financing through the issuance of equity or debt securities. Even if we are able to raise the funds required, it is possible that we could incur unexpected costs and expenses, or experience unexpected cash requirements that would force us to seek alternative financing. Furthermore, if we issue additional equity or debt securities, stockholders may experience additional dilution or the new equity securities may have rights, preferences, or privileges senior to those of existing holders of our common stock. The inability to obtain additional capital may restrict our ability to grow and may reduce our ability to continue to conduct business operations. If we are unable to obtain additional financing, we may have to curtail our marketing and development plans and possibly cease our operations.
We believe that we have assets to ensure that we can continue to operate without liquidation over the next twelve months, due to our current cash, and our experience in the past in being able to raise money from our investor base. Therefore, we believe we have the ability to continue our operations for the foreseeable future and will be able to realize assets and discharge liabilities in the normal course of our operations.
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 revenue, and has negative cash flows from operations, which raises substantial doubt about the Company’s ability to continue as a going concern. The ability of the Company to continue as a going concern is dependent upon, among other things, raising additional capital. Since our inception through June 30, 2015, the Company has obtained funds primarily from the issuance of debt. Management believes this funding will continue, and is continually seeking new investors. Management believes the existing shareholders and lenders and 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, we cannot assure that we will be successful in these endeavors.
Not applicable.
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed by the Company in the reports that it files under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer that it files under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive officer and principal financial officers, or persons performing similar functions as appropriate to allow timely decisions regarding required disclosure. The Company’s chief executive officer and chief financial officer is responsible for establishing and maintaining disclosure controls and procedures for the Company.
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, as appropriate to allow timely decisions regarding required disclosure.
Internal Control Over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, (as defined in Rule 13a-15(f) under the Exchange Act). The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes of accounting principles generally accepted in the United States. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance of achieving their control objectives. Furthermore, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate due to change in conditions, or the degree of compliance with the policies or procedures may deteriorate. After evaluating the Company’s internal controls over financial reporting, the Company’s chief executive officer and chief financial officer concluded that the internal controls over financial reporting are effective as of June 30, 2015.
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 the three month period ended June 30, 2015 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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.
There are no material changes from the risk factors previously disclosed in our annual report on Form 10-K filed March 30, 2015.
During the three months ended June 30, 2015, the Company had no unregistered sales of equity securities.
As further discussed in Note 5 to our condensed financial statements, as of June 30, 2015, we were in default on two convertible notes payable totaling $55,480. We are currently in discussions with the lenders and anticipate we will successfully negotiate extensions of the maturity date of the notes.
Not Applicable.
None
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3.1
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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).
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3.2
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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).
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3.3
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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).
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3.4
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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).
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3.5
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Bylaws of Carbon Sciences, Inc. (Incorporated by reference to the Company’s Registration Statement on Form SB-2 filed on July 27, 2007).
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4.3
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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)
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10.1
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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)
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10.2
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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)
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10.3
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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)
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10.4
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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)
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10.5
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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)
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10.6
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Carbon Sciences, Inc. 2011 Equity Incentive Plan. (Incorporated by reference to the Company’s Registration Statement on S-1 filed on November 7, 2011)
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10.7
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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)
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10.8
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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)
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10.9
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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)
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10.10
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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)
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10.11
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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)
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10.12
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Consulting Agreement between Carbon Sciences, Inc. and William Beifuss, dated May 31, 2013 (Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 filed on March 31, 2014)
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14.1
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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).
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31.1*
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Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
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31.2*
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Certification of the Acting Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
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32.1*
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Certification of the Chief Executive Officer furnished pursuant to Section 1350 of Chapter 63 of 18 U.S.C. as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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32.2*
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Certification of the acting Chief Financial Officer furnished pursuant to Section 1350 of Chapter 63 of 18 U.S.C. as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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EX-101.INS
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XBRL INSTANCE DOCUMENT
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EX-101.SCH
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XBRL TAXONOMY EXTENSION SCHEMA DOCUMENT
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EX-101.CAL
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XBRL TAXONOMY EXTENSION CALCULATION LINKBASE
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EX-101.DEF
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XBRL TAXONOMY EXTENSION DEFINITION LINKBASE
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EX-101.LAB
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XBRL TAXONOMY EXTENSION LABELS LINKBASE
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EX-101.PRE
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XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE
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*Filed herewith
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 Santa Barbara, State of California, on August 12, 2015.
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CARBON SCIENCES, INC.
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By:
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/s/ William Beifuss
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Chief Executive Officer (Principal Executive Officer ) and Acting Chief Financial Officer
(Principal Financial/Accounting Officer)
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