NewStream Energy Technologies Group Inc - Quarter Report: 2016 September (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549  

 

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FORM 10-Q

 

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(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: September 30, 2016

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________________ to ____________________.

 

Commission file number:  000-50053

 (Exact name of small business issuer as specified in its charter)

(Issuer’s telephone number)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed 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), Yes ☒  and (2) has been subject to such filing requirements for the past 90 days.  No ☒

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  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  ☐         Accelerated filer  ☐         Non-accelerated filer  ☐         Smaller reporting company  ☒

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes  ☐    No  ☒

 

The number of shares outstanding of Registrant’s Common Stock as of November 14, 2016:  87,323,691

TABLE OF CONTENTS

 

 

PART I - FINANCIAL INFORMATION

The accompanying unaudited financial statements have been prepared in accordance with the instructions to Form 10-Q pursuant to the rules and regulations of the Securities and Exchange Commission and, therefore, do not include all information and footnotes necessary for a complete presentation of our financial position, results of operations, cash flows, and stockholders' equity in conformity with generally accepted accounting principles. In the opinion of management, all adjustments considered necessary for a fair presentation of the results of operations and financial position have been included and all such adjustments are of a normal recurring nature.

 

Clean Coal Technologies, Inc.

Balance Sheets

(Unaudited)

 

The accompanying notes are an integral part of these unaudited financial statements.

 

Clean Coal Technologies, Inc.

Statements of Operations

(Unaudited)

 

The accompanying notes are an integral part of these unaudited financial statements.

 

Clean Coal Technologies, Inc.

Statements of Cash Flows

(Unaudited)

 

The accompanying notes are an integral part of these unaudited financial statements. 

Clean Coal Technologies, Inc.

Notes to Financial Statements

(Unaudited)

NOTE 1: BASIS OF PRESENTATION

The accompanying unaudited interim financial statements of Clean Coal Technologies, Inc. (“Clean Coal”) have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission, and should be read in conjunction with the audited financial statements and notes thereto contained in Clean Coal’s Annual Report on Form 10-K filed with the SEC. In the opinion of management, the accompanying unaudited interim financial statements reflect all adjustments, consisting of normal recurring adjustments, necessary to present fairly the financial position and the results of operations for the interim period presented herein. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year or for any future period. Notes to the financial statements which would substantially duplicate the disclosure contained in the audited financial statements for fiscal 2015 as reported in the Form 10K have been omitted.

Net Income (Loss) per Common Share

Basic net income (loss) per share is computed on the basis of the weighted average number of common shares outstanding during each year. Diluted net income (loss) per share is computed similar to basic net income (loss) 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. In periods where losses are reported, the weighted-average number of common stock outstanding excludes common stock equivalents, because their inclusion would be anti-dilutive.

During 2015, all common stock equivalents were excluded as they would have been anti-dilutive. For the nine months ended September 30, 2016, the dilutive effect of the outstanding common stock options was 0 shares, common stock warrants was 1,929,813 shares, the dilutive effect of the outstanding warrant conversion options was 27,553,046 shares and the dilutive effect of the outstanding convertible debt was 78,643,882 shares, with a reduction to net income of $57,529,457. For the three months ended September 30, 2016, the dilutive effect of the outstanding common stock options was 0 shares, common stock warrants was 1,347,259 shares, the dilutive effect of the outstanding warrant conversion options was 20,476,600 shares and the dilutive effect of the outstanding convertible debt was 78,389,279 shares, with a reduction to net income of $20,464,270.

 

NOTE 2: GOING CONCERN

 

The accompanying financial statements have been prepared on a going concern basis of accounting which contemplates continuity of operations, realization of assets, liabilities, and commitments in the normal course of business. The accompanying financial statements do not reflect any adjustments that might result if the Clean Coal is unable to continue as a going concern. Clean Coal has an accumulated deficit and a working capital deficit as of September 30, 2016 with no significant revenues anticipated for the near term. Management believes Clean Coal will need to raise capital in order to operate over the next 12 months. As shown in the accompanying financial statements, Clean Coal has also incurred significant losses since inception. Clean Coal’s continuation as a going concern is dependent upon its ability to generate sufficient cash flow to meet its obligations on a timely basis and ultimately to attain profitability. Clean Coal has limited capital with which to pursue its business plan. There can be no assurance that Clean Coal’s future operations will be significant and profitable, or that Clean Coal will have sufficient resources to meet its objectives. These conditions may raise doubt as to Clean Coal’s ability to continue as a going concern. Management may pursue either debt or equity financing or a combination of both, in order to raise sufficient capital to meet Clean Coal’s financial requirements over the next twelve months and to fund its business plan. There is no assurance that management will be successful in raising additional funds.

NOTE 3: RESEARCH AND DEVELOPMENT

Research and development consists of costs incurred related to the construction and testing of a 2-ton/hour test plant in Oklahoma. The estimated cost of moving the test facility to a permanent location and have it reassembled is $750,000. In quarter four 2015, the test plant was commissioned and testing of the plant started. Testing was successfully completed in April 2016 and the company is currently arranging for the plant to be moved to a permanent location. During the nine months ended September 30, 2016 and 2015, we incurred $1,495,348 and $0 in research and development expenses, respectively.

NOTE 4: RELATED PARTY TRANSACTIONS

 

Accruals for salary and bonuses to officers and directors are included in accrued liabilities in the balance sheets and totaled $2,550,426 and $3,037,376 as of September 30, 2016 and December 31, 2015, respectively.

During the nine months to September 30, 2016, the Company issued 1,785,714 common shares for the conversion of $500,000 of salary due to an officer. The fair value of the shares was $1,116,071, of which $616,071 was recorded as additional compensation expense.

During the nine months ended September 30, 2016, the Company issued 12,900,000 shares of common stock for bonuses to officers and directors valued at $6,289,640, which was recorded as compensation expense.

During the nine months ended September 30, 2016, officers of the company advanced $32,450 to the Company to cover short-term financing needs.  $1,000 was repaid and the outstanding balance was $31,450 as of September 30, 2016. The short-term loan is due on demand, does not accrue interest and is unsecured.

During the nine months ended September 30, 2016, an officer of the Company transferred 434,244 common shares of the Company to a note holder on behalf of the Company for default expense. The fair value of the shares of $121,371 was recognized as loan default expense.

 

NOTE 5: DEBT

Convertible Debt

During the nine months ended September 30, 2016, the Company borrowed an aggregate of $2,053,603, net of original issue discounts and fees of $231,350, under convertible notes payable and repaid $277,891 in principal of convertible debt. Additional discounts of $1,975,986 were recognized during the nine months ended September 30, 2016 due to derivative liabilities. As of September 30, 2016 and December 31, 2015, the Company had outstanding convertible notes payable of $6,215,940 and $5,605,287, net of unamortized discounts of $2,208,714 and $1,142,241, respectively. The outstanding convertible notes of the Company are unsecured, bear interest between 6% and 12% per annum, mature between November 2014 and September 2019 and are convertible at variable rates between 60% and 65% of the quoted market price of the Company’s common stock. All notes that were convertible during the nine months ended September 30, 2016 were accounted for as derivative liabilities (see Note 6). Aggregate amortization of the debt discounts on convertible debt for the nine months ended September 30, 2016 and 2015 was $1,142,865 and $376,950, respectively.

During the September 2016, the Company entered into a Debt Settlement Agreement with a convertible note holder of two past due notes with outstanding principal balances of $100,000 each. The settlement agreement provides for the payment of $250,000 to settle the notes, payable in four monthly installments of $62,500 beginning September 16, 2016. In connection with this settlement agreement, the Company transferred $50,000 accrued interest into principal of the note. The first payment of $62,500 was made on September 16, 2016.

During the September 2016, the Company entered into a Debt Settlement Agreement with a convertible note holder of a past due note with an outstanding principal balance of $100,000. The settlement agreement provides for the payment of $125,000 to settle the note, payable in three monthly installments of $31,250 beginning September 20, 2016. In connection with this settlement agreement, the Company transferred $25,000 accrued interest into principal of the note. The first payment of $31,250 was made on September 28, 2016.

During the nine months ended September 30, 2016, the Company incurred loan standstill expenses added to debt principal of $77,492. Also during the nine months ended September 30, 2016, the Company issued an aggregate of 2,557,693 shares to note holders to suspend the conversion of certain outstanding convertible notes. The fair value of these shares of $1,487,308 was recognized as a debt standstill expense.

During the nine months ended September 30, 2016, holders of eight convertible notes payable elected to convert a total of $428,250 principal and $18,595 accrued interest in principal into a total of 4,967,617 shares of the Company’s common stock.  During the nine months ended September 30, 2016, the Company repaid $277,891 in principal on convertible debt.

Nonconvertible Debt

During the nine months ended September 30, 2016, the Company issued a note payable in the aggregate amount of $100,000, net of original discount of $2,000. The note is due in one month, accrues interest at 12% per annum and is secured by 434,244 shares of the Company’s common stock.

As of September 30, 2016 and December 31, 2015, the Company had outstanding notes payable to former affiliates of the Company of $413,185. These notes payable of the Company are unsecured, bear no interest and are due on demand.

NOTE 6: DERIVATIVE LIABILITIES

During the nine months ended September 30, 2016, twenty eight convertible notes issued by the Company became convertible and qualified as derivative liabilities under Accounting Series Codification 815, Derivatives (ASC 815). In addition, all outstanding nonemployee common stock options and outstanding common stock warrants are tainted and required to be accounted for as derivative liabilities under ASC 815.

As of September 30, 2016 and December 31, 2015, the aggregate fair value of the outstanding derivative liabilities was $13,354,786 and $70,004,318, respectively. For the nine months ended September 30, 2016 the net gain on the change of fair value was $58,197,261. For the nine months ended September 30, 2015, the net loss on the change in fair value of derivative liabilities was $50,896,732.

The Company estimated the fair value of the derivative liabilities using the Black-Scholes option pricing model using the following key assumptions during the nine months ended September 30, 2016

The Company determines the fair market values of its financial instruments based on the fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The following three levels of inputs may be used to measure fair value:

 

 

 

The below table presents the change in the fair value of the derivative liabilities during the nine months ended September 30, 2016:

NOTE 7: EQUITY TRANSACTIONS

 

Common Stock

 

During the nine months ended September 30, 2016, the Company issued an aggregate of 2,557,693 to note holders to suspend the conversion of certain outstanding convertible notes. The fair value of these shares of $1,487,309 was recognized as a debt standstill expense. The Company also issued 434,244 common stock shares to a note holder in an event of default. These shares were originally owned by an officer of the Company and pledged to the note holder.

During the nine months ended September 30, 2016, the Company granted an aggregate of 12,900,000 common shares to various employees and directors for services rendered. The aggregate fair value of these awards was determined to be $6,289,640 and was recognized as stock compensation during the nine months ended September 30, 2016.

During the nine months ended September 30, 2016, the company issued 1,785,714 common shares for the conversion of $500,000 of salary due to an officer. The value of the shares was $1,116,071, of which $616,071 was recorded as additional compensation expense.

During the nine months to September 30, 2016, the Company issued a total of 4,967,617 shares of common stock for the extinguishment of $446,845 in convertible note principal and interest.

During the nine months to September 30, 2016, the Company issued a total of 100,000 common shares for investor relations consulting services valued at $21,975.

Common Stock Options

A summary of common stock option activity for the nine months ended September 30, 2016 is as follows:

The intrinsic value of the exercisable options as of September 30, 2016 was $0. During the nine months ended September 30, 2016 28,573 options expired unexercised.

 

Common Stock Warrants

The following table presents the common stock warrant activity during the nine months ended September 30, 2016:

The intrinsic value of the exercisable warrants as of September 30, 2016 was $34,047.

 

NOTE 8: SUBSEQUENT EVENTS

During October 2016, the Company entered into a Securities Purchase Agreement (“SPA”) for a convertible note in the amount of $355,000 net of original issuance discount and fees of $25,250. The convertible note bears interest at 8% per annum, is due in six months and is convertible into the Company’s common stock at a discount of 65% of the quoted market price of the Company’s common stock at the date of conversion.

During the October 2016, the Company entered into a Debt Settlement Agreement with a convertible note holder of a past due note with an outstanding principal balance of $185,000. The settlement agreement provides for the payment of $240,380 to settle the notes, payable in three monthly installments of $80,126 beginning October 14, 2016. As a result of this settlement agreement, the Company added $55,380 in principal to the note as debt settlement expense. The first payment of $80,126 was made on October 14, 2016.

During October 2016, a convertible note holder elected to convert $200,000 in principal and $2,564 in accrued interest into 3,751,192 shares of the Company’s common stock.

During October 2016, a convertible note holder elected to convert $40,000 in principal into 683,761 shares of the Company’s common stock.

During the October 2016, the Company entered into a fourth amendment to a Debt Settlement Agreement with a convertible note holder of a past due note with an outstanding principal balance of $517,724. The settlement agreement provides for the payment of $590,855 to settle the note, payable in three monthly installments of $140,000 beginning November 18, 2016. As a result of this settlement agreement, the Company added $73,131 in principal to the note as debt settlement expense.

 

FORWARD-LOOKING STATEMENTS AND FACTORS THAT MAY AFFECT FUTURE RESULTS

 

This Quarterly Report on Form 10-Q contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they do not materialize or prove correct, could cause our results to differ materially from those expressed or implied by such forward-looking statements. All statements other than statements of historical fact are statements that could be deemed forward-looking statements, including, but not limited to, statements concerning: our plans, strategies and objectives for future operations; new products or developments; future economic conditions, performance or outlook; the outcome of contingencies; expected cash flows or capital expenditures; our beliefs or expectations; activities, events or developments that we intend, expect, project, believe or anticipate will or may occur in the future; and assumptions underlying any of the foregoing. Forward-looking statements may be identified by their use of forward-looking terminology, such as “believes,” “expects,” “may,” “should,” “would,” “will,” “intends,” “plans,” “estimates,” “anticipates,” “projects” and similar words or expressions. You should not place undue reliance on these forward-looking statements, which reflect our management’s opinions only as of the date of the filing of this Quarterly Report on Form 10-Q and are not guarantees of future performance or actual results

 

Overview

Over the past decade, Clean Coal Technologies, Inc. has developed processes that address what we believe are the key technology priorities of the global coal industry. We currently have three processes in our intellectual property portfolio:

 

The original process, called Pristine, is designed to remove moisture and volatile matter, rendering a high-efficiency, cleaner thermal coal.  The process has been tested successfully on bituminous and subbituminous coals, and lignite from various parts of the United States and from numerous countries around the world.

 

Our second process, called Pristine-M, is a low-cost coal dehydration technology. In tests, this process has succeeded in drying coal cheaply and stabilizing it using volatile matter released by the feed coal. Our coal testing plant has now been constructed and the testing has been successfully been completed at the test facility at the AES coal power utility in Oklahoma.

 

Our third process, called Pristine-SA, is designed to eliminate 100% of the volatile matter in the feed coal and to achieve stable combustion by co-firing it with biomass or natural gas.  The idea is to produce a clean fuel that eliminates the need for emissions scrubbers and the corollary production of toxic coal ash.  We anticipate that treated coal that is co-fired with other energy resources will burn as clean as natural gas.

 

Anticipated Benefits of the Technology:

 

·	Reduction of undesired emissions and greenhouse gases through the removal of compounds that are not required for combustion in conventional boilers.

 

·

Cost savings and environmental impact reduction. Our pre-combustion solution is anticipated to be much less expensive than post-combustion solutions such as emissions scrubbers.  Not only are the latter prohibitively expensive, they produce coal ash containing the “scrubbed” compounds, which is dumped in toxic waste disposal sites where it may pose continuing environmental risk.  Coal treated using our processes may eliminate the need for post-combustion emissions scrubbers and the resulting toxic ash.

 

·

Potential use of compounds removed from treated coal. Volatile matter captured in the Pristine process is removed in the form of hydrocarbon liquids that we believe will be easily blended with crude oil or used as feedstock for various products.  For example, sulfur, which can be removed using the Pristine process, is a basic feedstock for fertilizer.  The harvesting of hydrocarbon liquids from abundant, cheap coal is a potentially lucrative side benefit of our processes.

 

·	Energy Independence.  To the extent that volatile matter is removed from coal, coal’s use as an energy resource is greatly improved, enabling the United States and other coal-rich countries to move towards energy independence owing to coal’s greater abundance.

Development Status:

 

Pristine process. Pristine process successfully lab tested on small scale and through advanced computer modeling. As at September 30, 2016 the key parts of this technology has also been successfully tested at the coal power utility at AES in Oklahoma. 

Pristine-M. Construction of the coal testing plant in Oklahoma was completed and testing of the plant commenced in December 2015. As at September 30, 2016 this process was successfully tested with more than 20 test runs completed. This process successfully dehydrated coal by in excess of 80% and increased the BTU output of the coal by 25%.

 

Pristine-SA process. Pristine SA process analysis is at a very early stage. Further research and development is expected post completion of the coal testing plant.

 

Business Outlook

 

·	Jindal Steel & Power expected to contract first commercial plant in the third quarter 2016. Given the successful testing the company is currently in discussions with Jindal as they review the test results

 

·	Several multinational corporations have undertaken due diligence on our processes and have visited the coal testing plant in Oklahoma and witnessed it processing coal. Discussions are underway with these corporations to move towards commercialization

 

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Numerous discussions continuing with various domestic and international coal producers, mine operators and power plant operators about our technology and its potential application.  Several major visits are scheduled during quarter 2016 as part of the companys efforts to secure commercial agreements.

The company is working with the Department of Energy assessing specific opportunities for the deployment of our technology in the United States.

 

Employees

 

As of September 30, 2016, we had two full-time executives. President and CEO Robin Eves, Chief Operations Officer and Aiden Neary have written employment agreements. Messrs. Eves and Neary received no compensation for their participation on the Board of Directors.

Factors Affecting Results of Operations

 

Our operating expenses include the following:

 

· Consulting expenses, which consist primarily of amounts paid for technology development and design and engineering services;

· General and administrative expenses, which consist primarily of salaries, commissions and related benefits paid to our employees, as well as office and travel expenses;

· Research and development expenses, which consist primarily of equipment and materials used in the development and testing of our technology; and

· Legal and professional expenses, which consist primarily of amounts paid for patent protections, audit, disclosure, and reporting services.

Results of Operations

 

The following information should be read in conjunction with the financial statements and notes appearing elsewhere in this Report. We have generated limited revenues from inception to date. We are also in preliminary discussions with companies, business groups, consortiums in the USA and Asia to license our technology, which, if successful, could realize limited short-term revenue opportunities from the signing of technology licensing agreements. Royalty revenue is not estimated until approximately 16 -18 months after the successful testing of the plant, currently anticipated in the third quarter of fiscal 2016, and an EPC contract has been signed to build a commercial scale facility.

 

For the Three Months Ended September 30, 2016 and September 30, 2015

 

Revenues

 

We have generated no revenues for the three months ended September 30, 2016 and 2015. In the third quarter of fiscal 2012, we received an initial license fee of $375,000 from Jindal paid pursuant to the signing of our coal testing plant construction contract. The balance of $375,000 will be due upon the signing of a commercial EPC agreement, anticipated in the third quarter of fiscal 2016. We do not anticipate additional license revenues until the coal testing plant has been successfully tested, and do not expect to receive any royalty fees for approximately 16 to 18 months after an EPC contract has been signed to build a commercial scale facility.

 

Operating Expenses

 

Our operating expenses for the three months ended September 30, 2016 totaled $896,724 compared to $2,313,291 for the three month period in 2015. The primary component of the operating expenses for the three months ended September 30, 2016 was general and administrative expenses, recognizing $896,724 for the three months ended September 30, 2016, compared to $239,485 for the three months ended September 30, 2015. The increase in general administrative is mainly due to recognition $559,000 in stock compensation expense related to employee common stock awards, there were no such awards issued during the three months ended September 30, 2015. Consulting services expense were $0 for the three months ended September 30, 2016, compared to $2,073,806 for the three months ended September 30, 2015. The decrease in consulting expense was mainly due to the recognition of $819,176 in stock compensation expense to consultants.

  

Other Income and Expenses

 

During the three months ended September 30, 2016, we recognized total other income of $23,050,543 compared to total other expenses of $42,637,713 for the three months ended September 30, 2015. The majority of the $65,688,256 increase is due to a gain on change in fair value of derivative liabilities of $24,072,316 during the three months ended September 30, 2016, compared to a loss on change in fair value of derivative liabilities of $42,244,917 during the three months ended September 30, 2015. The increase was partially offset by an increase of $462,583 in interest expense and the recognition of $166,394 in debt extension and standstill expense as a result of past due notes, there were no such debt extension and modification expenses in the comparable 2015 period.

Net Income/Loss

  

For the three months ended September 30, 2016, we had net income of $22,153,819, compared to a net loss of $44,951,004 for the three months ended September 30, 2015. The $67,104,823 increase in net income is mainly due to the increase in other income as discussed above, as well as the $1,416,567 decrease in operating expenses.

 

We anticipate losses from operations will increase during the next nine months due to costs associated with moving the test plant to a permanent location, as well as anticipated increased payroll expenses as we add necessary staff and increases in legal and accounting expenses associated with maintaining a reporting company. We expect that we will continue to have net losses from operations until revenues from operating facilities become sufficient to offset operating expenses, unless we are successful in the sale of licenses for our technology once the coal testing plant testing is complete.

 

For the Nine Months Ended September 30, 2016 and September 30, 2015

 

Revenues

 

We have generated no revenues for the nine months ended September 30, 2016 and 2015. In the third quarter of fiscal 2012, we received an initial license fee of $375,000 from Jindal paid pursuant to the signing of our coal testing plant construction contract. The balance of $375,000 will be due upon the signing of a commercial EPC agreement, anticipated in the third quarter of fiscal 2016. We do not anticipate additional license revenues until the coal testing plant has been successfully tested, and do not expect to receive any royalty fees for approximately 16 to 18 months after an EPC contract has been signed to build a commercial scale facility.

 

Operating Expenses

 

Our operating expenses for the nine months ended September 30, 2016 totaled $9,189,738 compared to $4,064,611 for the nine month period in 2015. The primary component of the operating expenses in both periods was for shares issued for services, officers’ salaries and legal fees. We recorded stock-based compensation consisting of common stock and options issued for services of $21,976 and common stock issued for officer salaries and bonus of $6,289,640 for the nine months ended September 30, 2016, compared to $2,872,155 for the nine months ended September 30, 2015. General and administrative expenses were $3,283,321 for the nine months ended September 30, 2016, compared to $982,360 for the nine months ended September 30, 2015. The increase in general and administrative was mainly due to the recognition of stock compensation expense to officers and directors. We also recognized $1,495,348 in research and development expenses in the nine months ended September 30, 2016, we had no such expenses for the 2015 comparative period.

  

Other Income and Expenses

 

During the nine months ended September 30, 2016, we recognized total other income of $54,713,366, compared to total other expenses of $51,966,635 for the nine months ended September 30, 2015. The majority of the $106,680,001 increase is due to a gain on change in fair value of derivative liabilities of $58,197,261 during the three months ended September 30, 2016, compared to a loss on change in fair value of derivative liabilities of $50,896,732 during the three months ended September 30, 2015. The increase was partially offset by an increase of $740,792 in interest expense and the recognition of $1,673,200 in debt extension and standstill expense as a result of past due notes, there were no such debt extension and modification expenses in the comparable 2015 period.

Net Income/Loss

  

For the nine months ended September 30, 2016, we had net income of $42,523,628, compared to a net loss of $56,031,246 for the nine months ended September 30, 2015. The $101,554,874 increase in net income is mainly due to the $106,680.001 increase in other income, partially offset by the $5,125,127 increase in operating expenses, as discussed above.

 

We anticipate losses from operations will increase during the next nine months due to costs associated with moving the test plant to a permanent location, as well as anticipated increased payroll expenses as we add necessary staff and increases in legal and accounting expenses associated with maintaining a reporting company. We expect that we will continue to have net losses from operations until revenues from operating facilities become sufficient to offset operating expenses, unless we are successful in the sale of licenses for our technology once the coal testing plant testing is complete.

 

Liquidity and Capital Resources

 

We have generated minimal revenues since inception. We have obtained cash for operating expenses through advances and/or loans from affiliates and stockholders, the sale of common stock, the issuance of loans and convertible debentures 

Net Cash Used in Operating Activities. Our primary source of operating cash during the nine months ended September 30, 2016, was borrowings on related party debt, third party debt and convertible debt. Our primary uses of funds in operations were the completion of the construction of the test facility including the testing of the plant, the payment of professional and consulting fees and general operating expenses.

 

Net cash used in operating activities, was $2,029,116 for the nine months ended September 30, 2016 compared to net cash used of $638,580 for the same period in 2015. Adjustments items to reconcile net income (loss) to net cash used in operating activities for nine months ended September 30, 2016 totaled $48,440,539 and consisted of amortization of debt discounts of $1,142,865, stock-based compensation of $6,927,686, debt settlement and modification expenses of $1,608,679 and a $58,197,261 gain on the change in the fair value of derivative liabilities.

Net Cash Used In Investing Activities. Net cash used in investing activities for the nine months ended September 30, 2016 and 2015 was $0 and $1,370,370, respectively. Cash used in investing activities in 2015 was related to plant construction.

Net Cash Provided by Financing Activities. Net cash provided by financing activities during the nine months ended September 30, 2016 totaled $1,907,162, compared to $2,112,497 for the nine months ended September 30, 2015. Net cash provided by financing activities consisting of borrowings on convertible debt of $2,153,603, net of original issue discounts and borrowings on related party notes of $ $32,450, offset by payments on convertible debt of $277,891 and related party notes of $1,000 for the nine months ended September 30, 2016. During the nine months ended September 30, 2015, borrowings on convertible debt were $2,989,000, net of original issue discounts and borrowings, borrowings from related parties and payments on related party debt were of $50,000 and 47,200, respectively, and payments on convertible debt were $879,303.

Cash Position and Outstanding Indebtedness

 

At September 30, 2016, we had $1,112 in current assets, consisting of all cash and $25,459,482 in liabilities which consist of $20,448,736 in current liabilities and $5,010,746 in long-term liabilities. Current liabilities consist primarily of accounts payable, accounts payable to related parties, accrued liabilities, short-term debt, convertible debt, related party debt and derivative liabilities.

At December 31, 2015, we had current assets of $123,066, consisting of all cash and $81,016,531 in liabilities, which consists of $76,543,117 in current liabilities and $4,473,414 in long-term liabilities. Current liabilities consist primarily of accounts payable, accounts payable to related parties, accrued liabilities, short-term debt, convertible debt, related party debt and derivative liabilities.

Our working capital deficit at September 30, 2016 and December 31, 2015 was $20,447,624 and $76,420,051, respectively.

 

Contractual Obligations and Commitments

 

The following table summarizes our contractual cash obligations and other commercial commitments at September 30, 2016.

 

 

(1)	Our New York office lease was converted to that of a satellite support office in February 2016 at a monthly rate of $200.00 per month. It is on a month to month basis.

 

SAIC Energy Environment & Infrastructure (SEE&I), our engineering consultant has tentatively estimated construction costs for each one million short ton coal complete cleaning facility of approximately $120 million (excluding land costs) or costs for a similar size Pristine-M-only facility of approximately $45-50 million (excluding land costs). Under the terms of our consulting agreement with SEE&I, we are obligated to pay to SEE&I a fee representing five percent of all gross revenues received by us from the sale of our technology, the operation of franchised plants utilizing the technology, or revenue received on any other basis that is related to the technology. This fee will remain in effect for a period of 15 years, commencing from the date that we receive our initial revenue stream from operations. All intellectual property rights associated with new art developed by SEE&I remain our property, however SEE&I would have a “right to use” the intellectual property provided it is deployed in non-competitive projects.

 

Construction of the test plant in Oklahoma was completed in December 2015 and testing was completed in April 2016. For the nine months to September 30, 2016 the company paid $1,495,348 as part of the testing of the facility and is recorded in our books under Research and Development. The test plant completed commissioning and commenced testing in December 2015. Testing was successfully completed in April 2016. The company is currently arranging the move of the facility to a permanent location.

Based on our current operational costs and including the capital requirements for our project deployments, we estimate we will need a total of approximately $2,000,000 to fund the Company for the balance of fiscal year 2016 and an additional $2,000,000 to continue for the following fiscal year (2017) or until an initial commercial plant is up and running. As we have now completed the successful testing of Pristine M we are in currently working on commercial agreements which if we are successful we believe we will have sufficient funding to meet our operating costs in 2016.

 

Off-Balance Sheet Arrangements

 

We have not and do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of establishing off-balance sheet arrangements or other contractually narrow or limited purposes. Therefore, we do not believe we are exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.

 

We are exposed to changes in prevailing market interest rates affecting the return on our investments but do not consider this interest rate market risk exposure to be material to our financial condition or results of operations. We invest primarily in United States Treasury instruments with short-term (less than one year) maturities. The carrying amount of these investments approximates fair value due to the short-term maturities. Under our current policies, we do not use derivative financial instruments, derivative commodity instruments or other financial instruments to manage our exposure to changes in interest rates or commodity prices.

 

As of September 30, 2016, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended. Based on this evaluation, management concluded that our financial disclosure controls and procedures were not effective due to our limited internal resources and lack of ability to have multiple levels of transaction review. There is a lack of appropriate segregation of duties within the Company, there is no management oversight, no control documentation being produced, and no one to review control documentation if it was being produced. As of September 30, 2016, we had two full time officers of the company.

There were no changes in disclosure controls and procedures that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially effect, our disclosure controls and procedures. We do not expect to implement any changes to our disclosure controls and procedures until there is a significant change in our operations or capital resources.

 

 

PART II - OTHER INFORMATION

 

We were named as a defendant in a lawsuit filed by a shareholder in the 15th Judicial Circuit Court in and for West Palm Beach County, Florida, Case No. 50 2010CA 028706XXXX MB on or about November 24, 2010. The Company has vigorously defended this action that the Company and its litigation counsel regard as absolutely frivolous, baseless and without merit. In August 2013, attorneys for the plaintiff filed a Fourth Amended Complaint. In December 2013, the Court dismissed one count of the amended complaint but plaintiff’s attorneys filed a request to file a fifth amendment. In January 2014, our attorneys filed a memorandum objecting to the motion to amend. We will continue to vigorously defend the action and we do not believe that the action will be materially adverse to the company. Our attorneys have put the plaintiff’s counsel on notice of our intent to seek sanctions against both the plaintiff, and the plaintiff’s counsel pursuant to Florida Statute Sec.57.105. Further, we have moved to dismiss the action on the basis that the Plaintiff has procedurally, factually, and legally failed to state a cause of action up which relief can be granted.

 

 

For information regarding risk factors, see “Part I. Item 1A. Risk Factors,” in our Annual Report on Form 10-K for the year ended December 31, 2015.

 

In January 2016 we issued 7,000,000 common shares to officers and directors of the Company for services valued at $4,375,000.

In February 2016, we issued an aggregate of 2,307,693 common shares to note holders for standstill fees.

In February, 2016 we issued 1,785,714 as part of management converting $500,000 of accrued salary due to them into equity.

In June 2016 we issued 3,900,000 common shares to officers and directors of the Company for services valued at $1,355,640.

In September 2016 we issued 2,000,000 common shares to officers and directors of the Company for services valued at $559,000.

The above shares were issued in reliance on the exemption from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended, and the regulations promulgated thereunder. The issuances were for services, interest on loans and investment, respectively. The transactions were privately negotiated and did not involve any kind of public solicitation.

 

None.

None.

 

 

 

SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.