COATES INTERNATIONAL, LTD.
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(Exact Name of Registrant as Specified in Its Charter) |
Delaware
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3510
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22-2925432
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(State or other Jurisdiction of Incorporation)
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(Primary Standard Classification Code)
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(IRS Employer Identification No.)
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Large accelerated filer
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o
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Accelerated filer
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o
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Non-accelerated filer
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o
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Smaller reporting company
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þ
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Title of Each Class of Securities
to
be Registered
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Amount to be
Registered (1)
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Proposed Maximum
Offering Price
Per Share (2)
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Proposed Maximum
Aggregate
Offering Price
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Amount of
Registration Fee
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Common Stock, par value $0.0001 per share, issuable pursuant to the Equity Credit Agreement
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19,000,000
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$
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0.37
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$
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7,030,000
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$
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816.18
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(1)
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We are registering 19,000,000 shares of our common stock (“Put Shares”) that we will put to Dutchess Opportunity Fund, II, LP (“Dutchess” or “Selling Security Holder”) pursuant to an investment agreement (the “Investment Agreement”) between Dutchess and the registrant entered into on June 6, 2011. In the event of stock splits, stock dividends or similar transactions involving the common stock, the number of common shares registered shall, unless otherwise expressly provided, automatically be deemed to cover the additional securities to be offered or issued pursuant to Rule 416 promulgated under the Securities Act of 1933, as amended (the “Securities Act”). In the event that the adjustment provisions of the Investment Agreement require the registrant to issue more shares than are being registered in this registration statement, for reasons other than those stated in Rule 416 of the Securities Act, the registrant will file a new registration statement to register those additional shares.
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(2)
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The offering price has been estimated solely for the purpose of computing the amount of the registration fee in accordance with Rule 457(o) of the Securities Act on the basis of the closing bid price of the common stock of the registrant as reported on the OTCBB on June 22, 2011.
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PART I: |
INFORMATION REQUIRED IN PROSPECTUS
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PROSPECTUS SUMMARY | 1 | ||||
THE OFFERING | 2 | ||||
RISK FACTORS | 2 | ||||
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS | 11 | ||||
ITEM 4: |
USE OF PROCEEDS
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11 | |||
ITEM 5: |
DETERMINATION OF OFFERING PRICE
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11 | |||
ITEM 6: |
DILUTION
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12 | |||
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ITEM 7: |
SELLING SECURITY
HOLDERS
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12 | |||
ITEM 8: |
PLAN OF DISTRIBUTION
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13 | |||
ITEM 9: |
DESCRIPTION OF SECURITIES TO BE REGISTERED
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14 | |||
ITEM 10: |
INTERESTS OF NAMED EXPERTS AND COUNSELS
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16 | |||
DESCRIPTION OF BUSINESS | 17 | ||||
DESCRIPTION OF PROPERTY | 24 | ||||
LEGAL PROCEEDINGS | 24 | ||||
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS | 25 | ||||
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | 25 | ||||
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE | 32 | ||||
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE | 33 | ||||
EXECUTIVE COMPENSATION | 39 | ||||
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT | 42 | ||||
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS | 43 | ||||
WHERE YOU CAN FIND MORE INFORMATION | 45 | ||||
INTERIM FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2011 AND 2010 | F-1 | ||||
FINANCIAL STATEMENTS FOR THE FISCAL YEARS ENDED DECEMBER 31, 2010 AND 2009 | F-20 | ||||
PART II: |
INFORMATION NOT REQUIRED IN PROSPECTUS
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II-1
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ITEM 13. |
OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
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II-1
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ITEM 14. |
INDEMNIFICATION OF DIRECTORS AND OFFICERS
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II-1
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ITEM 15. |
RECENT SALES OF UNREGISTERED SECURITIES
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II-2
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ITEM 16. |
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
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II-3
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ITEM 17. |
UNDERTAKINGS
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II-4
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SIGNATURES |
II-6
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Common stock offered by Selling Stockholder
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19,000,000 shares of common stock.
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Common stock outstanding before the offering
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281,616,261 shares of common stock as of June 21, 2011.
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Common stock outstanding after the offering
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300,616,261 shares of common stock.
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Use of proceeds
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We will not receive any proceeds from the sale of Shares by the selling stockholder. However, we will receive proceeds from the sale of securities pursuant to the Investment Agreement. The proceeds received under the Investment Agreement will be used for payment of general corporate and operating expenses.
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OTCBB Trading Symbol
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COTE. OB
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Risk Factors
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The common stock offered hereby involves a high degree of risk and should not be purchased by investors who cannot afford the loss of their entire investment. See “Risk Factors” beginning on page 2
.
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●
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Purchasing raw material inventory and hiring plant workers to commence our production phase
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Expanding manufacturing capacity
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Developing an expanded management team to oversee the expanded scope of our operating activities upon commencement of production
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Developing our engineering, administrative and marketing and sales organizations
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Expanding our research and development programs with respect to the basic CSRV system technology and applying the CSRV system technology to engines used in various commercially viable applications
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Implementation of new systems, processes and procedures to support growth.
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●
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Costs of the proposed share exchange transaction with a Chinese manufacturing company.
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As with any business, many aspects of our operations and our future outlook are subject to events and influences which are not within our control, such as the continuing worldwide economic crisis. This could have an adverse impact on us and our results of operations. For example:
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●
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The current severe limitation on the availability of credit and investor uncertainty could result in delays or the inability to acquire additional working capital needed to commence meaningful production.
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Almont may experience unanticipated challenges and delays in raising additional equity capital needed to make the remaining balance of the Release Payment due to us under the Escrow Agreement and the license payment due under the license agreements.
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Demand for our technology and products could be significantly reduced.
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Estimates used in the preparation of our financial statements may need to be revised.
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Our success in commencing our production phase of operations
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Results of testing of the CSRV system technology as it is designed into various commercially feasible applications
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Our prospects for entering into new potentially profitable license agreements for our technology
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Performance of the CSRV system technology in the field
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Improvements in engine technology by our competitors
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Changes in general conditions in the economy or the financial markets
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the name of the selling stockholder,
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●
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the number of shares of our common stock that the selling stockholder beneficially owned prior to the offering for resale of the shares under this Prospectus,
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●
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the maximum number of shares of our common stock that may be offered for resale for the account of the selling stockholder under this Prospectus, and
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●
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the number and percentage of shares of our common stock to be beneficially owned by the selling stockholder after the offering of the shares (assuming all of the offered shares are sold by the selling stockholder).
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Name
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Shares of Common Stock Beneficially Owned prior to Offering (1)
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Maximum Number of Shares of Common Stock to be Offered
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Number of Shares of Common Stock Beneficially Owned after Offering
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Percent Ownership after Offering
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Dutchess Opportunity Fund, II, LP (2)
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19,000,000 | 19,000,000 | 0 | 0 | % |
(1)
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Beneficial ownership is determined in accordance with the rules and regulations of the SEC. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, securities that are currently convertible or exercisable into shares of our common stock, or convertible or exercisable into shares of our common stock within 60 days of the date hereof are deemed outstanding. Such shares, however, are not deemed outstanding for the purposes of computing the percentage ownership of any other person. Except as indicated in the footnotes to the following table, each stockholder named in the table has sole voting and investment power with respect to the shares set forth opposite such stockholder’s name.
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(2)
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As the General Partner, Dutchess Capital Management, II, LLC, which is controlled by Douglas H. Leighton and Michael Novielli, Managing Members, has the voting and dispositive power over the shares owned by Dutchess Opportunity Fund, II, LP.
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●
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ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers;
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block trades in which the broker-dealer will attempt to sell the shares as agent, but may position and resell a portion of the block as principal to facilitate the transaction
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purchases by a broker-dealer as principal and resale by the broker-dealer for its account;
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an exchange distribution in accordance with the rules of the applicable exchange;
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privately negotiated transactions;
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short sales after this registration statement becomes effective;
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broker-dealers may agree with the selling stockholder to sell a specified number of such shares at a stipulated price per share;
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through the writing of options on the shares;
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a combination of any such methods of sale; and
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any other method permitted pursuant to applicable law.
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Name
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Title
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Number o f Shares of Common Stock Underlying Stock Options
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Exercise Price per Share
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Option
Expiration
Date
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George J. Coates
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Chairman, Chief Executive Officer and President
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1,000,000 | (1 | ) | $ | 0.44 |
10/23/2021
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50,000 | (1 | ) | $ | 0.43 |
11/4/2024
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275,000 | (2 | ) | $ | 0.40 |
11/17/2025
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Gregory Coates
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Director and President, Technology Division
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500,000 | (1 | ) | $ | 0.44 |
10/23/2021
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Barry C. Kaye
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Director, Treasurer and Chief Financial Officer
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125,000 | (1 | ) | $ | 0.44 |
10/18/2021
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Dr. Frank J. Adipietro
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Non-employee Director
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25,000 | (1 | ) | $ | 0.44 |
3/28/2022
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50,000 | (1 | ) | $ | 0.43 |
11/3/2024
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85,000 | (2 | ) | $ | 0.40 |
11/17/2025
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Richard W. Evans
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Non-employee Director
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25,000 | (1 | ) | $ | 0.4 |
3/28/2022
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50,000 | (1 | ) | $ | 0.39 |
12/27/2024
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Dr. Michael J. Suchar
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Non-employee Director
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25,000 | (1 | ) | $ | 0.44 |
3/28/2022
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Richard Whitworth
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Non-employee Director
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25,000 | (1 | ) | $ | 0.44 |
3/28/2022
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William Wolf. Esq.
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Outside General Counsel
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25,000 | (1 | ) | $ | 0.44 |
4/4/2022
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Company Supplier
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Company Supplier
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30,000 | (1 | ) | $ | 1.00 |
10/7/2015
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(1)
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These stock options are fully vested.
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(2)
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These stock options will vest on November 17, 2010.
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● |
The Release Payment Date as defined in the escrow agreement has been extended to March 19, 2012. At the time of the assignment, the remaining unpaid balance of the Release Payment was approximately $5,997,000. Provided that Almont remits this entire unpaid balance to us on or before the Release Payment Date, the US License will be released from escrow and granted to Almont. Almont is required to remit to us 60% of all monies it raises from future equity or debt transactions, exclusive of proceeds from equipment purchase financing transactions, until the Release Payment is paid in full.
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After payment of the Release Payment which includes the $ 1 million deposit towards the US License, Almont will also become obligated to pay the $49 million balance of the US License Fee to us. Payment shall be made quarterly in an amount equal to 5% of Almont’s quarterly net profits. In addition, Almont is required to remit to us a portion of the proceeds it receives from equity or debt transactions, exclusive of equipment financing transactions until the entire balance of the US License fee is paid in full. However, in any event, the entire $49 million licensing fee is required to be paid on or before February 19, 2015.
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Licensee shall have the exclusive right to use, lease and sell electric power generators that are based on the CSRV system technology within Canada.
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Licensee shall have a specified right of first refusal to market the electric power generators worldwide.
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Upon commencement of the production and distribution of the electric power generators, the minimum annual number of generators to be purchased by Licensee in order to maintain exclusivity is 120. Until otherwise agreed between the parties, the price per Gen Set shall be $159,000. In the event Licensee fails to purchase the minimum 120 CSRV Gen Sets during any year, Licensee will automatically lose its exclusivity. In such a case, Licensee would retain non-exclusive rights to continue to use and sell the CSRV Gen Sets in the territory of Canada.
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Licensee is required to pay a royalty to us equal to 5% of the sum of its annual gross profits and $400,000.
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All licensed rights under this license agreement related to the CSRV system technology will remain with us.
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1st Quarter
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2
nd
Quarter
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3
rd
Quarter
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4
th
Quarter
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2010:
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High
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$ | 0.42 | $ | 0.40 | $ | 0.35 | $ | 0.27 | ||||||||
Low
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$ | 0.32 | $ | 0.30 | $ | 0.20 | $ | 0.19 | ||||||||
2009:
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High
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$ | 0.49 | $ | 0.49 | $ | 1.18 | $ | 0.73 | ||||||||
Low
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$ | 0.24 | $ | 0.30 | $ | 0.42 | $ | 0.31 |
Amount Due Within
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||||||||||||
Total
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2011
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2012
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Mortgage loan payable
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$ | 1,650,000 | $ | 1,650,000 | $ | - | ||||||
Promissory notes to related parties
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225,000 | 225,000 | - | |||||||||
Employment agreements
(1)
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133,000 | 133,000 | - | |||||||||
Convertible promissory notes
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133,000 | 33,000 | 100,000 | |||||||||
Maturity of 10% promissory notes
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10,000 | 10,000 | - | |||||||||
Total
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$ | 2,151,000 | $ | 2,051,000 | $ | 100,000 |
(1)
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Our obligation under employment agreements would increase to an annual rate of $550,000, upon achieving an adequate level of Working Capital, as defined.
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●
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Assembly – to develop assembly lines at a new manufacturing facility to be constructed or acquired in the future in order to increase our manufacturing capacity. When the demand for our products justifies it, we will take the required steps in order to increase our work force. We anticipate that we will recruit a significant number of new employees and make substantial capital expenditures in connection with establishing such large scale operations.
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●
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Licensing our CSRV system technology to Original Equipment Manufacturers (“OEM's”) – to take advantage of third party manufacturers’ production capacity by signing OEM agreements.
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Name
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Age
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Position
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George J. Coates
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71
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Chairman of the Board of Directors, Chief Executive Officer and President
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Gregory Coates
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40
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Director and President of the Technology Division
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Barry C. Kaye
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58
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Director, Treasurer and Chief Financial Officer
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Dr. Richard W. Evans
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79
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Director and Secretary
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Dr. Frank Adipietro
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53
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Director (1)(2)
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Dr. Michael J. Suchar
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55
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Director (1)(2)
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Richard Whitworth
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62
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Director (1)(2)(3)
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●
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RWTH Aachen University, Aachen, Germany,
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University of Birmingham, Birmingham, England
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Rutgers University, New Brunswick, New Jersey, USA.
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annually reviewing and approving corporate goals and objectives relevant to compensation of our chief executive officer;
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determining the compensation of our chief executive officer;
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reviewing and approving, or making recommendations to our board of directors with respect to the compensation of our other executive officers;
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overseeing an evaluation of our senior executives;
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overseeing and administering our cash and equity incentive plans; and
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reviewing and making recommendations to our board with respect to director compensation.
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any breach of their duty of loyalty to the corporation or its stockholders;
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acts or omissions that are not in good faith or that involve intentional misconduct or a knowing violation of law;
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unlawful payments of dividends or unlawful stock repurchases or redemptions; or
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any transaction from which the director derived an improper personal benefit.
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Option
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All Other
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Name and Principal Position
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Year
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Salary
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Awards
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Compensation
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George J. Coates (1)
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2010
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$ | 311,394 | (1) | (1 | ) | $ | 10,000 | (4) | |||||
Chief Executive Officer and President |
2009
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$ | 269,231 | (1) | (1 | ) | (4 | ) | ||||||
Barry C. Kaye (2)
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2010
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$ | - | (2 | ) | $ | 102,018 | (2) | ||||||
Chief Financial Officer and Treasurer |
2009
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$ | - | (2 | ) | $ | 102,393 | (2) | ||||||
Gregory Coates (3)
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2010
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$ | 176,602 | (3) | (3 | ) | (4 | ) | ||||||
President, Technology Division |
2009
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$ | 158,654 | (3) | (3 | ) | (4 | ) |
(1)
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In April 2007, we executed an amended and restated employment agreement with George J. Coates (the “GJC Agreement”) that replaced an employment agreement signed in 2006. The term of the GJC Agreement, which became effective as in October 2006, is for five years. The GJC Agreement originally provided for annual salary of $183,549, an annual performance bonus determined by unanimous vote of the independent members of the board of directors, plus vacation, sick leave and participation in health, dental and life insurance and any other established benefit plans. In August 2008, the board of directors authorized an increase in Mr. Coates’ annual base compensation to $250,000. The GJC Agreement further provides that upon achieving a sufficient level of working capital, the amount of annual salary shall be increased to $300,000, an automobile will be provided to Mr. Coates and he will be entitled to a severance payment equal to three years’ annual compensation, should he terminate his employment with Good Reason, as defined, or upon his death. He will also be provided with a $2 million life insurance policy and will cooperate with us in securing key-man life insurance. In accordance with the GJC Agreement, in April 2007, we granted Mr. Coates 1,000,000 stock options to purchase shares of our common stock at an exercise price of $0.44 per share. In November 2009, we granted 50,000 stock options to purchase shares of our common stock at an exercise price of $0.43 per share. In November 2011, we granted 275,000 stock options to purchase shares of our common stock at an exercise price of $0.40 per share.
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(2)
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These amounts represent payments to Mr. Kaye for consulting services provided to us during 2010 and 2009, respectively. In April 2007, we granted to Mr. Kaye 125,000 options to purchase shares of our common stock at an exercise price of $0.44 per share. These options are fully vested.
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(3)
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In April 2007, the Company executed an amended and restated employment agreement with Gregory Coates (the “GC Agreement”) that replaced an employment agreement signed in 2006. The term of the GC Agreement, which became effective as of October 2006, is for five years. The GC Agreement originally provided for annual salary of $79,898, plus vacation, sick leave and participation in health, dental and life insurance and any other established benefit plans. In August 2008, the board of directors authorized an increase in Gregory Coates’ annual base compensation to $150,000. The GC Agreement further provides that upon the Company achieving a sufficient level of working capital, the amount of annual salary shall be increased to $250,000; he will become eligible for an annual performance bonus, a company-provided automobile and a severance payment equal to two years’ annual compensation, should he terminate his employment with Good Reason, as defined. He will also be provided with a $2 million life insurance policy and will cooperate with the Company in securing key-man life insurance. In accordance with the GC Agreement, on April 2007, we granted to Gregory Coates 500,000 options to purchase shares of our common stock at an exercise price of $0.44 per share.
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(4)
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George J. Coates and Gregory Coates were provided with health care, dental care and life insurance benefits amounting to approximately $27,400 and $12,200, respectively, in 2010 and amounting to approximately $16,900 and $7,500, respectively in 2009. In addition, in 2010, pursuant anti-dilution provisions applicable to Mr. Coates, he received 4,001 shares of Series A Preferred Stock valued at $10,000 which entitle the holder to 10,000 votes per share at all matters brought before a vote of the common stockholders.
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Name
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Number of Securities Underlying Unexercised Options that are Exercisable
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Number of Securities Underlying Unexercised Options that are Unexercisable
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Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options
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Option
Exercise Price
|
Option
Expiration Date
|
||||||||||||
George J. Coates
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1,000,000
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-
|
-
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$
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0.44
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10/23/2021
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|||||||||||
50,000
|
-
|
-
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$
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0.43
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11/3/2024
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||||||||||||
275,000
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275,000
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(1)
|
-
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$
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0.40
|
11/18/2025
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|||||||||||
Gregory Coates
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500,000
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-
|
-
|
$
|
0.44
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10/23/2021
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|||||||||||
Barry C. Kaye
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125,000
|
-
|
-
|
$
|
0.44
|
10/17/2021
|
(1) |
These stock options shall become fully vested on November 19, 2011.
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Name of Director
|
Year Ended
December 31,
|
Fees Earned or Paid in Cash
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Stock Options Awarded
|
Total Compensation
|
||||||||||
Dr. Frank J. Adipietro
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2010
|
$
|
-
|
$
|
17,700
|
$
|
17,700
|
|||||||
2009
|
$
|
-
|
$
|
13,600
|
$
|
13,600
|
||||||||
Dr. Richard W. Evans
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2010
|
$
|
-
|
$
|
-
|
$
|
-
|
|||||||
2009
|
$
|
-
|
$
|
12,340
|
$
|
12,340
|
Name & Position
|
Annual compensation
|
Number of
stock options(
2)
|
Life insurance
|
Severance payment(
3)
|
Term of the Agreement
|
||||||||||
George Coates, President and Chief Executive Officer
|
$
|
250,000
|
(1)
|
1,000,000
|
$
|
2,000,000
|
Three years salary(
4)
|
Five years
|
|||||||
Gregory Coates, President Technology Division
|
$
|
150,000
|
(1)
|
500,000
|
$
|
2,000,000
|
Two years salary(
4)
|
Five years
|
(1)
|
The annual salary for George J. Coates and Gregory Coates shall be increased to $300,000 and $250,000, respectively, at such time that the board of directors determines that we have Sufficient Capital, as defined.
|
(2)
|
These Options were granted in 2007 and are fully vested. In November 2009, we granted an additional 50,000 stock options which have fully vested to George J. Coates to purchase shares of our common stock at an exercise price of $0.43 per share. In November 2010, we granted an additional 285,000 stock options which will vest in November 2011 to George J. Coates to purchase shares of our common stock at an exercise price of $0.40 per share.
|
(3)
|
The entitlement for the severance payment is subject to the employee terminating his employment for a good reason.
|
(4)
|
The severance payment shall become effective in the event such termination for a good reason occurs after the board of directors determines that we have Sufficient Capital, as defined.
|
● |
each of our executive officers and directors;
|
● | all of our executive officers and directors as a group; and |
● |
any other beneficial owner of more than 5% of our outstanding common stock.
|
Beneficial Ownership
|
||||||||||||||||
Outstanding Shares
|
Right to Acquire Within 60 Days After
|
Shares Beneficially Owned
|
||||||||||||||
Name and Address of Beneficial Owner
|
Beneficially Owned
|
December 31, 2010
|
Number
|
Percentage
|
||||||||||||
George J. Coates
|
208,634,862
|
(1)
|
1,050,000
|
209,684,862
|
(1)
|
74.46
|
%
|
|||||||||
Gregory Coates
|
14,032,520
|
500,000
|
14,532,520
|
5.16
|
%
|
|||||||||||
Dr. Frank Adipietro
|
2,490,402
|
75,000
|
2,565,402
|
0.91
|
%
|
|||||||||||
Dr. Richard Evans
|
1,760,087
|
75,000
|
1,835,807
|
0.65
|
%
|
|||||||||||
Barry C. Kaye
|
219,000
|
125,000
|
344,000
|
0.12
|
%
|
|||||||||||
Dr. Michael J. Suchar
|
130,800
|
25,000
|
155,800
|
0.06
|
%
|
|||||||||||
Richard Whitworth
|
-
|
25,000
|
25,000
|
0.01
|
%
|
|||||||||||
All executive officers and directors as a group (7 persons)
|
227,267,671
|
1,875,000
|
229,142,671
|
81.37
|
%
|
|||||||||||
2010
|
2009
|
|||||||
George J. Coates (a) (b)
|
$
|
321,000
|
$
|
286,000
|
||||
Gregory Coates (a)
|
177,000
|
166,000
|
||||||
Bernadette Coates
|
75,000
|
77,000
|
(a)
|
Includes compensation paid in 2010 and 2009 for vacation earned but not taken.
|
(b)
|
For the year ended December 31, 2010, George J. Coates received 4,001 shares of Series A Preferred Stock which entitles the holder to 10,000 votes per share at all matters brought before the common stockholders for a vote. The estimated fair value of these shares of $10,000 is included in the reported amount of compensation for 2010.
|
Dr. Frank Adipietro
|
Director *, ** |
|
||
Dr. Michael J. Suchar
|
Director *, **
|
|
||
Richard Whitworth
|
Director *, **, *** |
|
Interim Financial Statements (Unaudited) |
Page
|
||
Balance Sheets as of March 31, 2011 and December 31, 2010 | F-1 | ||
Statements of Operations for the Three Months Ended March 31, 2011 and 2010 | F-2 | ||
Condensed Statements of Cash Flows for the Three Months Ended March 31, 2011 and 2010 | F-3 | ||
Notes to Financial Statements | F-4 | ||
F-5 | |||
Audited Financial Statement as of and for the Years Ended December 31, 2010 and 2009 | |||
Report of Meyler & Company LLC, Independent Public Accounting Firm | F-20 | ||
Balance Sheets | F-21 | ||
Statements of Operations | F-22 | ||
Statements of Stockholders' Deficienty | F-23 | ||
Statements of Cash Flows | F-24 | ||
Notes to Financial Statements | F-25 |
March 31,
|
December 31,
|
|||||||
2011
|
2010
|
|||||||
(Unaudited)
|
||||||||
Assets
|
||||||||
Current Assets
|
||||||||
Cash
|
$
|
25,500
|
$
|
53,360
|
||||
Restricted cash
|
31,718
|
61,643
|
||||||
Other receivables
|
-
|
11,440
|
||||||
Inventory, net
|
462,366
|
431,999
|
||||||
Total Current Assets
|
519,584
|
558,442
|
||||||
Property, plant and equipment, net
|
2,357,887
|
2,368,680
|
||||||
Deferred licensing costs, net
|
62,795
|
63,866
|
||||||
Total Assets
|
$
|
2,940,266
|
$
|
2,990,988
|
||||
Liabilities and Stockholders' Deficiency
|
||||||||
Current Liabilities
|
||||||||
Accounts payable and accrued liabilities
|
$
|
1,349,458
|
$
|
1,242,842
|
||||
Unearned revenue
|
154,124
|
144,124
|
||||||
Promissory notes to related parties
|
298,682
|
463,537
|
||||||
Mortgage loan payable
|
1,680,000
|
1,710,000
|
||||||
Convertible promissory notes, net of unamortized discount
|
95,573
|
84,700
|
||||||
Derivative liability related to convertible promissory notes
|
77,366
|
84,800
|
||||||
10% Convertible note
|
10,000
|
10,000
|
||||||
Total Current Liabilities
|
3,665,203
|
3,740,003
|
||||||
License deposits
|
375,000
|
375,000
|
||||||
Total Liabilities
|
4,040,203
|
4,115,003
|
||||||
Commitments and Contingencies
|
||||||||
Stockholders' Deficiency
|
||||||||
Preferred Stock, $0.001 par value, 100,000,000 shares authorized, 14,001 shares issued and outstanding at March 31, 2011
and December 31, 2010 |
14
|
14
|
||||||
Common Stock, $0.0001 par value, 1,000,000,000 shares authorized, 278,755,194 and 275,906,253 shares issued and
outstanding at March 31, 2011 and December 31, 2010, respectively |
27,876
|
27,591
|
||||||
Additional paid-in capital
|
23,120,915
|
22,553,853
|
||||||
Accumulated deficit
|
(24,248,742
|
)
|
(23,705,473
|
)
|
||||
Total Stockholders' Deficiency
|
(1,099,937
|
)
|
(1,124,015
|
)
|
||||
Total Liabilities and Stockholders' Deficiency
|
$
|
2,940,266
|
$
|
2,990,988
|
For the Three Month Ended March 31,
|
||||||||
2011
|
2010
|
|||||||
Revenue from research and development
|
$
|
-
|
$
|
850,000
|
||||
Expenses:
|
||||||||
Research and development costs
|
20,858
|
-
|
||||||
General and administrative expenses
|
349,265
|
320,680
|
||||||
Depreciation and amortization
|
16,654
|
15,120
|
||||||
386,777
|
335,800
|
|||||||
(386,777
|
)
|
514,200
|
||||||
Other Operating Expense:
|
||||||||
Increase in estimated fair value of embedded derivative liabilities
|
17,160
|
-
|
||||||
(Loss) Income from Operations
|
(403,937
|
)
|
514,200
|
|||||
Interest expense, net
|
139,332
|
61,636
|
||||||
(Loss) Income Before Income Taxes
|
(543,269
|
)
|
452,564
|
|||||
Provision for income taxes
|
-
|
-
|
||||||
Net (Loss) Income
|
$
|
(543,269
|
)
|
$
|
452,564
|
|||
Basic net (loss) income per share
|
$
|
-
|
$
|
-
|
||||
Basic weighted average shares outstanding
|
276,531,131
|
275,505,697
|
||||||
Diluted net (loss) income per share
|
$
|
-
|
$
|
-
|
||||
Diluted weighted average shares outstanding
|
276,531,131
|
275,616,172
|
For the the Three Months Ended March 31,
|
||||||||
2011
|
2010
|
|||||||
Net Cash Flows (Used in) Provided by Operating Activities
|
$
|
(280,570
|
)
|
$
|
433,330
|
|||
Cash Flows Used in Investing Activities:
|
||||||||
Acquisition of property, plant and equipment
|
(4,790
|
)
|
-
|
|||||
Net Cash Used in Investing Activities
|
(4,790
|
)
|
-
|
|||||
Cash Flows Provided by (Used in) Financing Activities:
|
||||||||
Issuance of convertible promissory note
|
32,500
|
-
|
||||||
Issuance of promissory notes to related parties
|
37,000
|
-
|
||||||
Repayment of promissory notes to related party
|
(12,000
|
)
|
(100,000
|
)
|
||||
Repayment of 10% convertible note
|
-
|
(10,000
|
)
|
|||||
Issuance of common stock and warrants
|
200,000
|
3,645
|
||||||
Release from Interest reserve
|
30,000
|
-
|
||||||
Repayment of Mortgage Loan
|
(30,000
|
)
|
-
|
|||||
Net Cash Provided by Provided by (Used in) Financing Activities
|
257,500
|
(106,355
|
)
|
|||||
Net (Decrease) Increase in Cash
|
(27,860
|
)
|
326,975
|
|||||
Cash, beginning of yearperiod
|
53,360
|
252,902
|
||||||
Cash, end of period
|
$
|
25,500
|
$
|
579,877
|
||||
Supplemental Disclosure of Cash Flow Information:
|
||||||||
Cash paid during the period for interest
|
$
|
31,885
|
$
|
45,036
|
||||
Supplemental Disclosure of Non-cash Financing Activities:
|
||||||||
Conversion of convertible promissory notes
|
$
|
93,500
|
$ |
-
|
||||
Conversion of promissory notes to related party
|
180,000
|
|
-
|
|||||
$
|
273,500
|
$
|
-
|
1.
|
BASIS OF PRESENTATION
|
2.
|
ACCOUNTING POLICIES
|
3.
|
CONCENTRATIONS OF CREDIT AND BUSINESS RISK
|
4.
|
AGREEMENTS ASSIGNED TO ALMONT ENERGY INC.
|
●
|
The Release Payment Date as defined in the escrow agreement has been extended to March 19, 2012. At the time of the assignment, the remaining unpaid balance of the Release Payment was $5,997,000. Provided that Almont remits this entire unpaid balance to the Company on or before the Release Payment Date, the US License will be released from escrow and granted to Almont. Almont is required to remit to the Company 60% of all monies it raises from future equity or debt transactions, exclusive of proceeds from equipment purchase financing transactions, until the Release Payment is paid in full.
|
●
|
After payment of the Release Payment which includes the $ 1 million deposit towards the US License, Almont has also become obligated to pay the $49 million remaining balance of the US License Fee to the Company. Payment shall be made quarterly in an amount equal to 5% of Almont’s quarterly net profits. In addition, Almont is required to remit a portion of the proceeds it receives from equity or debt transactions, exclusive of equipment financing transactions to the Company until the entire balance of the US License fee is paid in full. However, in any event, the entire $49 million licensing fee is required to be paid on or before February 19, 2015.
|
●
|
Licensee shall have the exclusive right to use, lease and sell electric power generators designed with the CSRV system technology within Canada.
|
●
|
Licensee shall have a specified right of first refusal to market the CSRV electric power generators worldwide.
|
●
|
Upon commencement of the production and distribution of the CSRV electric power generators, the minimum annual number of generators to be purchased by Licensee in order to maintain exclusivity is 120. Until otherwise agreed between the parties, the price per generator shall be $159,000. In the event Licensee fails to purchase the minimum 120 Coates generator engines during any year, Licensee will automatically lose its exclusivity. In such a case, Licensee would retain non-exclusive rights to continue to use and sell the CSRV generator engine in the territory of Canada.
|
●
|
Licensee is required to pay a royalty to the Company equal to 5% of the sum of its annual gross profits and $400,000.
|
●
|
All licensed rights under this license agreement related to the CSRV system technology will remain with the Company.
|
5.
|
COOPERATION AGREEMENT WITH TONGJI UNIVERSITY OF CHINA
|
6.
|
INVESTMENT IN COATES FINANCE MANAGEMENT, LTD.
|
7.
|
INVENTORY
|
March 31, 2011
|
December 31, 2010
|
|||||||
Raw materials
|
$
|
449,000
|
$
|
447,000
|
||||
Work-in-process
|
164,000
|
136,000
|
||||||
Finished goods
|
-
|
-
|
||||||
Reserve for obsolescence
|
(151,000
|
)
|
(151,000
|
)
|
||||
Total
|
$
|
462,000
|
$
|
432,000
|
8.
|
PROPERTY, PLANT AND EQUIPMENT
|
March 31, 2011
|
December 31, 2010
|
|||||||
Land
|
$
|
1,235,000
|
$
|
1,235,000
|
||||
Building
|
964,000
|
964,000
|
||||||
Building improvements
|
83,000
|
83,000
|
||||||
Machinery and equipment
|
662,000
|
658,000
|
||||||
Furniture and fixtures
|
39,000
|
39,000
|
||||||
2,983,000
|
2,979,000
|
|||||||
Less: Accumulated depreciation
|
(625,000
|
)
|
(610,000
|
)
|
||||
Total
|
$
|
2,358,000
|
$
|
2,369,000
|
9.
|
MORTGAGE LOAN PAYABLE
|
10.
|
PROMISSORY NOTES TO RELATED PARTIES
|
11.
|
CONVERTIBLE PROMISSORY NOTES AND EMBEDDED DERIVATIVE LIABILITIES
|
Issued
|
Principal Amount
|
Nominal Interest Rate
|
Maturity
|
Balance,
March 31, 2011
|
||||||||||
August 2010
|
$
|
78,500
|
8.00
|
%
|
May 2011
|
$
|
-
|
|||||||
September 2010
|
67,500
|
8.00
|
%
|
July 2011
|
52,500
|
|||||||||
December 2010
|
58,000
|
8.00
|
%
|
September 2011
|
58,000
|
|||||||||
February 2011
|
32,500
|
8.00
|
%
|
November 2011
|
32,500
|
|||||||||
$
|
236,500
|
$
|
143,000
|
12.
|
10% CONVERTIBLE NOTE TO RELATED PARTY
|
13.
|
CONTRACTUAL OBLIGATIONS
|
Amount Due Within
|
||||||||
Total
|
2011
|
|||||||
Mortgage loan payable
|
$
|
1,680,000
|
$
|
1,680,000
|
||||
Promissory notes to related parties
(1)
|
299,000
|
299,000
|
||||||
Employment agreements
(2)
|
233,000
|
233,000
|
||||||
Convertible promissory notes
(3)
|
143,000
|
143,000
|
||||||
10% promissory note
|
10,000
|
10,000
|
||||||
Total
|
$
|
2,365,000
|
$
|
2,365,000
|
(1)
|
In April 2011, promissory notes to related parties with an aggregate principal amount of $250,000, plus accrued interest thereon of $70,000, were converted into 1,869,570 shares of the Company’s common stock at a conversion rate of $0.171 per share, there by reducing this commitment to $49,000.
|
(2)
|
Our obligation under employment agreements would increase to $550,000, upon achieving an adequate level of Working Capital, as defined.
|
(3)
|
In April 2011, an aggregate of $52,000 principal amount of convertible promissory notes, including interest thereon amounting to $3,000, was converted by the holder into 554,511 unregistered shares of the Company’s common stock, thereby reducing this commitment to $90,500.
|
14.
|
CAPITAL STOCK
|
Basic Net Income
|
$
|
453,000
|
||
Interest on 10% Convertible Note
|
-
|
|||
Diluted Net Income
|
$
|
453,000
|
||
Basic Weighted Average Number of Shares Outstanding
|
275,505,697
|
|||
Assumed conversion of 10% Convertible Note
|
22,222
|
|||
Assumed conversion of Warrants
|
88,253
|
|||
Diluted Weighted Average Number of Shares Outstanding
|
275,616,172
|
Exercise Price Per Share
|
Number Outstanding
|
Weighted Average Remaining Contractual Life
|
Number Exercisable
|
Weighted Average Exercise Price
|
Weighted Average Fair Value Per Stock Option at Date of Grant
|
|||||||||||||||||||
Balance, 1/1/10
|
$
|
0.39 -1.00
|
2,290,000
|
12
|
1,905,000
|
$
|
0.44
|
$
|
0.36
|
|||||||||||||||
Granted
|
$
|
0.25
|
200,000
|
15
|
-
|
$
|
0.25
|
$
|
0.17
|
|||||||||||||||
Balance, 3/31/11
|
$
|
0.25 -1.00
|
2,490,000
|
12
|
1,905,000
|
$
|
0.42
|
$
|
0.34
|
·
|
Historical stock price volatility
|
139-180
|
%
|
||
·
|
Risk-free interest rate
|
1.11%-4.64
|
%
|
||
·
|
Expected life (in years)
|
4
|
|||
·
|
Dividend yield
|
0.00
|
%
|
●
|
Historical stock price volatility: The Company obtained the volatility factor of other publicly traded engine manufacturers that were also in the research and development stage.
|
●
|
Risk-free interest rate: The Company bases the risk-free interest rate on the interest rate payable on U.S. Treasury securities in effect at the time of the grant for a period that is commensurate with the assumed expected option life.
|
●
|
Expected life: The expected life of the options represents the period of time options are expected to be outstanding. The Company has no historical data on which to base this estimate. Accordingly, the Company estimated the expected life based on its assumption that the executives will be subject to frequent black out periods during the time that the stock options will be exercisable and based on the Company’s expectation that it will complete its research and development phase and commence its initial production phase. The vesting period of these options was also considered in the determination of the expected life of each stock option grant.
|
●
|
No expected dividends.
|
For the Three Months
Ended March 31,
|
||||||||
2011
|
2010
|
|||||||
George J. Coates
|
$
|
65,000
|
$
|
104,000
|
||||
Gregory Coates
|
42,000
|
52,000
|
||||||
Bernadette Coates
|
20,000
|
18,000
|
/s/ Meyler & Company, LLC
|
|
Middletown, New Jersey
|
|
March 30, 2011
|
2010
|
2009
|
|||||||
(Consolidated)
|
||||||||
Assets
|
||||||||
Current Assets
|
||||||||
Cash
|
$
|
53,360
|
$
|
252,902
|
||||
Restricted cash
|
61,643
|
100,813
|
||||||
Other receivables
|
11,440
|
-
|
||||||
Inventory, net
|
431,999
|
511,189
|
||||||
Deferred financing costs and other assets
|
-
|
16,042
|
||||||
Total Current Assets
|
558,442
|
880,946
|
||||||
Property, plant and equipment, net
|
2,368,680
|
2,282,105
|
||||||
Deferred licensing costs, net
|
63,866
|
68,149
|
||||||
Total Assets
|
$
|
2,990,988
|
$
|
3,231,200
|
||||
Liabilities and Stockholders' Deficiency
|
||||||||
Current Liabilities
|
||||||||
Accounts payable and accrued liabilities
|
$
|
1,242,842
|
$
|
1,169,518
|
||||
Due to related party
|
-
|
12,500
|
||||||
Unearned revenue
|
144,124
|
-
|
||||||
Promissory notes to related parties
|
463,537
|
300,000
|
||||||
Mortgage loan payable
|
1,710,000
|
1,750,000
|
||||||
Convertible promissory notes, net of unamortized discount
|
84,700
|
-
|
||||||
Derivative liability related to convertible promissory notes
|
84,800
|
-
|
||||||
10% Convertible note
|
10,000
|
20,000
|
||||||
Total Current Liabilities
|
3,740,003
|
3,252,018
|
||||||
License deposits
|
375,000
|
375,000
|
||||||
Total Liabilities
|
4,115,003
|
3,627,018
|
||||||
Commitments and Contingencies
|
||||||||
Stockholders' Deficiency
|
||||||||
Preferred Stock, $0.001 par value, 100,000,000 shares authorized, 14,001 and 10,000 shares issued and outstanding at December 31, 2010 and 2009,
respectively
|
14
|
10
|
||||||
Common Stock, $0.0001 par value, 1,000,000,000 shares authorized, 275,906,253 and 275,496,253 shares issued and outstanding at December 31, 2010
and 2009, respectively
|
27,591
|
27,550
|
||||||
Additional paid-in capital
|
22,553,853
|
22,231,753
|
||||||
Accumulated deficit
|
(23,705,473
|
)
|
(22,655,131
|
)
|
||||
Total Stockholders' Deficiency
|
(1,124,015
|
)
|
(395,818
|
)
|
||||
Total Liabilities and Stockholders' Deficiency
|
$
|
2,990,988
|
$
|
3,231,200
|
2010
|
2009
|
|||||||
(Consolidated)
|
||||||||
Sales
|
$
|
159,000
|
$
|
-
|
||||
Cost of Sales
|
95,517
|
-
|
||||||
Gross Margin
|
63,483
|
-
|
||||||
Revenue from research and development
|
850,000
|
840,000
|
||||||
Total Revenues
|
913,483
|
840,000
|
||||||
Expenses:
|
||||||||
Research and development costs
|
483,185
|
303,552
|
||||||
General and administrative expenses
|
1,059,572
|
2,186,014
|
||||||
Depreciation and amortization
|
79,108
|
31,900
|
||||||
1,621,865
|
2,521,466
|
|||||||
Other Operating Income (Expense):
|
||||||||
Gain on sale of land and building
|
-
|
978,479
|
||||||
Change in estimated fair value of embedded derivative liabilities
|
(53,000
|
)
|
-
|
|||||
(53,000
|
)
|
978,479
|
||||||
(Loss) Income from Operations
|
(761,382
|
)
|
(702,987
|
)
|
||||
Interest expense, net
|
288,960
|
103,769
|
||||||
(Loss) Income Before Income Taxes
|
(1,050,342
|
)
|
(806,756
|
)
|
||||
Provision for income taxes
|
-
|
-
|
||||||
Net (Loss) Income
|
$
|
(1,050,342
|
)
|
$
|
(806,756
|
)
|
||
Basic net (loss) income per share
|
$
|
-
|
$
|
-
|
||||
Basic weighted average shares outstanding
|
275,518,171
|
274,296,319
|
||||||
Diluted net (loss) income per share
|
$
|
-
|
$
|
-
|
||||
Diluted weighted average shares outstanding
|
275,518,171
|
274,296,319
|
Series A Preferred Stock, $0.001 par value per share
|
Common Stock, $0.0001 par value per share
|
Additional
|
Accumulated
|
Total Stockholders'
|
||||||||||||||||||||||||
Shares
|
Amount
|
Shares
|
Amount
|
Paid-In Capital
|
Deficit
|
Deficiency
|
||||||||||||||||||||||
Balance, January 1, 2009
|
-
|
$
|
-
|
273,126,636
|
$
|
27,313
|
$
|
20,722,899
|
$
|
(21,848,375
|
)
|
$
|
(1,098,163
|
)
|
||||||||||||||
Issuance of Series A Preferred Stock to George J. Coates
|
10,000
|
10
|
9,990
|
10,000
|
||||||||||||||||||||||||
Issuance of common stock to son of a director
|
1,838,096
|
184
|
609,816
|
610,000
|
||||||||||||||||||||||||
Issuance of common stock under equity line of credit with Dutchess Private Equities Fund, Ltd.
|
556,521
|
56
|
332,343
|
332,399
|
||||||||||||||||||||||||
Retirement of common stock received from litigation settlement
|
(25,000
|
)
|
(3
|
)
|
3
|
-
|
||||||||||||||||||||||
Stock-based compensation expense
|
556,702
|
556,702
|
||||||||||||||||||||||||||
Net loss for the year
|
(806,756
|
)
|
(806,756
|
)
|
||||||||||||||||||||||||
Balance, December 31, 2009
|
10,000
|
|
10
|
275,496,253
|
27,550
|
22,231,753
|
(22,655,131
|
)
|
(395,818
|
)
|
||||||||||||||||||
Issuance of Series A Preferred Stock to George J. Coates
|
4,001
|
4
|
9,996
|
10,000
|
||||||||||||||||||||||||
Issuance of common stock under equity line of credit with Dutchess Private Equities Fund, Ltd.
|
10,000
|
1
|
3,644
|
3,645
|
||||||||||||||||||||||||
Issuance of common stock to son of a director
|
400,000
|
40
|
99,960
|
100,000
|
||||||||||||||||||||||||
Stock-based compensation expense
|
54,100
|
54,100
|
||||||||||||||||||||||||||
Embedded conversion feature from Convertible Promissory Notes
|
154,400
|
154,400
|
||||||||||||||||||||||||||
Net loss for the year
|
(1,050,342
|
)
|
(1,050,342
|
)
|
||||||||||||||||||||||||
Balance, December 31, 2010
|
14,001
|
$
|
14
|
275,906,253
|
$
|
27,591
|
$
|
22,553,853
|
$
|
(23,705,473
|
)
|
$
|
(1,124,015
|
)
|
||||||||||||||
2010
|
2009
|
|||||||
(Consolidated)
|
||||||||
Cash Flows from Operating Activities:
|
$
|
(1,050,342
|
)
|
$
|
(806,756
|
)
|
||
Adjustments to Reconcile Net Income (Loss) to Net Cash Used in Operating Activities
|
||||||||
Cost of sales not requiring an outlay of cash during the period
|
51,526
|
-
|
||||||
Accrued interest not paid
|
147,407
|
43,079
|
||||||
Research & development expenses not requiring an outlay of cash during the period
|
99,656
|
-
|
||||||
Non-cash income from settlement of liabilites upon termination of joint venture
|
(61,500
|
)
|
-
|
|||||
Depreciation and amortization
|
79,108
|
31,900
|
||||||
Stock based compensation expense
|
64,100
|
(978,479
|
)
|
|||||
Change in embedded derivative liability
|
53,000
|
556,702
|
||||||
Gain on sale of land and building
|
-
|
-
|
||||||
Other non-cash expenses
|
-
|
2,500
|
||||||
Changes in operating assets and liabilities
|
||||||||
Inventory
|
(196,640
|
)
|
(23,641
|
)
|
||||
Prepaid expenses and other assets
|
-
|
4,679
|
||||||
Accounts payable and accrued liabilities
|
79,127
|
(102,774
|
)
|
|||||
Due to related party
|
(12,500
|
)
|
12,500
|
|||||
Unearned revenue
|
144,124
|
-
|
||||||
Net cash (used in) operating activities
|
(602,934
|
)
|
(1,260,290
|
)
|
||||
Cash flows used in investing activities:
|
||||||||
Acquisition of property, plant and equipment
|
(24,790
|
)
|
(2,075,346
|
)
|
||||
Net cash used in investing activities
|
(24,790
|
)
|
(2,075,346
|
)
|
||||
Cash flows used in financing activities:
|
||||||||
Issuance of promissory notes to related parties
|
238,537
|
300,000
|
||||||
Issuance of convertible promissory notes
|
204,000
|
-
|
||||||
Issuance of common stock and warrants
|
103,645
|
942,399
|
||||||
(Repayment) proceeds of mortgage loan
|
40,000
|
(100,813
|
)
|
|||||
Repayment of promissory note to related party
|
(40,000
|
)
|
1,750,000
|
|||||
Repayment of 10% convertible note
|
(108,000
|
)
|
-
|
|||||
Release from (establishment of) interest reserve
|
(10,000
|
)
|
-
|
|||||
Deferred financing costs
|
-
|
(25,000
|
)
|
|||||
Net Cash Provided by Financing Activities
|
428,182
|
2,866,586
|
||||||
Net Decrease in Cash
|
(199,542
|
)
|
(469,050
|
)
|
||||
Cash, beginning of year
|
252,902
|
721,952
|
||||||
Cash, end of year
|
$
|
53,360
|
$
|
252,902
|
||||
Supplemental Disclosure of Cash Flow Information:
|
||||||||
Cash paid during the year for interest
|
$
|
146,063
|
$
|
61,615
|
||||
Cash security deposit applied towards purchase of reacquired land and building
|
$
|
-
|
$
|
195,000
|
||||
Coates International, Ltd. is a Delaware corporation organized in October 1991 as successor-in-interest to a Delaware corporation of the same name incorporated in August 1988. Our operations are located in Wall Township, New Jersey.
Coates International, Ltd. (the "Company") has acquired the exclusive licensing rights for the Coates spherical rotary valve system (“CSRV”) system technology in North America, Central America and South America (the “CSRV License”). The CSRV system technology has been developed over a period of more than 15 years by the Company’s founder George J. Coates and his son Gregory Coates. The CSRV system technology is adaptable for use in piston-driven internal combustion engines of many types and has been patented in the United States and numerous countries throughout the world.
|
The CSRV system technology is designed to replace the intake and exhaust conventional “poppet valves” currently used in almost all piston-driven, automotive, truck, motorcycle, marine and electric power generator engines, among others. Unlike conventional valves which protrude into the engine cylinder, the CSRV system technology utilizes spherical valves that rotate in a cavity formed between a two-piece cylinder head. The CSRV system technology utilizes significantly fewer moving parts than conventional poppet valve assemblies. As a result of these design improvements, management believes that engines incorporating the CSRV system technology (“Coates Engines”) will last significantly longer and will require less lubrication over the life of the engine, as compared to conventional engines. In addition, CSRV Engines can be designed with larger openings into the engine cylinder than with conventional valves so that more fuel and air can be inducted into and expelled from the cylinder in a shorter period of time. Larger valve openings permit higher revolutions-per-minute (RPM’s) and permit higher compression ratios with lower combustion chamber temperatures, allowing the Coates Engine to produce more power than equivalent conventional engines. The extent to which higher RPM’s, greater volumetric efficiency and thermal efficiency can be achieved with the CSRV system technology, is a function of the engine design and application.
|
The accompanying financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and rules and regulations of the Securities and Exchange Commission (the “SEC”).
|
Since the Company’s inception, the Company has been responsible for the development costs of this technology in order to optimize the value of the licensing rights and has incurred related operational costs, the bulk of which have been funded primarily through cash generated from sales of stock, short term promissory notes, capital contributions, loans made by George J. Coates, fees received from research and development of prototype models and licensing fees. The Company has incurred substantial cumulative losses from operations since its inception. The Company expects that losses from operations will continue until the Coates Engines are successfully introduced into and accepted in the marketplace, or the Company receives substantial licensing revenues. These losses from operations were substantially related to research and development of the Company’s intellectual property rights, patent filing and maintenance costs and general and administrative expenses.
|
As shown in the accompanying financial statements, the Company has incurred recurring losses from operations and, as of December 31, 2010, had a stockholders’ deficiency of $1,124,000. The Company will be required to renegotiate the terms of an extension of a $1,710,000 mortgage loan which matures in June 2011, or successfully refinance the property with another mortgage lender, if possible. Failure to do so could adversely affect the Company’s financial position and results of operations. In addition, the current economic environment, which is characterized by tight credit markets, investor uncertainty about how to safely invest their funds and low investor confidence, has introduced additional risk and difficulty to the Company’s challenge to secure needed additional working capital. These factors raise substantial doubt about the Company’s ability to continue as a going concern. Management has instituted a cost control program intended to restrict variable costs to only those expenses that are necessary to complete its activities related to entering the production phase of operations, develop additional commercially feasible applications of the CSRV system technology, seek additional sources of working capital and cover general and administrative costs in support of such activities. The Company has been actively undertaking efforts to secure new sources of working capital. At the end of 2010, the Company had negative working capital of ($3,182,000) compared with negative working capital of ($2,371,000) at the end of 2009.
|
●
|
The Release Payment Date, as defined in the Escrow Agreement has been extended to March 19, 2012. At the time of the assignment, the remaining unpaid balance of the Release Payment was approximately $6 million. Provided that Almont remits this entire unpaid balance to the Company on or before the Release Payment Date, the US License will be released from escrow and granted to Almont. Almont is required to remit to the Company 60% of all monies it raises from future equity or debt transactions, exclusive of proceeds from equipment purchase financing transactions, until the Release Payment is paid in full.
|
●
|
Almont has also become obligated to pay the $49 million balance of the US License Fee to the Company. Payment shall be made quarterly in an amount equal to 5% of Almont’s quarterly net profits. In addition, Almont is required to remit a portion of the proceeds it receives from equity or debt transactions, exclusive of equipment financing transactions to the Company until the entire balance of the US License fee is paid in full. However, the entire $49 million licensing fee is required to be paid on or before February 19, 2015.
|
●
|
Sublicensee shall have the exclusive right to use, lease and sell electric power generators designed with the CSRV system technology within Canada.
|
●
|
Sublicensee will have a specified right of first refusal to market the electric power generators worldwide.
|
●
|
Upon commencement of the production and distribution of the electric power generators, the minimum annual number of generators to be purchased by Sublicensee in order to maintain exclusivity is 120. Until otherwise agreed between the parties, the price per generator shall be $159,000. In the event Sublicensee fails to purchase the minimum 120 Coates generator engines during any year, Licensee will automatically lose its exclusivity. In such a case, Sublicensee would retain non-exclusive rights to continue to use and sell the CSRV generator engine in the territory of Canada.
|
●
|
All licensed rights under this license agreement related to the CSRV system technology will remain with the Company.
|
2010
|
2009
|
|||||||
Raw materials
|
$
|
447,000
|
$
|
390,000
|
||||
Work-in-process
|
136,000
|
32,000
|
||||||
Finished goods
|
-
|
240,000
|
||||||
Less: Reserve for obsolescence
|
(151,000
|
)
|
(151,000
|
)
|
||||
Total
|
$
|
432,000
|
$
|
511,000
|
2010
|
2009
|
|||||||
Land
|
$
|
1,235,000
|
$
|
1,235,000
|
||||
Building
|
964,000
|
964,000
|
||||||
Building improvements
|
83,000
|
71,000
|
||||||
Machinery and equipment
|
658,000
|
522,000
|
||||||
Furniture and fixtures
|
39,000
|
39,000
|
||||||
2,979,000
|
2,831,000
|
|||||||
Less: Accumulated depreciation
|
(610,000
|
)
|
(549,000
|
)
|
||||
Total
|
$
|
2,369,000
|
$
|
2,282,000
|
2010
|
2009
|
|||||||
Legal and professional fees
|
$
|
926,000
|
$
|
949,000
|
||||
Accrued compensation and benefits
|
138,000
|
147,000
|
||||||
General and administrative expenses
|
91,000
|
46,000
|
||||||
Accrued interest expense
|
88,000
|
28,000
|
||||||
Total
|
$
|
1,243,000
|
$
|
1,170,000
|
Percentage of voting rights held:
|
George J. Coates
|
All other shareholders
|
|||||||
Prior to issuance of the Series A Preferred Stock
|
85. 73%
|
14.23%
|
|||||||
Immediately after issuance of the Series A Preferred Stock
|
87.11%
|
12.89%
|
Exercise Price Per Share
|
Number Outstanding
|
Weighted Average Remaining Contractual Life
|
Number Exercisable
|
Weighted Average Exercise Price
|
Weighted Average Fair Value Per Stock Option at Date of Grant
|
|||||||||||||||||||
Balance, 1/1/09
|
$
|
0.44
|
1,800,000
|
11
|
1,161,666
|
$
|
0.44
|
$
|
0.40
|
|||||||||||||||
Granted
|
$
|
0.39 - $0.43
|
150,000
|
13
|
$
|
0.42
|
$
|
0.26
|
||||||||||||||||
Vested
|
$
|
0.44
|
568,334
|
$
|
0.44
|
$
|
0.40
|
|||||||||||||||||
Forfeitures
|
$
|
0.44
|
(50,000
|
)
|
(30,000
|
)
|
$
|
0.44
|
$
|
0.40
|
||||||||||||||
Balance, 12/31/09
|
$
|
0.39 - $0.44
|
1,900,000
|
11
|
1,700,000
|
$
|
0.44
|
$
|
0.39
|
|||||||||||||||
Granted
|
$
|
0.40 - $1.00
|
390,000
|
15
|
$
|
0.45
|
$
|
0.21
|
||||||||||||||||
Vested
|
$
|
0.39 - $1.00
|
205,000
|
$
|
0.50
|
$
|
0.27
|
|||||||||||||||||
Balance, 12/31/10
|
$
|
0.44
|
2,290,000
|
12
|
1,905,000
|
$
|
0.44
|
$
|
0.36
|
●
|
Historical stock price volatility
|
180%
|
|
●
|
Risk-free interest rate
|
2.20%-4.64%
|
|
●
|
Expected life (in years)
|
4
|
|
●
|
Dividend yield
|
0.00
|
●
|
Historical stock price volatility: The Company obtained the volatility factor of other publicly traded engine manufacturers that were also in the research and development stage.
|
●
|
Risk-free interest rate: The Company bases the risk-free interest rate on the interest rate payable on U.S. Treasury securities in effect at the time of the grant for a period that is commensurate with the assumed expected option life.
|
●
|
Expected life: The expected life of the options represents the period of time options are expected to be outstanding. The Company has very limited historical data on which to base this estimate. Accordingly, the Company estimated the expected life based on its assumption that the executives will be subject to frequent black out periods during the time that the stock options will be exercisable and based on the Company’s expectation that it will complete its research and development phase and commence its initial production phase. The vesting period of these options was also considered in the determination of the expected life of each stock option grant.
|
●
|
No expected dividends.
|
Name
|
Title
|
Number of Shares of Common Stock Underlying Stock Options
|
Exercise Price per Share
|
Option
Expiration
Date
|
||||
George J. Coates
|
Chairman, Chief Executive Officer and President
|
1,000,000
|
(1)
|
$
|
0.44
|
10/23/2021
|
||
50,000
|
(1)
|
$
|
0.43
|
11/4/2024
|
||||
275,000
|
(4)
|
$
|
0.40
|
11/17/2025
|
||||
Gregory Coates
|
Director and President, Technology Division
|
500,000
|
(1)
|
$
|
0.44
|
10/23/2021
|
||
Barry C. Kaye
|
Director, Treasurer and Chief Financial Officer
|
125,000
|
(1)
|
$
|
0.44
|
10/18/2021
|
||
Dr. Frank J. Adipietro
|
Non-employee Director
|
25,000
|
(2)
|
$
|
0.44
|
3/28/2022
|
||
50,000
|
(1)
|
$
|
0.43
|
11/3/2024
|
||||
85,000
|
(4)
|
$
|
0.40
|
11/17/2025
|
||||
Richard W. Evans
|
Non-employee Director
|
25,000
|
(2)
|
$
|
0.4
|
3/28/2022
|
||
50,000
|
(1)
|
$
|
0.39
|
12/27/2024
|
||||
Dr. Michael J. Suchar
|
Non-employee Director
|
25,000
|
(2)
|
$
|
0.44
|
3/28/2022
|
||
Richard Whitworth
|
Non-employee Director
|
25,000
|
(2)
|
$
|
0.44
|
3/28/2022
|
||
William Wolf. Esq.
|
Outside General Counsel
|
25,000
|
(3)
|
$
|
0.44
|
4/4/2022
|
||
Company Supplier
|
Company Supplier
|
30,000
|
(1)
|
$
|
1.00
|
10/7/2015
|
(1) These stock options are fully vested. |
(2) Four-fifths of these stock options are fully vested. The balance shall vest on each of March 28, 2011. |
(3) Four-fifths of these stock options are fully vested. The balance shall vest on each of April 4, 2011. |
(4) These options will fully vest on 11/18/2011. |
Year Ending December 31,
|
Amount (1)
|
|||
2011
|
333,000
|
|||
Total
|
$
|
333,000
|
(1)
The minimum payments under these employment agreements would increase to $550,000 per annum upon the Company achieving an adequate level of Working Capital, as defined in the employment agreements.
|
2010
|
2009
|
|||||||
Current deferred tax asset - inventory reserve
|
$
|
100,000
|
$
|
100,000
|
||||
Non-Current Deferred Tax Assets:
|
||||||||
Net operating loss carryforwards
|
6,062,000
|
5,587,000
|
||||||
Accrued liabilities not paid
|
737,000
|
356,000
|
||||||
Stock-based compensation expense
|
502,000
|
475,000
|
||||||
Imputed interest related to convertible promissory notes
|
27,000
|
-
|
||||||
Total long-term deferred tax assets
|
7,328,000
|
6,418,000
|
||||||
Total deferred tax assets
|
7,428,000
|
6,518,000
|
||||||
Less: valuation allowance
|
(7,428,000
|
)
|
(6,518,000
|
)
|
||||
Net deferred tax assets
|
$
|
-
|
$
|
-
|
2010
|
2009
|
|||||||
Federal tax provision (benefit) at the statutory rate
|
(34.0
|
)%
|
(34.0
|
)%
|
||||
State income tax provision (benefit), net of federal benefit
|
(0.4
|
)
|
3.8
|
|||||
Accrued liabilities not deductible for tax return purposes
|
(36.0
|
)
|
12.3
|
|||||
Net change in net operating loss carryforwards
|
(13.6
|
)
|
(20.5
|
)
|
||||
Stock-based compensation expense
|
(2.7
|
)
|
29.2
|
|||||
Interest expense from amortization of discount on convertible promissory notes
|
(2.7
|
)
|
-
|
|||||
Accrued interest not deductible for tax return purposes
|
(2.6
|
)
|
-
|
|||||
Gain on sale of property
|
-
|
(48.0
|
)
|
|||||
Other
|
-
|
0.6
|
||||||
Total
|
(92.0
|
)
|
(56.6
|
)
|
||||
Valuation allowance
|
92.0
|
56.6
|
||||||
Effective tax rate
|
0.0
|
%
|
0.0
|
%
|
●
|
$6,037 from Bernadette Coates, the spouse of George J. Coates and issued a promissory note,
|
●
|
$35,500 from George J. Coates in a series of transactions, $8,000 principal amount of which was repaid in 2010; and,
|
●
|
$180,000 from The Coates Family Trust, a trust owned and controlled by George J. Coates.
|
2010
|
2009
|
|||||||
George J. Coates (a) (b)
|
$
|
321,000
|
$
|
286,000
|
||||
Gregory Coates (a)
|
177,000
|
166,000
|
||||||
Bernadette Coates
|
75,000
|
77,000
|
(a) |
Includes compensation paid in 2010 and 2009 for vacation earned but not taken.
|
(b)
|
For the year ended December 31, 2010, George J. Coates received 4,001 shares of Series A Preferred Stock which entitles the holder to 10,000 votes per share at all matters brought before the common stockholders for a votes. The estimated fair value of these shares of $10,000 is included in the reported amount of compensation for 2010.
|
Amount Due Within
|
||||||||
Total
|
2011
|
|||||||
Mortgage loan payable
|
$
|
1,710,000
|
$
|
1,710,000
|
||||
Promissory notes to related parties
|
464,000
|
464,000
|
||||||
Employment agreements
(1)
|
333,000
|
333,000
|
||||||
Convertible promissory notes
|
204,000
|
204,000
|
||||||
Maturity of 10% promissory notes
|
10,000
|
10,000
|
||||||
Total
|
$
|
2,721,000
|
$
|
2,721,000
|
(1)
Our obligation under employment agreements would increase to $550,000, upon achieving an adequate level of Working Capital, as defined.
|
Securities and Exchange Commission Registration Fee
|
$
|
816.18
|
||
Transfer Agent Fees
|
-
|
|||
Accounting fees
|
|
5,000.00
|
||
Legal fees and expense
|
|
20,000.00
|
||
Blue Sky fees and expenses
|
|
-
|
||
Total
|
$
|
25,816.18
|
Exhibit
Number
|
Description of Exhibits
|
|
3.1
|
Restated Certificate of Incorporation of Coates International, Ltd. [Incorporated by reference to Exhibit 3.1 to the Company’s Registration Statement on Form SB-2 filed with the Securities and Exchange Commission on May 31, 2007, File No. 000-33155].
|
|
3.1(i)
|
Certificate of Amendment to Certificate of Incorporation of Coates International, Ltd. filed with the Secretary of State of Delaware on May 22, 2000 [Incorporated by reference to Exhibit 3.1(i) to the Company’s Registration Statement on Form SB-2 filed with the Securities and Exchange Commission on May 31, 2007, File No. 000-33155].
|
|
3.1 (ii)
|
Certificate of Amendment to Certificate of Incorporation filed with the Secretary of State of Delaware on August 31, 2001 [Incorporated by reference to Exhibit 3.1(ii) to the Company’s Registration Statement on Form SB-2 filed with the Securities and Exchange Commission on May 31, 2007, File No. 000-33155].
|
|
3.2
|
Bylaws of Coates International, Ltd. [Incorporated by reference to Exhibit 3.2 to the Company’s Registration Statement on Form SB-2 filed with the Securities and Exchange Commission on May 31, 2007, File No. 000-33155].
|
|
5.1
|
Opinion of Counsel
|
|
10.1
|
License Agreement, dated September 29, 1999, with Well to Wire Energy, Inc. [Incorporated by reference to Exhibit 10.6 to the Company’s Registration Statement and amendments thereto filed on Form 10-SB with the Securities and Exchange Commission, File No. 000-33155].
|
|
10.2
|
Amendment No. 1 to License Agreement with Well to Wire Energy Inc. dated April 6, 2000 [Incorporated by reference to Exhibit 10.7 to the Company’s Registration Statement and amendments thereto filed on Form 10-SB with the Securities and Exchange Commission, File No. 000-33155].
|
|
10.3
|
Amendment No. 2 to License Agreement with Well to Wire Energy Inc. dated July 21, 2000
[
Incorporated by reference to Exhibit 10.8 to the Company’s Registration Statement and amendments thereto filed on Form 10-SB with the Securities and Exchange Commission, File No. 000-33155].
|
|
10.4
|
Confirmation Letter between the Coates and Well to Wire Energy Inc. dated July 7, 2006 [Incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-QSB for the quarter ended June 30, 2006].
|
|
10.5
|
2006 Employee Stock Option and Incentive Plan adopted on October 25, 2006 [Incorporated by reference to Exhibit 10.22 to the Company’s Annual Report on Form 10-KSB/A for the fiscal year ended December 31, 2005].
|
|
10.6
|
License Agreement between Coates and Coates Trust dated October 23, 2006 [Incorporated by reference to Exhibit 10.20 to the Company’s Annual Report on Form 10-KSB/A for the fiscal year ended December 31, 2005].
|
|
10.7
|
Amended and Restated Employment Agreement between Coates and George J. Coates dated April 6, 2007 [Incorporated by reference to Exhibit 10.16 to the Company’s Annual Report on Form 10-KSB for the fiscal year ended December 31, 2006
].
|
|
10.8
|
Amended and Restated Employment Agreement between Coates and Gregory Coates dated April 6, 2007 [Incorporated by reference to Exhibit 10.17 to the Company’s Annual Report on Form 10-KSB for the fiscal year ended December 31, 2006
].
|
|
10.9
|
Amended and Restated License Agreement between the Coates and George J. Coates and Gregory Coates dated April 6, 2007 [Incorporated by reference to Exhibit 10.19 to the Company’s Annual Report on Form 10-KSB for the fiscal year ended December 31, 2006
].
|
|
10.10
|
Investment Agreement dated April 26, 2007, by and between the Company and Dutchess Private Equities Fund, Ltd. [Incorporated by reference to Exhibit 10.1 to the Company’s Current Report Form 8-K filed with the SEC on May 1, 2007].
|
|
10.11
|
Registration Rights Agreement dated April 26, 2007, by and between the Company and Dutchess Private Equities Fund, Ltd. [Incorporated by reference to Exhibit 10.2 to the Company’s Current Report Form 8-K filed with the SEC on May 1, 2007].
|
|
10.12
|
Cooperation Agreement executed June 16, 2010 between the Company and Tongji University of China [incorporated by reference to Exhibit 10.16 to the Company’s Quarterly Report on Form 10-Q filed on August 13, 2010].
|
|
10.13
|
Placement Agency Agreement between the Company and Stonegate Securities, Inc. dated December 21, 2007 [Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on January 3, 2008].
|
|
10.14
|
License Agreement between the Company and Well to Wire Energy, Inc. dated January 29, 2008 and executed on April 7, 2008 [Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on April 11, 2008].
|
|
10.15
|
Escrow Agreement between the Company and Well to Wire Energy, Inc. dated April 11, 2008 [Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on April 11, 2008].
|
|
10.16
|
Memorandum of Understanding dated February 8, 2010 among the Company, Well to Wire Energy, Inc. and Almont Energy, Inc. covering the consent of the Company to the assignment of the Canadian License, Research and Development Agreement, Rights to the US Licensing Agreement and the Right of First Refusal [incorporated by reference to Exhibit 10.15 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009.]
|
|
10.17
|
Investment Agreement, dated August 20, 2010, between the Company and Dutchess Opportunity Fund II, LP [Incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on August 27, 2010].
|
|
10.18
|
Registration Rights Agreement, dated August 20, 2010, between the Company and Dutchess Opportunity Fund II, LP [Incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on August 27, 2010.]
|
|
10.19
|
Preliminary Letter of Intent to Merge with Heavy Equipment Manufacturer in China, dated December 3, 2010. [Incorporated by reference to Exhibit 10.1 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010.]
|
|
10.20
|
Investment Agreement dated June 6, 2011, by and between the Company and Dutchess Private Equities Fund, Ltd. [Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on June 7, 2011].
|
|
10.21
|
Registration Rights Agreement dated June 6, 2011, by and between the Company and Dutchess Private Equities Fund, Ltd. [Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on June 7, 2011].
|
|
10.22
|
Agreement between Coates International, Ltd. and S.W.T., dated May 21, 2011.
|
|
10.23
|
Letter from Cummins confirming supply arrangement with Coates International, Ltd.
|
|
23.1
|
Consent of Meyler & Company LLC
|
|
23.2
|
Consent of Counsel [filed as Exhibit 5.1 hereto].
|
COATES INTERNATIONAL, LTD.
|
|||
By:
|
/s/ George J. Coates
|
||
George J. Coates,
|
|||
President and Chief Executive Officer
|
Signature
|
Title
|
Date
|
||
/s/ George J. Coates
|
President and Chief Executive Officer
|
June 24, 2011
|
||
George J. Coates
|
||||
/s/ Barry C. Kaye
|
Principal Financial Officer
|
June 24, 2011
|
||
Barry C. Kaye
|
Signature
|
Date
|
|
/s/ George J. Coates
|
June 24, 2011
|
|
George J. Coates
|
||
/s/ Barry C. Kaye
|
June24, 2011
|
|
Barry C. Kaye
|
||
/s/
Gregory G. Coates
|
June24, 2011
|
|
Gregory G. Coates
|
||
/s/ Dr. Richard W. Evans
|
June 24, 2011
|
|
Dr. Richard W. Evans
|
||
/s/Dr. Frank Adipietro
|
June 24,2011
|
|
Dr. Frank J. Adipietro
|
||
/s/ Michael J. Suchar
|
June 24, 2011
|
|
Dr. Michael J. Suchar
|
||
/s/ Richard H. Whitworth
|
June24, 2011
|
|
Richard H. Whitworth
|
ANSLOW & JACLIN, LLP
|
||
By:
|
/s/ Gregg E. Jaclin | |
Gregg E. Jaclin, Partner | ||
ANSLOW & JACLIN, LLP | ||