þ
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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COATES INTERNATIONAL, LTD.
(Exact name of registrant as specified in its charter)
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Delaware
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22-2925432
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(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.)
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Highway 34 & Ridgewood Road, Wall Township, New Jersey 07719
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(Address of principal executive offices) (Zip Code)
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Securities registered under Section 12(b) of the Exchange Act:
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Title of each class:
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Name of each exchange on which registered:
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None
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None
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Securities registered under Section 12(g) of the Exchange Act:
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Common Stock, par value $0.0001
(Title of class)
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Large accelerated filer | o | Accelerated filer | o |
Non-accelerated filer | o | Smaller reporting company | þ |
(Do not check if a smaller reporting company) |
Page | ||||||
PART I | ||||||
Item 1. | 4 | |||||
Item 1A. | 10 | |||||
Item 1B. | 16 | |||||
Item 2. | 17 | |||||
Item 3. | 17 | |||||
Item 4. | 17 | |||||
PART II | ||||||
Item 5. | 18 | |||||
Item 6. | 20 | |||||
Item 7. | 20 | |||||
Item 7A. | 25 | |||||
Item 8. | 25 | |||||
Item 9. | 26 | |||||
Item 9A. | 26 | |||||
Item 9B. | 26 | |||||
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||||||
PART III | ||||||
Item 10. | 27 | |||||
Item 11. | 32 | |||||
Item 12. | 34 | |||||
Item 13. | 35 | |||||
Item 14. | 38 | |||||
PART IV | ||||||
Item 15. | 39 | |||||
Signatures | 43 | |||||
Financial Statements | F-1 |
Automobiles
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Buses
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Trucks
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Total
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130,892,240
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846,051
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110,332,254
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242,060,545
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●
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Assembly – to develop assembly lines within owned manufacturing facilities. We intend to initially commence production of Gen Sets on a small scale. This will enable us to prove our concept for the CSRV system technology and we expect this will dovetail with the existing substantial demand in the marketplace. We plan to address this demand by establishing large scale manufacturing operations in the United States. We have already taken steps to identify a suitable size and appropriate location for a high capacity manufacturing plant. Transitioning to large scale manufacturing is expected to require a substantial increase in our work force and substantial capital expenditures.
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Licensing the CSRV system technology to Original Equipment Manufacturers (“OEM’s”) – to take advantage of third party manufacturers’ production capacity and resources by signing OEM agreements.
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Sublicensee shall have the exclusive right to use, lease and sell electric power generators designed with the CSRV system technology within Canada.
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Sublicensee will 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 Sublicensee in order to maintain exclusivity is 120. Until otherwise agreed between the parties, the price per generator shall be $159,000. We have agreed to pass along to Almont savings we expect to realize from economies of scale inherent in high volume production of the CSRV units. In the event Sublicensee fails to purchase the minimum 120 Coates generator engines during any year, Sublicensee will automatically lose its exclusivity. We have temporarily waived this provision due to the delay in delivery of Gen Sets. In such case, Sublicensee would retain non-exclusive rights to continue to use and sell the CSRV generator engine in the territory of Canada.
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●
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Sublicensee is required to pay a royalty to us equal to 5% of its annual modified gross profit (which has been defined as sales, less cost of sales, plus $400,000).
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All licensed rights under this sublicense agreement related to the CSRV system technology will remain with the Company.
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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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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 an efficient level of production. Resuming production and shipments are a vital factor in Almont’s ability to remit further payments toward the Release Payment.
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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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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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|||||||||||||
2012:
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||||||||||||||||
High
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$ | 0.16 | $ | 0.13 | $ | 0.08 | $ | 0.07 | ||||||||
Low
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$ | 0.12 | $ | 0.05 | $ | 0.05 | $ | 0.01 | ||||||||
2011:
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||||||||||||||||
High
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$ | 0.24 | $ | 0.56 | $ | 0.29 | $ | 0.20 | ||||||||
Low
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$ | 0.17 | $ | 0.16 | $ | 0.14 | $ | 0.12 |
Number of securities to be issued upon exercise of outstanding options, rights and warrants
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Weighted average exercise price of outstanding options, rights and warrants
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Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)
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||||||||||
(a)
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(b)
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(c)
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||||||||||
Equity Compensation plans approved by security holders:
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11,697,000 | $ | 0.1788 | 803,000 | ||||||||
Equity Compensation plans without approval by security holders
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None
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N/A | N/A | |||||||||
Total
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11,697,000 | $ | 0.1788 | 803,000 |
●
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Assembly – to develop assembly lines within our premises. We intend to initially commence production on a small scale. This will enable us to prove our concept for the CSRV system technology and we expect this will dovetail with the existing substantial demand in the marketplace. We plan to address this demand by establishing large scale manufacturing operations in the United States. Transitioning to large-scale manufacturing is expected to require a substantial increase in our work force and substantial capital expenditures. To date, we have not been successful in securing the necessary working capital for this purpose.
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●
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Licensing the CSRV system technology to OEM’s – to take advantage of third party manufacturers’ production capacity by signing OEM agreements.
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Total
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Amount due
within
2013
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|||||||
Deferred compensation payable
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$ | 1,912,000 | $ | 1,912,000 | ||||
Mortgage loan payable
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1,575,000 | 1,575,000 | ||||||
Promissory notes to related parties
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507,000 | 507,000 | ||||||
Convertible promissory notes
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120,000 | 120,000 | ||||||
Maturity of 10% promissory notes
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10,000 | 10,000 | ||||||
Total
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$ | 4,124,000 | $ | 4,124,000 |
1.
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Recognized financial instruments and derivative instruments that are offset in accordance with either Section 210-20-45 or Section 815-10-45.
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2.
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Recognized financial instruments and derivative instruments that are subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are offset in accordance with either Section 210-20-45 or Section 815-10-45.
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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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73
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Director, Chairman of the Board, Chief Executive Officer and President
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Gregory Coates
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42
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Director, co-Secretary and President, Technology Division
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Barry C. Kaye
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59
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Director, Treasurer and Chief Financial Officer
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Dr. Richard W. Evans
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81
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Director and co-Secretary
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Dr. Frank Adipietro
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55
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Director *, **
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Dr. Michael J. Suchar
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57
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Director *, **
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Richard Whitworth
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64
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Director *, **, ***
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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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Name and Principal
Position
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Year
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Salary
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Stock
Awards
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Stock Option
Awards
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Anti-dilution
Awards
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All Other
Compensation
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Total
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||||||||||||||||||||
George J. Coates
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2012
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$ | 250,000 | (1) | $ | - | $ | 116,000 | (3) | $ | 1,674,000 | (4) | $ | 27,000 | (5) | $ | 2,067,000 | ||||||||||
Chief Executive Officer |
2011
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$ | 270,000 | (1) | $ | 255,000 | (2) | $ | 450,000 | (3) | $ | 22,000 | (4) | $ | 30,000 | (5) | $ | 1,027,000 | |||||||||
and President | |||||||||||||||||||||||||||
Barry C. Kaye
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2012
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$ | - | $ | - | $ | - | $ | - | $ | 67,000 | (6) | $ | 67,000 | |||||||||||||
Chief Financial Officer
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2011
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$ | - | $ | - | $ | - | $ | - | $ | 104,000 | (6) | $ | 104,000 | |||||||||||||
and Treasurer | |||||||||||||||||||||||||||
Gregory Coates
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2012
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$ | 150,000 | (7) | $ | - | $ | - | $ | - | $ | 23,000 | (5) | $ | 173,000 | ||||||||||||
President, Technology Division
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2011
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$ | 162,000 | (7) | $ | - | $ | 432,000 | (8) | $ | - | $ | 28,000 | (5) | $ | 622,000 | |||||||||||
Richard W. Evans
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2012
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$ | - | $ | - | $ | 200,000 | (10) | $ | - | $ | - | $ | 200,000 | |||||||||||||
Secretary and Director
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2011
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$ | - | $ | 264,000 | (9) | $ | 35,000 | (10) | $ | - | $ | - | $ | 299,000 |
(1)
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George J. Coates was compensated under an employment agreement which terminated in October 2011 and we have not entered into another employment agreement. For the years ended December 31, 2011, Mr. Coates was also paid $20,000 for unused vacation time.
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(2)
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No stock awards were made in 2012. During the year ended December 31, 2011, we made compensatory stock awards to Mr. Coates to recognize his tireless efforts and many years of dedicated service and support to the Company. This included 620,000 restricted shares of common stock with an estimated fair market value on the date of award of $130,000, which includes the estimated cost for the Company’s obligation under this award to pay the resulting personal income taxes of Mr. Coates. The shares underlying this award have not yet been issued. For the year ended December 31, 2011, we also made a compensatory award of 50,000 shares of Series A Preferred Stock representing the right to 500,000,000 shareholder votes with an estimated fair market value on the date of award of $125,000.
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(3)
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During the year ended December 31, 2012 and 2011, we granted 1,815,000 and 1,800,000 common stock options with exercise prices of $0.25 and $0.06 per share, respectively, to George J. Coates. These stock options expire in June 2027 and July 2026, respectively. The grant in 2012 will fully vest in June 2013 and the grant in 2011 became fully vested in July 2012.
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(4)
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Effective January 1, 2012, we established a new anti-dilution arrangement for George J. Coates which was approved by the board of directors and provides for the award of one new restricted share of our common stock to Mr. Coates for each new share of stock issued to any non-Coates family members as a result of a sale or conversion. Under the new arrangement, no shares of stock would be issued to George J. Coates in connection with any new shares of common stock issued upon sale or conversion of the our securities pursuant to any public offerings by the Company. For the year ended December 31, 2012, 20,275,046 shares of our common stock with an estimated fair market value of $1,674,000 were awarded to Mr. Coates for anti-dilution. Issuance of these shares was deferred until January 2013.
Prior to 2012, we had established an anti-dilution arrangement, approved by the board of directors, for George J. Coates which was designed to restore the Coates Family’s voting percentage upon any future issuance of new shares of the Company’s common stock as a result of a sale or conversion of securities into common stock. As a result of this arrangement, Mr. Coates would not experience a dilution in his voting percentage in connection with any matters brought before the shareholders for a vote. This arrangement was terminated as of December 31, 2011. For the year ended December 31, 2011, 8,882 shares of Series A Preferred Stock with an estimated fair market value of $22,000 representing the right to 88,820,000 shareholder votes were issued to George J. Coates pursuant to this anti-dilution arrangement in effect.
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(5)
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Other compensation for George J. Coates and Gregory Coates consisted of health and dental insurance, life insurance and payroll taxes for the years ended December 31, 2012 and 2011, respectively.
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(6)
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These amounts represent payments to Mr. Kaye for consulting services provided to us during 2012 and 2011, respectively. For the year ended December 31, 2012, Mr. Kaye earned an additional $47,000, which was not paid and has been deferred until the Company has sufficient working capital to remit payment to him. This amount is included in accounts payable and accrued liabilities in the accompanying balance sheet at December 31, 2012.
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(7)
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Gregory Coates was being compensated under an employment agreement which terminated in October 2011 and we have not entered into another employment agreement. For the year ended December 31, 2011 Gregory Coates was also paid $12,000 for unused vacation time.
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(8)
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During the year ended December 31, 2011, we granted 1,800,000 common stock options to Gregory Coates which expire in 2026 with an exercise price of $0.24 per share. These stock options became fully vested in August 2012.
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(9)
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During the year ended December 31, 2011, we made a compensatory stock award of 1,100,000 restricted shares of our common stock to Dr. Richard W. Evans to recognize his years of service and support to the Company. These shares were not issued until April 2012. We have agreed to pay all the personal income taxes related to his receipt of this award. The estimated fair market value of these awards, including estimated taxes to be paid by us amounted to $264,000.
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(10)
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During the year ended December 31, 2012, we granted 3,125,000 common stock options with an exercise price of $0.06 per share to Dr. Richard W. Evans. These stock options will fully vest in June 2013 and expire in 2027. The estimated fair value of these stock options on the date of grant was $200,000 and $43,000, respectively. During the year ended December 31, 2011, we granted 200,000 common stock options with an exercise price of $0.25 per share to Dr. Richard W. Evans, which expire in 2026. The estimated fair market value of these stock options on the date of grant was $35,000. These stock options became fully vested in February 2012.
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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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Exercise
Price
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Option Expiration Date
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||||||||||||
George J. Coates
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1,000,000 | - | - | $ | 0.44 |
10/23/2021
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|||||||||||
50,000 | - | - | $ | 0.43 |
11/3/2024
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275,000 | - | - | $ | 0.40 |
11/18/2025
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||||||||||||
1,800,000 | - | - | $ | 0.25 |
7/26/2026
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||||||||||||
1,815,000 | (1) | - | $ | 0.06 |
6/24/27
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Gregory Coates
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500,000 | - | - | $ | 0.44 |
10/23/2021
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|||||||||||
1,800,000 | - | - | $ | 0.24 |
8/8/2026
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Barry C. Kaye
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125,000 | - | - | $ | 0.44 |
10/17/2021
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(1)
These stock options shall become fully vested on June 25, 2013.
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Name of Director
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Year Ended
December 31,
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Fees Earned or
Paid in Cash
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Stock Options
Awarded (1)
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Restricted Stock
Awarded
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Total
Compensation
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|||||||||||||
Dr. Frank J. Adipietro
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2012
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$ | - | $ | 43,000 | $ | - | $ | 43,000 | |||||||||
Dr. Richard W. Evans
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2012
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$ | - | $ | 200,000 | $ | - | $ | 200,000 |
(1)
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During the year ended December 31, 2012, we granted 3,125,000 and 667,000 common stock options with an exercise price of $0.06 per share to Dr. Richard W. Evans and Dr. Frank J. Adipietro, respectively. These stock options will fully vest in June 2013 and expire in 2027. The estimated fair value of these stock options on the date of grant was $200,000 and $43,000, respectively.
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●
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each of our executive officers and directors;
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●
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all of our executive officers and directors as a group; and
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●
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any other beneficial owner of more than 5% of our outstanding common stock.
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Beneficial Ownership
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||||||||||||||||
Shares Beneficially Owned
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||||||||||||||||
Name of Beneficial Owner
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Outstanding Shares
Beneficially Owned
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Right to Acquire Within 60 Days After March 26, 2012
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Number
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Percentage
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||||||||||||
George J. Coates
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235,832,857 | 1 | 3,125,000 | 238,957,857 | (1) | 69.17 | % | |||||||||
Gregory Coates
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14,032,520 | 2,300,000 | 16,332,520 | 4.73 | % | |||||||||||
Dr. Richard Evans
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4,869,087 | 275,000 | 5,144,087 | 1.49 | % | |||||||||||
Dr. Frank Adipietro
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3,735,364 | 160,000 | 3,895,364 | 1.13 | % | |||||||||||
Barry C. Kaye
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975,358 | 125,000 | 1,100,358 | 0.32 | % | |||||||||||
Dr. Michael J. Suchar
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310,800 | 47,222 | 358,022 | 0.10 | % | |||||||||||
Richard Whitworth
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- | 25,000 | 25,000 | 0.01 | % | |||||||||||
All executive officers and directors as a group (7 persons)
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259,755,986 | 6,057,222 | 265,813,208 | 76.95 | % |
●
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the director is, or at any time during the past three years was, an employee of the company;
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●
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the director or a family member of the director accepted any compensation from the company in excess of $120,000 during any period of 12 consecutive months within the three years preceding the independence determination (subject to certain exclusions, including, among other things, compensation for board or board committee service);
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●
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a family member of the director is, or at any time during the past three years was, an executive officer of the company;
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●
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the director or a family member of the director is a partner in, controlling stockholder of, or an executive officer of an entity to which the company made, or from which the company received, payments in the current or any of the past three fiscal years that exceed 5% of the recipient’s consolidated gross revenue for that year or $200,000, whichever is greater (subject to certain exclusions);
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●
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the director or a family member of the director is employed as an executive officer of an entity where, at any time during the past three years, any of the executive officers of the company served on the compensation committee of such other entity; or the director or a family member of the director is a current partner of the company’s outside auditor, or at any time during the past three years was a partner or employee of the company’s outside auditor, and who worked on the company’s audit.
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●
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approved by our audit committee; or
|
|
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●
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entered into pursuant to pre-approval policies and procedures established by the audit committee, provided the policies and procedures are detailed as to the particular service, the audit committee is informed of each service, and such policies and procedures do not include delegation of the audit committee’s responsibilities to management.
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(1)
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Consolidated Financial Statements.
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(2)
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Financial Statement Schedules.
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(3)
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Exhibits
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Exhibit No.
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Description
|
|
3.1 @
|
-
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Restated Certificate of Incorporation
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3.1(i) @
|
-
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Certificate of Amendment to Certificate of Incorporation filed with the Secretary of State of Delaware on May 22, 2000
|
3.1(ii) @
|
-
|
Certificate of Amendment to Certificate of Incorporation filed with the Secretary of State of Delaware on August 31, 2001
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3.1(iii)
u
|
-
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Certificate of Amendment to Certificate of Incorporation filed with the Secretary of State of Delaware on September 12, 2007
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3.2 @
|
-
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Bylaws
|
4.1
Ý
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Certification of Designation of Series A Preferred Stock, effective April 30, 2009
|
|
4.2
Ý
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Certificate of Amendment of Certification of Designation of Series A Preferred Stock, effective May 24, 2011
|
@
|
Incorporated by reference from the Company’s Registration Statement filed May 31, 2007 on Form SB-2 with the Securities and Exchange Commission, File No. 000-33155.
|
u
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Incorporated by reference from the Company’s Schedule 14C DEF filed with the Securities and Exchange Commission on October 1, 2007.
|
+
|
Incorporated by reference from the Company's Registration Statement and amendments thereto filed September 9, 2001 on Form 10-SB with the Securities and Exchange Commission, File No. 000-33155.
|
~ |
Incorporated by reference from the Company’s Form 10-KSB/A for the year ended December 31, 2005.
|
*
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Incorporated by reference from the Company’s Form 10-KSB for the fiscal year ended December 31, 2006.
|
¢
|
Incorporated by reference from the Company’s Form 8-K filed with the Securities and Exchange Commission on January 3, 2008.
|
Ã
|
Incorporated by reference from the Company’s Form 8-K filed with the Securities and Exchange Commission on April 11, 2008.
|
¦
|
Incorporated by reference from the Company’s Form 10-K for the fiscal year ended December 31, 2009.
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Ó
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Incorporated by reference from the Company’s Form 8-K filed with the Securities and Exchange Commission on August 27, 2010.
|
ª
|
Incorporated by reference from the Company’s Form 8-K filed with the Securities and Exchange Commission on June 7, 2011.
|
# |
Incorporated by reference to Exhibit 10.22 to the Company's Registration Statement on Form S-1 filed on June 24, 2011.
|
& |
Incorporated by reference to Exhibit 10.23 to the Company's Registration Statement on Form S-1 filed on June 24, 2011.
|
º
|
Incorporated by reference from the Company’s Form 8-K filed with the Securities and Exchange Commission on March 4, 2013.
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COATES INTERNATIONAL, LTD. | |||
|
By:
|
/s/ George J. Coates | |
George J. Coates, Chairman and Chief Executive Officer | |||
By: | /s/ Barry C. Kaye | ||
Barry C. Kaye, Chief Financial Officer |
Signature
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Title
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Date
|
||
/s/ George J. Coates | Director, Chairman, Chief Executive Officer and President (principal executive officer) | |||
George J. Coates
|
April 15, 2013
|
|||
/s/ Gregory Coates |
Director, co-Secretary and President-Technology Division
|
|||
Gregory Coates
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April 15, 2013
|
|||
/s/ Barry C. Kaye |
Director, Treasurer, Chief Financial Officer (principal financial and accounting officer)
|
|||
Barry C. Kaye
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April 15, 2013
|
|||
/s/ Richard W. Evans |
Director and co-Secretary
|
|||
Richard W. Evans
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April 15, 2013
|
|||
/s/ Michael J. Suchar |
Director
|
|||
Michael J. Suchar
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April 15, 2013
|
|||
/s/ Frank J. Adipietro |
Director
|
|||
Frank J. Adipietro
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April 15, 2013
|
|||
/s/ Richard Whitworth |
Director
|
|||
Richard Whitworth
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April 15, 2013
|
Page
|
||||
Report of Cowan, Gunteski & Co. P.A. Independent Registered Public Accounting Firm
|
F-2 | |||
Report of Meyler & Company, LLC, Independent Registered Public Accounting Firm
|
F-3 | |||
Consolidated Financial Statements:
|
||||
Consolidated Balance Sheets
|
F-4 | |||
Consolidated Statements of Operations
|
F-5 | |||
Consolidated Statements of Stockholders' Deficiency
|
F-6 | |||
Consolidated Statements of Cash Flows
|
F-7 | |||
Notes to Consolidated Financial Statements
|
F-8 |
/s/ Cowan, Gunteski & Co., P.A.
|
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Tinton Falls, New Jersey
|
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April 15, 2013
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/s/ Meyler & Company, LLC
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Middletown, New Jersey
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March 29, 2012
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Coates International, Ltd. and Subsidiaries
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Consolidated Balance Sheets
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As of December 31,
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2012
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2011
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Assets
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Current Assets
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Cash
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$ | 13,303 | $ | 52,955 | ||||
Inventory, net
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111,115 | 387,483 | ||||||
Deferred offering costs
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16,207 | 33,969 | ||||||
Total Current Assets
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140,625 | 474,407 | ||||||
Property, plant and equipment, net
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2,241,847 | 2,303,073 | ||||||
Deferred licensing costs, net
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55,299 | 59,583 | ||||||
Total Assets
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$ | 2,437,771 | $ | 2,837,063 | ||||
Liabilities and
Stockholders'
Deficiency
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Current Liabilities
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Accounts payable and accrued liabilities
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$ | 1,797,439 | $ | 1,304,309 | ||||
Deferred stock-based compensation payable
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1,911,775 | 451,800 | ||||||
Mortgage loan payable
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1,575,000 | 1,630,000 | ||||||
Promissory notes to related parties
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507,694 | 447,440 | ||||||
Derivative liability related to convertible promissory notes
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135,263 | 243,306 | ||||||
Convertible promissory notes, net of unamortized discount
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77,363 | 111,775 | ||||||
Unearned revenue
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19,124 | 29,124 | ||||||
10% Convertible note
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10,000 | 10,000 | ||||||
Total Current Liabilities
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6,033,658 | 4,227,754 | ||||||
License deposits
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341,400 | 360,600 | ||||||
Total Liabilities
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6,375,058 | 4,588,354 | ||||||
Commitments and Contingencies
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Stockholders' Deficiency
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Preferred Stock, $0.001 par value, 100,000,000 shares authorized, 72,883 and 72,883 shares issued and outstanding at December 31, 2012 and 2011, respectively
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73 | 73 | ||||||
Common Stock, $0.0001 par value, 1,000,000,000 shares authorized, 305,078,818 and 284,127,846 shares issued and outstanding at December 31, 2012 and 2011, respectively
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30,508 | 28,413 | ||||||
Additional paid-in capital
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27,259,253 | 24,917,261 | ||||||
Accumulated deficit
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(31,227,121 | ) | (26,697,038 | ) | ||||
Total Stockholders' Deficiency
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(3,937,287 | ) | (1,751,291 | ) | ||||
Total Liabilities and Stockholders' Deficiency
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$ | 2,437,771 | $ | 2,837,063 |
Coates International, Ltd. and Subsidiaries
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Consolidated Statements of Operations
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For the Year Ended December 31,
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2012
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2011
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Sales
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$ | - | $ | 125,000 | ||||
Cost of goods sold
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- | 65,446 | ||||||
Gross Margin
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- | 59,554 | ||||||
Revenue from research and development
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- | 150,000 | ||||||
Sublicensing fee revenue
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19,200 | 14,400 | ||||||
Total Revenues
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19,200 | 223,954 | ||||||
Expenses:
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Research and development costs
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825,504 | 359,463 | ||||||
General and administrative expenses
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3,332,205 | 2,090,198 | ||||||
Depreciation and amortization
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65,509 | 69,891 | ||||||
Total Expenses | 4,223,218 | 2,519,552 | ||||||
Loss from Operations | (4,204,018 | ) | (2,295,598 | ) | ||||
Other Income (Expense):
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Decrease (Increase) in estimated fair value of embedded derivative liabilities
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130,146 | (165,472 | ) | |||||
Other income
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60,000 | - | ||||||
Total other income (expense)
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190,146 | (165,472 | ) | |||||
Interest expense, net
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(516,211 | ) | (530,495 | ) | ||||
Loss Before Income Taxes
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(4,530,083 | ) | (2,991,565 | ) | ||||
Provision for income taxes
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- | - | ||||||
Net Loss
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$ | (4,530,083 | ) | $ | (2,991,565 | ) | ||
Basic net loss per share
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$ | (0.01 | ) | $ | (0.01 | ) | ||
Basic weighted average shares outstanding
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302,946,983 | 280,953,780 | ||||||
Diluted net loss per share
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$ | (0.01 | ) | $ | (0.01 | ) | ||
Diluted weighted average shares outstanding
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302,946,983 | 280,953,780 |
Coates International, Ltd. and Subsidiaries
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Statements of Stockholders' Deficiency
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For the Two Years Ended December 31, 2012
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Series A Preferred Stock,
$0.001 par value per share
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Common Stock, $0.0001
par value per share
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Additional
Paid-In
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Accumulated |
Total
Stockholders'
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||||||||||||||||||||||||
Shares
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Amount
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Shares
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Amount
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Capital
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Deficit
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Deficiency
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Balance, January 1, 2011
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14,001 | $ | 14 | 275,906,253 | $ | 27,591 | $ | 22,553,853 | $ | (23,705,473 | ) | $ | (1,124,015 | ) | ||||||||||||||
Issuance of Series A Preferred Stock to George J. Coates
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58,882 | 59 | 147,109 | 147,168 | ||||||||||||||||||||||||
Issuance of common stock to son of a director
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1,930,036 | 193 | 524,807 | 525,000 | ||||||||||||||||||||||||
Issuance of common stock to director
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200,000 | 20 | 49,980 | 50,000 | ||||||||||||||||||||||||
Conversion of convertible promissory notes to common stock
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3,046,480 | 304 | 349,656 | 349,960 | ||||||||||||||||||||||||
Issuance of common stock in satisfaction of promissory notes to related parties
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3,035,077 | 304 | 517,529 | 517,833 | ||||||||||||||||||||||||
Issuance of common stock under equity line of credit
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10,000 | 1 | 1,489 | 1,490 | ||||||||||||||||||||||||
Beneficial Conversion Feature on convertible promissory notes
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325,055 | 325,055 | ||||||||||||||||||||||||||
Adjustment of embedded derivative liability related to convertible promissory notes
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15,783 | 15,783 | ||||||||||||||||||||||||||
Stock-based compensation expense
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432,000 | 432,000 | ||||||||||||||||||||||||||
Net Loss for the Year
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(2,991,565 | ) | (2,991,565 | ) | ||||||||||||||||||||||||
Balance, December 31, 2011
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72,883 | 73 | 284,127,846 | 28,413 | 24,917,261 | (26,697,038 | ) | (1,751,291 | ) | |||||||||||||||||||
Issuance of common stock to Dutchess Opportunity Fund II, LP
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2,256,677 | 226 | 258,496 | 258,722 | ||||||||||||||||||||||||
Issuance of common stock to director
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551,281 | 55 | 34,945 | 35,000 | ||||||||||||||||||||||||
Issuance of common stock and warrants to son of a director
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5,747,560 | 575 | 379,149 | 379,724 | ||||||||||||||||||||||||
Conversion of Convertible Promissory Notes
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8,415,515 | 842 | 371,348 | 372,190 | ||||||||||||||||||||||||
Issuance of common stock in satisfaction of promissory notes to related parties
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3,547,279 | 354 | 231,413 | 231,767 | ||||||||||||||||||||||||
Issuance or common stock to George J. Coates under anti-dilution arrangements
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18,593,313 | 1,859 | 1,609,909 | 1,611,768 | ||||||||||||||||||||||||
Common stock awarded to officers and directors
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1,960,000 | 196 | 301,004 | 301,200 | ||||||||||||||||||||||||
Cancellation of common stock previously issued to George J. Coates
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(20,120,653 | ) | (2,012 | ) | (1,750,996 | ) | (1,753,008 | ) | ||||||||||||||||||||
Stock-based compensation expense
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713,932 | 713,932 | ||||||||||||||||||||||||||
Beneficial Conversion Feature on Convertible Promissory Notes
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192,792 | 192,792 | ||||||||||||||||||||||||||
Net loss for the year
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(4,530,083 | ) | (4,530,083 | ) | ||||||||||||||||||||||||
Balance, December 31, 2012
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72,883 | $ | 73 | 305,078,818 | $ | 30,508 | $ | 27,259,253 | $ | (31,227,121 | ) | $ | (3,937,287 | ) |
Coates International Ltd. and Subsidiaries
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Consolidated Statements of Cash Flows
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For the Years Ended December 31,
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2012
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2011
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Net Cash Flows Used in Operating Activities
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Net loss for the Year
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$ | (4,530,083 | ) | $ | (2,991,565 | ) | ||
Adjustments to Reconcile Net Income (Loss) to Net Cash Used in Operating Activities
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Stock based compensation expense
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2,388,307 | 1,030,968 | ||||||
Accrued interest not paid
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410,144 | 403,561 | ||||||
Provision for slow moving and obsolete inventory
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235,942 | - | ||||||
(Decrease) Increase in fair value of embedded derivative liabilities
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(130,146 | ) | 165,472 | |||||
Depreciation and amortization
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65,509 | 69,891 | ||||||
Amortization of financing costs
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11,822 | 4,269 | ||||||
Non-cash licensing revenues
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(19,200 | ) | (14,400 | ) | ||||
Recognition of unearned revenues
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(10,000 | ) | (125,000 | ) | ||||
Cost of sales not requiring an outlay of cash
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- | 53,473 | ||||||
Research & development expenses not requiring an outlay of cash
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- | 17,764 | ||||||
Changes in Operating Assets and Liabilities
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Interest reserve account - restricted
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- | 1,643 | ||||||
Accounts Receivable
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(10 | ) | 11,440 | |||||
Inventory
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- | 44,516 | ||||||
Deferred Financing Costs
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- | (47,238 | ) | |||||
Accounts Payable and accrued liabilities
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469,586 | 27,408 | ||||||
Unearned revenue
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- | 10,000 | ||||||
Net Cash (Used in) Operating Activities
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(1,108,129 | ) | (1,337,798 | ) | ||||
Net Cash Provided by (Used in) Investing Activities
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- | - | ||||||
Cash Flows Provided by (Used in) Financing Activities:
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Issuance of common stock and warrants
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355,000 | 525,000 | ||||||
Issuance of common stock to director
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35,000 | 50,000 | ||||||
Issuance of common stock under equity line of credit
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258,722 | 1,490 | ||||||
Issuance of convertible promissory note
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244,500 | 367,000 | ||||||
Issuance of promissory notes to related parties
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270,755 | 556,595 | ||||||
Repayment of promissory notes to related party
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(40,500 | ) | (142,692 | ) | ||||
Release from Interest reserve
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- | 60,000 | ||||||
Repayment of Mortgage Loan
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(55,000 | ) | (80,000 | ) | ||||
Net Cash Provided by Financing Activities
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1,068,477 | 1,337,393 | ||||||
Net Decrease in Cash
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(39,652 | ) | (405 | ) | ||||
Cash, beginning of period
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52,955 | 53,360 | ||||||
Cash, end of period
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$ | 13,303 | $ | 52,955 | ||||
Supplemental Disclosure of Cash Flow Information:
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Cash paid during the period for interest
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$ | 112,029 | $ | 138,516 | ||||
Supplemental Disclosure of Non-cash Financing Activities:
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Conversion of convertible promissory notes
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$ | 372,190 | $ | 349,960 | ||||
Conversion of promissory notes to related parties
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231,768 | 517,833 | ||||||
$ | 603,958 | $ | 867,793 |
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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. Coates International, Ltd. and its majority-owned subsidiaries Coates Oklahoma Engine Manufacturing, Ltd. (“Coates Oklahoma”) and Coates Hi-Tech Engines, Ltd. (Coates Hi-Tech”) (collectively, the “Company”) operate in Wall Township, New Jersey. The Company’s majority-owned subsidiaries had not commenced operations as of December 31, 2012.
The Company has acquired the exclusive licensing rights for the Coates spherical rotary valve (“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 20 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.
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Coates Hi-Tech was formed in 2012 for the purpose of applying for a package of business, finance and tax benefit incentives from state and local municipalities. Certain states and their municipalities generally will offer such incentives to companies as an inducement to establish manufacturing operations within their jurisdiction, resulting in a stimulus to their economy and the creation of new jobs. Should the Company accept such an incentive package and decide to locate its manufacturing operations in a particular state, it would be required to raise substantial new working capital to carry out such an undertaking.
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Coates Oklahoma was formed in 2011 for the purpose of applying for a package of business, finance and tax benefit incentives. Oklahoma generally will offer such incentives to companies as an inducement to establish manufacturing operations in Oklahoma, resulting in a stimulus to the state economy and the creation of new jobs. Should the Company decide to locate its manufacturing operations in Oklahoma, it would be required to raise substantial new working capital to carry out this undertaking.
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The accompanying consolidated 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”).
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Since the Company’s inception, the Company has been responsible for the development costs of the CSRV 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, Bernadette Coates and certain directors, fees received from research and development of prototype models, licensing fees and a small number of CSRV engine generator sales. The Company has incurred substantial cumulative losses from operations since its inception. Losses from operations are expected to 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 consolidated financial statements, the Company has incurred recurring losses from operations and, as of December 31, 2012, had a stockholders’ deficiency of ($3,937,000). The Company will be required to renegotiate the terms of an extension of a $1,575,000 mortgage loan which matures in July 2013, 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 December 31, 2012, the Company had negative working capital of ($5,893,000) compared with negative working capital of ($3,753,000) at the end of 2011.
During the years ended December 31, 2012 and 2011, the Company raised $1,123,000 and $1,357,000, respectively, of new working capital from the following:
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Description
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2012
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2011
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Sales of shares of common stock and warrants to the son of a director
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$ | 355,000 | $ | 525,000 | ||||
Sales of common stock to a director
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35,000 | 50,000 | ||||||
Sales of common stock under equity line of credit
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259,000 | 1,000 | ||||||
Issuance of convertible promissory notes
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244,000 | 367,000 | ||||||
Issuance of promissory notes to related parties, net of repayments
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230,000 | 414,000 | ||||||
$ | 1,123,000 | $ | 1,357,000 |
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For the year ended December 31, 2011, the Company also received cash from research and development of $150,000 and earned gross profit of $60,000 from the sale of a CSRV electric power, engine generator.
In the fourth quarter of 2011, the Company identified cracks on the lower engine heads of its Gen Sets that resulted from a defect in the manufacturing by one of its suppliers. Based on testing of the Gen Set to confirm the Company’s resolution of this problem, management believes it has determined the cause of this cracked head condition. As soon as the Company raises sufficient working capital, it will procure new cast-steel head castings to resolve the cracked head problems with the engines originally shipped to Almont and undertake field testing of the generators, after which, it will begin larger scale production.
The Company continues to actively seek out new sources of working capital; however, there can be no assurance that it will be successful in these efforts. The accompanying consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
Certain amounts included in the accompanying financials statements for the year ended December 31, 2011 have been reclassified in order to make them comparable to the amounts presented for the year ended December 31, 2012.
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The financial statements of the Company were consolidated with the accounts of Coates Hi-Tech Engines, Ltd., a majority-owned subsidiary commencing in July 2012 and Coates Oklahoma Engine Manufacturing, Ltd., a majority-owned subsidiary commencing in August 2011. Neither of these companies had commenced operations at December 31, 2012. All significant intercompany transactions and accounts were eliminated in consolidation.
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Sales and cost of sales are recognized at the time of shipment, provided the risk of loss has transferred to the customer and collection of the sales price is reasonably assured. Shipping arrangements and costs are the responsibility of the customer.
Revenue from research and development activities is recognized when collection of the related revenues is reasonably assured and, when applicable, in accordance with Accounting Standards Update No. 2010-17, “Milestone Method of Revenue Recognition, a consensus of the FASB Emerging Issues Task Force”. This standard provides guidance on defining a milestone and permits recognition of revenue from research and development that is contingent upon achievement of one or more specified milestones defined in the research and development arrangements which meet specified criteria for such revenue recognition.
Unearned revenue represents a deposit from a customer for a CSRV Gen Set order. Revenue is recognized as described above.
Licensing deposits, which are non-refundable, received from the granting of sub-licenses, are recognized as earned, generally commencing upon the completion of certain tests and acceptance by the licensee. At that time, license revenue will be recognized ratably over the period of time that the sub-license has been granted using the straight-line method. Upon termination of a sub-license agreement, non-refundable license deposits, less any costs related to the termination of the sub-license agreement, are recognized as revenue. Revenue from research and development activities is recognized when earned and realization is reasonably assured, provided that financial risk has been transferred from the Company to its customer.
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The Company commenced shipping production units to Almont under the Canadian Sublicense in April 2011 and began recognizing the license deposit of $300,000 on the Canadian Licensee as revenue on a straight-line basis over the approximate remaining life through 2027 of the last CSRV technology patent in force, at that date.
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Research and development costs are expensed when incurred. For the year ended December 31, 2012, the Company charged $115,000 to expense for the estimated remediation costs for previously sold Gen Sets determined to have cracked heads.
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Under a licensing agreement with George J. Coates and Gregory Coates, the Company obtained the rights to manufacture, use and sell the CSRV engine technology throughout the territory defined as the Western Hemisphere. In accordance with GAAP, the Company is not permitted to record a value for this intellectual property because it was obtained from principal stockholders, and, accordingly this intangible asset is not reflected in the accompanying consolidated financial statements.
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Under the CSRV Licensing Agreement for the CSRV engine technology, the Company is responsible for all costs in connection with applying for, obtaining and maintenance of patents to protect the CSRV system technology. Such costs are expensed as incurred.
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Advertising costs, which are included in general and administrative expenses, are expensed when incurred. Advertising expense amounted to $5,000 and $28,000 for the years ended December 31, 2012 and 2011, respectively.
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C
ompensation expense relating to stock-based payments is recognized as an expense using the fair value measurement method. Under the fair value method, the estimated fair value of awards to employees is charged to income on a straight-line basis over the requisite service period, which is the earlier of the employee’s retirement eligibility date or the vesting period of the award. The Company incurs non-cash, stock-based compensation expense for stock options awarded and for awards of restricted shares of its common stock under it 2006 Stock Option and Incentive Plan.
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Deferred stock-based compensation represents the estimated fair value of restricted shares of the Company’s common stock awarded to officers and directors, issuance of which has been delayed into the future, plus the estimated amount of the Company’s obligation to pay the personal income taxes of the award recipient.
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Inventory consists of raw materials and work-in-process, including overhead and is stated at the lower of cost or market determined by the first-in, first-out method. Inventory items designated as obsolete or slow moving are reduced to net realizable value. Market value is determined using current replacement cost.
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Property, plant and equipment are stated at cost. Depreciation is computed using the straight-line method over the estimated useful life of the assets: 40 years for buildings and building improvements, 3 to 7 years for machinery and equipment and 5 to 10 years for furniture and fixtures. Repairs and maintenance expenditures, which do not extend the useful lives of the related assets, are expensed as incurred.
In the event that facts and circumstances indicate that long-lived assets may be impaired, an evaluation of recoverability is performed. Should such evaluation indicate that there has been an impairment of one or more long-lived assets, the cost basis of such assets would be adjusted accordingly, at that time.
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Deferred income tax assets and liabilities are computed for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future. Such deferred income tax asset and liability computations are based on enacted tax laws and rates applicable to periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized and are adjusted when conditions indicate that deferred assets will be realized. Income tax expense (benefit) is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities.
The Company evaluates any uncertain tax positions for recognition by determining if the weight of available evidence indicates it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes. In the event recognition of an uncertain tax position is indicated, the Company measures the tax benefit as the largest amount which is more than 50% likely of being realized upon ultimate settlement. This process of evaluating and estimating uncertain tax positions and tax benefits requires the consideration of many factors, which may require periodic adjustments and which may not accurately forecast actual outcomes. Interest and penalties, if any, related to tax contingencies would be included in income tax expense.
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Basic net loss per share is based on the weighted average number of common shares outstanding without consideration of potentially dilutive shares of common stock. There were no shares of preferred stock outstanding with rights to share in the Company’s net income during the years ended December 31, 2012 and 2011. Diluted net income per share is based on the weighted average number of common and potentially dilutive common shares outstanding, when applicable.
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The preparation of the Company’s consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. These significant estimates include determining the fair value of convertible promissory notes containing embedded derivatives and variable conversion rates, determining a value for Series A Preferred Stock issued and certain limited anti-dilution rights granted to George J. Coates as more fully described in Note 17, assigning useful lives to the Company’s property, plant and equipment, determining an appropriate amount to reserve for obsolete and slow moving inventory, estimating a valuation allowance for deferred tax assets, assigning expected lives to, and estimating the rate of forfeitures of, stock options granted and selecting a trading price volatility factor for the Company’s common stock in order to estimate the fair value of the Company’s stock options on the date of grant or other appropriate measurement date. Actual results could differ from those estimates.
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With the exception of convertible promissory notes, the carrying amount of these items approximates their fair value because of the short term maturity of these instruments. The convertible promissory notes are reported at their estimated fair value determined as described in more detail in Note 16. |
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Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
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The Release Payment Date, as defined in the Escrow Agreement had been extended to March 19, 2012. In early 2012, we agreed to extend the Release Payment Date under the Escrow Agreement until March 2014 to compensate for the delay caused by the late delivery of Gen Sets. 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.
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Almont also became 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, 2016.
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Sublicensee shall have the exclusive right to use, lease and sell electric power generators designed with the CSRV system technology within Canada.
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Sublicensee will 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 Sublicensee in order to maintain exclusivity is 120. The Company has temporarily waived this provision due to the delay in delivery of Gen Sets. In the event Sublicensee fails to purchase the minimum 120 CSRV generator engines during any year, Sublicensee will automatically lose its exclusivity. In such a case, Sublicensee would retain non-exclusive rights to continue to use and sell the CSRV generator engines in the territory of Canada. Until otherwise agreed between the parties, the price per generator shall be $159,000.
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●
|
Sublicensee is required to pay a royalty to the Company equal to 5% of its annual modified gross profit (which has been defined as sales, less cost of sales, plus $400,000.
|
●
|
All licensed rights under this license agreement related to the CSRV system technology will remain with the Company.
|
2012
|
2011
|
|||||||
Raw materials
|
$ | 439,000 | $ | 473,000 | ||||
Work-in-process
|
59,000 | 65,000 | ||||||
Finished goods
|
- | - | ||||||
Less: Reserve for obsolescence
|
(387,000 | ) | (151,000 | ) | ||||
Total
|
$ | 111,000 | $ | 387,000 |
2012
|
2011
|
|||||||
Land
|
$ | 1,235,000 | $ | 1,235,000 | ||||
Building
|
964,000 | 964,000 | ||||||
Building improvements
|
83,000 | 83,000 | ||||||
Machinery and equipment
|
658,000 | 658,000 | ||||||
Furniture and fixtures
|
39,000 | 39,000 | ||||||
2,979,000 | 2,979,000 | |||||||
Less: Accumulated depreciation
|
(737,000 | ) | (676,000 | ) | ||||
Total
|
$ | 2,242,000 | $ | 2,303,000 |
2012
|
2011
|
|||||||
Legal and professional fees
|
$ | 1,240,000 | $ | 1,043,000 | ||||
Accrued compensation and benefits
|
175,000 | 140,000 | ||||||
General and administrative expenses
|
149,000 | 82,000 | ||||||
Accrued interest expense
|
118,000 | 39,000 | ||||||
Research and development costs
|
115,000 | - | ||||||
Total
|
$ | 1,797,000 | $ | 1,304,000 |
Issued
|
Principal
Amount
|
Stated
Interest Rate
|
Maturity
|
Unamortized
Discount at 12/31/12
|
Effective
Interest Rate
|
Principal
Balance,
12/31/12
|
||||||||||||||||
February 2011
|
$ | 32,000 | 8.00 | % |
November 2011
|
$ | - | 147 | % | - | ||||||||||||
May 2011
|
100,000 | 8.00 | % |
February 2012
|
- | 147 | % | - | ||||||||||||||
July 2011
|
79,000 | 8.00 | % |
April 2012
|
- | 147 | % | - | ||||||||||||||
September 2011
|
52,000 | 8.00 | % |
June 2012
|
- | 123 | % | - | ||||||||||||||
October 2011
|
52,000 | 8.00 | % |
July 2012
|
- | 147 | % | - | ||||||||||||||
November 2011
|
52,000 | 8.00 | % |
August 2012
|
- | 92 | % | - | ||||||||||||||
January 2012
|
52,000 | 8.00 | % |
October 2012
|
- | 130 | % | - | ||||||||||||||
April 2012
|
43,000 | 8.00 | % |
January 2013
|
- | 125 | % | - | ||||||||||||||
June 2012
|
43,000 | 8.00 | % |
March 2013
|
- | 141 | % | 12,000 | ||||||||||||||
August 2012
|
43,000 | 8.00 | % |
May 2013
|
12,000 | 142 | % | 43,000 | ||||||||||||||
September 2012
|
32,000 | 8.00 | % |
June 2013
|
14,000 | 122 | % | 32,000 | ||||||||||||||
November 2012
|
33,000 | 8.00 | % |
August 2013
|
17,000 | 101 | % | 33,000 | ||||||||||||||
$ | 613,000 | $ | 43,000 | $ | 120,000 |
|
The Company’s common stock is traded on the Over the Counter Bulletin Board (“OTCBB”) market system Pink Sheets under the ticker symbol COTE.
Effective January 1, 2012, a new anti-dilution arrangement was established, pursuant to which George J. Coates, majority shareholder, is to be issued one restricted share of common stock of the Company for each new share issued to any person or entity that is not a member of the Coates family.
During the year ended December 31, 2012:
|
●
|
The Company sold in a series of transactions, 5,557,375 restricted shares of its common stock, and 10,839,752 warrants to purchase one share of its common stock at exercise prices ranging from $0.045 to $0.12 per share and received proceeds of $355,000 from the son of a director. These transactions were private sales of unregistered, restricted securities pursuant to stock purchase agreements.
|
●
|
The Company issued 190,185 restricted shares of its common stock to the son of a director in consideration for 185,185 tradable shares of common stock which were utilized to pay for services.
|
●
|
The Company sold a total of 551,281 restricted shares of its common stock in consideration for $35,000 to Dr. Frank J. Adipietro, director. These transactions were private sales of unregistered, restricted securities pursuant to a stock purchase agreement.
|
●
|
The Company sold a total of 2,256,677 registered shares of its common stock under an equity line of credit with Dutchess Opportunity Fund II, LP and received proceeds of $259,000. (See Note 23.) There were no offering costs related to the sales of these shares.
|
●
|
In a series of transactions, $293,000 principal amount of convertible promissory notes, including $12,000 of accrued interest thereon were converted into 8,415,515 restricted shares of the Company’s common stock.
|
●
|
The Company issued 1,100,000 and 240,000 restricted shares of its common stock to Dr. Richard W. Evans and Dr. Frank J. Adipietro, directors, respectively. These shares were originally awarded as compensatory stock awards in 2011.
|
●
|
By mutual agreement, a $120,000 principal amount promissory note due to Dr. Richard W. Evans was converted into 2,000,000 restricted shares of the Company’s common stock.
|
●
|
By mutual agreement, a $50,000 principal amount promissory note, plus accrued interest thereon of $7,000, due to Dr. Frank J. Adipietro, was converted into 639,939 restricted shares of the Company’s common stock.
|
●
|
Under the anti-dilution arrangement which became effective January 1, 2012, George J. Coates was awarded 20,275,046 restricted shares of the Company’s common stock during the year ended December 31, 2012. Of this amount, 18,593,313 shares of common stock were initially issued throughout 2012. In December 2012, these shares were cancelled and restored to unissued status. The entire 20,275,046 shares of common stock awarded in 2012 were then reissued in January 2013. The estimated fair value of these shares was $1,674,000, which amount is included in stock-based compensation expense in the accompanying consolidated statement of operations for the year ended December 31, 2012.
|
|
During the year ended December 31, 2011:
|
●
|
The Company sold in a series of transactions, 1,930,035 restricted shares of its common stock, and 1,930,035 warrants to purchase one share of its common stock at exercise prices ranging from $0.25 to $0.35 per share and in consideration for $525,000 received from the son of a director. These transactions were private sales of unregistered, restricted securities pursuant to stock purchase agreements.
|
●
|
The Company sold 200,000 restricted shares of its common stock in consideration for $50,000 received from Dr. Richard W. Evans. This transaction was a private sale of unregistered, restricted securities pursuant to a stock purchase agreement.
|
●
|
In a series of transactions, $350,000 principal amount of convertible promissory notes, including $13,000 of accrued interest thereon were converted into 3,046,480 restricted shares of the Company’s common stock.
|
●
|
The Company sold 10,000 registered shares of its common stock under an equity line of credit with Dutchess Opportunity Fund II, LP and received proceeds of $1,000. (See Note 23.) There were no offering costs related to the sale of these shares.
|
●
|
The outstanding balance of promissory notes issued to The Coates Trust, a trust controlled by George J. Coates, totaling approximately $198,000, including accrued interest thereon, was converted into 1,165,507 restricted shares of the Company's common stock.
|
●
|
The outstanding balance of promissory notes issued to Richard W. Evans and Frank J. Adipietro, including accrued interest totaling approximately $131,000 and $188,000, respectively, were converted into 768,848 and 1,100,922 restricted shares, respectively, of the Company's common stock.
|
●
|
The Company granted a compensatory stock award of 620,000 restricted shares of its common stock to George J. Coates. These shares were initially issued and later cancelled and restored to unissued status in 2012. The estimated fair value of these shares was $87,000. This amount is included in deferred stock-based compensation payable in the accompanying balance at December 31, 2012.
|
|
At December 31, 2012, the Company had reserved 46,166,880 shares of its common stock to cover the potential conversion of convertible securities and exercise of stock options and warrants.
|
|
The Company is authorized to issue 100,000,000 new shares of preferred stock, par value, $0.001 per share (the “Preferred Stock”). The Company may issue any class of the Preferred Stock in any series. The board shall have authority to establish and designate series, and to fix the number of shares included in each such series and the relative rights, preferences and limitations as between series, provided that, if the stated dividends and amounts payable on liquidation are not paid in full, the shares of all series of the same class shall share ratably in the payment of dividends including accumulations, if any, in accordance with the sums which would be payable on such shares if all dividends were declared and paid in full, and in any distribution of assets other than by way of dividends in accordance with the sums which would be payable on such distribution if all sums payable were discharged in full. Shares of each such series when issued shall be designated to distinguish the shares of each series from shares of all other series.
|
|
The board has designated 100,000 shares of preferred stock as Series A Preferred Stock, $0.001 par value per share. Each share of Series A Preferred Stock entitles the holder of record to the right to vote 10,000 shares of common stock with respect to all matters that are submitted to a vote of shareholders. The Series A Preferred Stock does not provide the holder any rights to share in dividends or any distribution of assets to any other shareholders of any other class of the Company’s securities in a liquidation or for any other purpose.
In order to enable the Company to raise needed working capital, an anti-dilution arrangement was established which authorized the issuance of shares of Series A Preferred Stock to George J. Coates to restore the Coates Family’s voting percentage upon any future issuance of new shares of the Company’s common stock as a result of a sale or conversion of securities into common stock (except that no Series A Preferred Stock shall be issued to George J. Coates to restore the Coates Family voting percentage in connection with any new shares of common stock issued upon sale or conversion of the Company’s securities pursuant to public offerings by the Company). This anti-dilution arrangement was terminated on December 31, 2011 and replaced with a new anti-dilution arrangement as previously described.
During the year ended December 31, 2011, 8,882 shares of Series A Preferred Stock were issued to George J. Coates pursuant to an anti-dilution agreement in effect and a compensatory award of 50,000 shares of Series A Preferred Stock was granted to George J. Coates resulting in the right to 588,820,000 aggregate additional votes.
Each issuance of shares of Series A Preferred Stock to George J. Coates did not have any effect on the share of dividends or liquidation value of the holders of the Company’s common stock. However, the voting rights of the holders of the Company’s common stock are diluted with each issuance.
In 2010, the Company arranged for an independent professional services firm to determine the estimated fair value of the shares of Series A Preferred Stock provided to Mr. Coates. Based on this estimated valuation, the aggregate estimated fair value of the Series A Preferred Stock provided to Mr. Coates in 2011 amounted to $147,000. This amount, which did not require any outlay of cash, was recorded as stock-based compensation expense in the accompanying consolidated statement of operations for the year ended December 31, 2011.
|
Description
|
Number of Underlying Shares of Common
Stock
|
Exercise
Price
|
Number
Vested
|
Number
Non-Vested
|
||||||||||||
Common stock options
|
5,607,000 | $ | 0.0600 | - | 5,607,000 | |||||||||||
Common stock options
|
1,800,000 | 0.2400 | 1,800,000 | - | ||||||||||||
Common stock options
|
2,000,000 | 0.2500 | 2,000,000 | - | ||||||||||||
Common stock options
|
50,000 | 0.3900 | 50,000 | - | ||||||||||||
Common stock options
|
360,000 | 0.4000 | 360,000 | - | ||||||||||||
Common stock options
|
100,000 | 0.4300 | 100,000 | - | ||||||||||||
Common stock options
|
1,750,000 | 0.4400 | 1,750,000 | - | ||||||||||||
Common stock options
|
30,000 | 1.0000 | 30,000 | - | ||||||||||||
Common stock warrants
|
333,333 | 0.0450 | N/A | N/A | ||||||||||||
Common stock warrants
|
400,000 | 0.0500 | N/A | N/A | ||||||||||||
Common stock warrants
|
2,181,819 | 0.0550 | N/A | N/A | ||||||||||||
Common stock warrants
|
2,000,000 | 0.0600 | N/A | N/A | ||||||||||||
Common stock warrants
|
4,269,838 | 0.0625 | N/A | N/A | ||||||||||||
Common stock warrants
|
571,529 | 0.0700 | N/A | N/A | ||||||||||||
Common stock warrants
|
666,666 | 0.0900 | N/A | N/A | ||||||||||||
Common stock warrants
|
416,667 | 0.1200 | N/A | N/A | ||||||||||||
Common stock warrants
|
1,200,000 | 0.2500 | N/A | N/A | ||||||||||||
Common stock warrants
|
833,333 | 0.2700 | N/A | N/A | ||||||||||||
Common stock warrants
|
333,333 | 0.3000 | N/A | N/A | ||||||||||||
Common stock warrants
|
153,846 | 0.3250 | N/A | N/A | ||||||||||||
Common stock warrants
|
1,028,570 | 0.3500 | N/A | N/A | ||||||||||||
$10,000, 10% Convertible promissory note
|
22,222 | 0.4500 | N/A | N/A | ||||||||||||
8% Convertible promissory notes
|
10,550,214 | (1 | ) | N/A | N/A | |||||||||||
Total
|
36,658,370 |
Description
|
Number of Underlying Shares of Common
Stock
|
Exercise
Price
|
Number
Vested
|
Number
Non-Vested
|
||||||||||||
Common stock options
|
1,800,000 | $ | 0.240 | - | 1,800,000 | |||||||||||
Common stock options
|
2,000,000 | 0.250 | - | 2,000,000 | ||||||||||||
Common stock options
|
50,000 | 0.390 | 50,000 | - | ||||||||||||
Common stock options
|
360,000 | 0.400 | 360,000 | - | ||||||||||||
Common stock options
|
100,000 | 0.430 | 100,000 | - | ||||||||||||
Common stock options
|
1,750,000 | 0.440 | 1,750,000 | - | ||||||||||||
Common stock options
|
30,000 | 1.000 | 30,000 | - | ||||||||||||
Common stock warrants
|
1,200,000 | 0.250 | N/A | N/A | ||||||||||||
Common stock warrants
|
833,333 | 0.270 | N/A | N/A | ||||||||||||
Common stock warrants
|
333,333 | 0.300 | N/A | N/A | ||||||||||||
Common stock warrants
|
153,846 | 0.325 | N/A | N/A | ||||||||||||
Common stock warrants
|
1,028,570 | 0.350 | N/A | N/A | ||||||||||||
Common stock warrants
|
210,000 | 1.100 | N/A | N/A | ||||||||||||
$10,000, 10% Convertible promissory note
|
22,222 | 0.450 | N/A | N/A | ||||||||||||
8% Convertible promissory notes
|
3,181,753 | (1 | ) | N/A | N/A | |||||||||||
Total
|
13,053,057 |
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, 1/1/11
|
$ | 0.44 | 2,290,000 | 12 | 1,905,000 | 0.44 | 0.36 | |||||||||||||||||
Stock options granted
|
0.24 | 1,800,000 | 15 | - | 0.24 | 0.24 | ||||||||||||||||||
Stock options granted
|
0.25 | 2,000,000 | 15 | - | 0.25 | 0.24 | ||||||||||||||||||
Vested
|
0.40 - 0.44 | - | 11 | 285,000 | 0.40 | 0.22 | ||||||||||||||||||
Balance, 12/31/11
|
0.25 -1.00 | 6,090,000 | 12 | 2,290,000 | 0.32 | 0.28 | ||||||||||||||||||
Stock options granted
|
0.06 | 5,607,000 | 15 | - | 0.06 | 0.06 | ||||||||||||||||||
Vested
|
0.24 | - | 14 | 1,800,000 | 0.24 | 0.24 | ||||||||||||||||||
Vested
|
0.25 | - | 14 | 2,000,000 | 0.25 | 0.24 | ||||||||||||||||||
Balance, 12/31/12
|
0.06 – 1.00 | 11,697,000 | 14 | 6,090,000 | 0.19 | 0.18 |
●
|
Historical stock price volatility
|
139% - 180%
|
●
|
Risk-free interest rate
|
0.21%-4.64%
|
●
|
Expected life (in years)
|
4
|
●
|
Dividend yield
|
0.00
|
●
|
Historical stock price volatility: The Company utilized the volatility in the trading of its common stock computed for the 12 months of trading immediately preceding the date of grant for options granted in 2012 and 2011. Prior to 2011, 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)
50,000
(1)
275,000
(1)
1,800,000
(1)
1,815,000
(2)
|
$0.44
0.43
0.40
0.25
0.06
|
10/23/2021
11/4/2024
11/17/2025
7/25/2026
6/24/27
|
||||
Gregory Coates
|
Director and President, Technology Division
|
500,000
(1)
1,800,000
(1)
|
0.44
0.24
|
10/23/2021
8/8/2026
|
||||
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
(1)
50,000
(1)
85,000
(1)
667,000
(2)
|
0.44
0.43
0.40
0.06
|
3/28/2022
11/3/2024
11/17/2025
6/24/27
|
||||
Richard W. Evans
|
Non-employee Director and Secretary
|
25,000
(1)
50,000
(1)
200,000
(1)
3,125 000
(2)
|
0.44
0.39
0.25
0.06
|
3/28/2022
12/27/2024
2/15/26
6/20/27
|
||||
Dr. Michael J. Suchar
|
Non-employee Director
|
25,000
(1)
|
0.44
|
3/28/2022
|
||||
Richard Whitworth
|
Non-employee Director
|
25,000
(1)
|
0.44
|
3/28/2022
|
||||
William Wolf. Esq.
|
Outside General Counsel
|
25,000
(1)
|
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)
These options will fully vest in June 2013.
|
|
George J. Coates was being compensated under an employment agreement which originally provided for annual salary of $183,549, an annual performance bonus, vacation, sick leave and participation in health, dental and life insurance and any other established benefit plans. In August 2008, the board authorized an increase in Mr. Coates’ annual base compensation under this prior agreement to $250,000. This employment agreement terminated in October 2011 and the Company has not entered into another employment agreement. Although George J. Coates is the majority shareholder of the Company, he could voluntarily terminate his employment with the Company at any time and for any reason. In such case, he would not be prevented from establishing one or more new businesses that might compete with the Company.
|
|
Gregory Coates was being compensated under an employment agreement which 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 authorized an increase in Gregory Coates’ annual base compensation to $150,000. This employment agreement terminated in October 2011 and the Company has not entered into another employment agreement. Although Gregory Coates is a major shareholder of the Company, he could voluntarily terminate his employment with the Company at any time and for any reason. In such case, he would not be prevented from establishing one or more new businesses that might compete with the Company.
|
2012
|
2011
|
|||||||
Current deferred tax asset - inventory reserve
|
$ | 195,000 | $ | 100,000 | ||||
Non-Current Deferred Tax Assets:
|
||||||||
Net operating loss carryforwards
|
5,774,000 | 5,023,000 | ||||||
Stock-based compensation expense
|
1,436,000 | 734,000 | ||||||
Accrued liabilities not paid
|
492,000 | 442,000 | ||||||
Accrued interest on notes to related parties
|
64,000 | - | ||||||
Imputed interest related to convertible promissory notes
|
- | 11,000 | ||||||
Total long-term deferred tax assets
|
7,767,000 | 6,391,000 | ||||||
Total deferred tax assets
|
7,961,000 | 6,491,000 | ||||||
Less: valuation allowance
|
(7,961,000 | ) | (6,491,000 | ) | ||||
Net deferred tax assets
|
$ | - | $ | - |
2012
|
2011
|
|||||||
Federal tax provision (benefit) at the statutory rate
|
34.0 | % | 34.0 | % | ||||
State income tax provision (benefit), net of federal benefit
|
(2.7 | ) | (2.6 | ) | ||||
Net change in net operating loss carryforwards
|
(16.6 | ) | 23.4 | |||||
Stock-based compensation expense
|
(15.6 | ) | (13.8 | ) | ||||
Decrease (Increase) in estimated fair value of embedded derivative liabilities
|
2.9 | (2.2 | ) | |||||
Provision for slow-moving and obsolete inventory
|
(2.1 | ) | - | |||||
Accrued interest not deductible for tax return purposes
|
(1.2 | ) | (0.7 | ) | ||||
Accrued liabilities not deductible for tax return purposes
|
(1.1 | ) | (1.2 | ) | ||||
Total
|
(2.4 | ) | 36.9 | |||||
Valuation allowance
|
2.4 | (36.9 | ) | |||||
Effective tax rate
|
0.0 | % | 0.0 | % |
|
Issuances of common stock and common stock warrants to related parties during the years ended December 31, 2012 and 2011 to related parties are discussed in detail in Note 17
Issuances of common stock under anti-dilution arrangements to George J. Coates during the year ended December 31, 2012 are discussed in detail in Note 17
Conversions of promissory notes to related parties converted into restricted shares of the Company’s common stock are discussed n detail in Note 14.
|
|
Issuances of promissory notes to related parties during the years ended December 31, 2012 and 2011 to related parties are discussed in detail in Note 14.
The promissory notes to related parties are payable on demand and provide for interest at the rate of 17% per annum, compounded monthly.
At December 31, 2012, interest accrued but not paid on outstanding promissory notes to related parties, aggregated $99,000.
|
|
Stock options granted to related parties during the years ended December 31, 2012 and 2011 are discussed in detail in Note 22.
|
|
Shares of Series A Preferred Stock awarded to George J. Coates during the year ended December 31, 2011 is discussed in detail in Note 18.
|
|
George J. Coates has pledged certain of his shares of common stock of the Company to the extent required by the lender and provided a personal guaranty as additional collateral for a mortgage loan on the Company’s headquarters facility.
|
|
The approximate amount of compensation and benefits, all of which were approved by the board, paid to George J. Coates, Gregory Coates and Bernadette Coates, exclusive of stock-based compensation for restricted shares of common stock awarded to George J. Coates and non-cash, stock-based compensation for employee stock options granted to George J. Coates and Gregory Coates, for the years ended December 31, 2012 and 2011, is summarized as follows:
|
2012
|
2011
|
|||||||
George J. Coates (a) (b) (c) (d) (e)
|
$ | 277,000 | $ | 299,000 | ||||
Gregory Coates (a) (f)
|
173,000 | 189,000 | ||||||
Bernadette Coates
|
77,000 | 81,000 |
(a)
|
Includes compensation paid in 2011for vacation earned but not taken.
|
(b)
|
Excludes compensation in 2012 consisting of 20,275,046 restricted shares of common stock awarded to George J. Coates pursuant to an anti-dilution arrangement in effect during the year ended December 31, 2012. Of this amount, 18,593,313 shares of common stock were initially issued throughout 2012. In December 2012, these shares were cancelled and restored to unissued status. The entire 20,275,046 shares of common stock awarded in 2012 were then reissued in January 2013. The estimated fair value of these shares was $1,674,000, which amount is included in stock-based compensation expense in the accompanying consolidated statement of operations for the year ended December 31, 2012.
|
(c)
|
Excludes compensation paid in 2011 consisting of 58,882 shares of Series A Preferred Stock issued to George J. Coates consisting of 8,882 shares issued pursuant to an anti-dilution arrangement and 50,000 shares issued for a compensatory stock award. The estimated fair value of these shares amounted to $143,000. Each share of Series A Preferred Stock entitles the holder to 10,000 votes per share for all matters brought before the common stockholders for a vote.
|
(d)
|
Excluded from the amounts reported above for 2012 and 2011, are 1,815,000 and 1,800,000 stock options with exercise prices of $0.06 and $0.25 per share, respectively. The estimated fair values of these stock options at the dates of grant were $116,000 and $450,000, respectively.
|
(e)
|
Excluded from the amount reported above for 2011 are 620,000 restricted shares of common stock awarded to George J. Coates which have not been issued. The Company is obligated to pay the personal income taxes of Mr. Coates related to this award. The estimated fair value of these shares, including related income taxes on the date of award was approximately $130,000.
|
(f)
|
Excluded from the amounts reported above for 2011 are 1,800,000 stock options with an exercise price of $0.24 per share. The estimated fair value of these stock options at the date of grant was $432,000.
|
|
Barry C. Kaye, Treasurer and Chief Financial Officer, was paid consulting fees of approximately $67,000 and $104,000 in 2012 and 2011, respectively. For the year ended December 31, 2012, Mr. Kaye earned an additional $47,000, which was not paid and has been deferred until the Company has sufficient working capital to remit payment to him.
|
Total
|
Amount due
within
2013
|
|||||||
Deferred compensation payable
|
$ | 1,912,000 | $ | 1,912,000 | ||||
Mortgage loan payable
|
1,575,000 | 1,575,000 | ||||||
Promissory notes to related parties
|
507,000 | 507,000 | ||||||
Convertible promissory notes
|
120,000 | 120,000 | ||||||
Maturity of 10% promissory notes
|
10,000 | 10,000 | ||||||
Total
|
$ | 4,124,000 | $ | 4,124,000 |
●
|
Recognized financial instruments and derivative instruments that are offset in accordance with either Section 210-20-45 or Section 815-10-45
|
●
|
Recognized financial instruments and derivative instruments that are subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are offset in accordance with either Section 210-20-45 or Section 815-10-45.
|
|
In February 2013, the Company issued 999,999 unregistered, restricted shares of common stock and 2,000,001 common stock warrants to purchase one share of restricted common stock at a price per share of $0.035 to the son of a director in consideration for $35,000. This transaction was a private sale of unregistered, restricted securities.
|
|
Subsequent to year-end, the Company entered into an agreement whereby it is permitted to issue in a series of tranches up to $335,000 of convertible promissory notes which bear interest at 12% per annum and mature on the one year anniversary of the notes. In March 2013, the Company issued a $67,000 principle amount convertible promissory note under this arrangement and received cash proceeds of $60,000. The arrangement provides for an approximately 10.5% original discount on the principal amount of each tranche, which is netted against the amount funded to the Company. The promissory note may be prepaid at any time within the first 90 days, upon which the interest for the outstanding period will be forgiven. The lender may convert the promissory notes into shares of the Company’s common stock at any time beginning 180 days after the date of funding. The conversion rate shall be equal to the lesser of $0.035 per share or 60% of the lowest trade price of the common stock in the 25 days prior to the date of conversion. The Company has reserved 35 million shares of its unissued common stock for potential conversion of the first tranche of $67,000.
|
|
Subsequent to year-end, an aggregate of $92,000 principal amount of the convertible promissory notes, including interest thereon amounting $5,000, was converted by the holder into 5,705,447,unregistered shares of the Company’s common stock.
|
|
Subsequent to year-end, the Company sold 86,128 registered shares of its common stock to Dutchess under an equity line of credit and received cash of $3,000 which was used for working capital purposes.
|
|
Subsequent to year-end, the Company issued 20,275,045 restricted shares of common stock to George J. Coates pursuant an anti-dilution arrangement with an estimated fair value of $1,674,000. The shares were originally awarded in 2012.
Subsequent to year-end, the Company awarded and issued 6,705,446 restricted shares of common stock to George J. Coates pursuant an anti-dilution arrangement with an estimated fair value of $238,000.
|
|
Subsequent to year-end, the Company issued 620,000 restricted shares of common stock to George J. Coates representing compensatory shares of common stock originally awarded in 2011.The estimated fair value of the shares of $87,000, plus estimated additional personal income taxes of Mr. Coates for which the Company was obligated, was included in deferred compensation payable in the accompanying balance sheet at December 31, 2012 and 2011.
|
|
Subsequent to year-end, in a series of transactions the Company issued promissory notes payable on demand to George J. Coates and received cash proceeds of $87,000. The Company also repaid $17,000 of such promissory notes bringing the total principal amount of outstanding promissory notes due to George J. Coates to $511,000. These notes bear interest at 17% per annum, compounded monthly.
Subsequent to year-end, in a series of transactions the Company issued promissory notes payable on demand to Bernadette Coates and received cash proceeds of $48,000. The Company also repaid $6,500 of such promissory notes bringing the total principal amount of outstanding promissory notes due to Bernadette Coates to $107,000. These notes bear interest at 17% per annum, compounded monthly.
|
|
In order to preserve our working capital, George J. Coates, Barry C. Kaye and Bernadette Coates have voluntarily agreed to defer payment of their compensation for certain periods in 2013 and 2012, which as of March 25, 2013, amounted to approximately $38,000, $71,000 and $5,000, respectively. This deferred compensation is intended to be paid when raises sufficient new working capital.
|
(i)
|
alter or change the rights, preferences or privileges of the Series A Preferred Stock, or increase the authorized number of shares of Series A Preferred Stock;
|
(ii)
|
alter or change the rights, preferences or privileges of any capital stock of the Corporation so as to affect adversely the Series A Preferred Stock;
|
(iii)
|
increase the par value of the Common Stock;
|
COATES INTERNATIONAL LTD.
|
|||
By:
|
/s/ George J. Coates
|
||
Name: |
George J. Coates
|
||
Title: |
President and Chief Executive Officer
|
(i)
|
alter or change the rights, preferences or privileges of the Series A Preferred Stock, or increase the authorized number of shares of Series A Preferred Stock;
|
(ii)
|
alter or change the rights, preferences or privileges of any capital stock of the Corporation so as to affect adversely the Series A Preferred Stock;
|
(iii)
|
increase the par value of the Common Stock;
|
COATES INTERNATIONAL LTD.
|
|||
By:
|
/s/ George J. Coates
|
||
Name: |
George J. Coates
|
||
Title: |
President and Chief Executive Officer
|
●
|
Perform services as a consultant, employee, officer, director, advisor or in any other capacity, or, where feasible, permit any close relative to perform services as an officer or director, for a significant customer, significant supplier or direct competitor of the Company, other than at the request of the Company.
|
●
|
Have, or, where feasible, permit any close relative to have, a financial interest in a significant supplier or significant customer of the Company, other than an investment representing less than one percent of the outstanding shares of a publicly-held company or less than five percent of the outstanding shares of a privately-held company.
|
●
|
Have, or, where feasible, permit any close relative to have, a financial interest in a direct competitor of the Company, other than an investment representing less than one percent of the outstanding shares of a publicly-held company.
|
●
|
Supervise, review or influence the job evaluation or compensation of a member of his or her immediate family.
|
●
|
Engage in any other activity or have any other interest that the Board of Directors of the Company determines to constitute a conflict of interest.
|
●
|
Perform services as a consultant, employee, officer, director, advisor or in any other capacity, or, where feasible, permit any close relative to perform services as an officer or director, for a direct competitor of the Company.
|
●
|
Have, or, where feasible, permit any close relative to have, a financial interest in a direct competitor of the Company, other than an investment representing less than one percent of the outstanding shares of a publicly-held company.
|
●
|
Use his or her position with the Company to influence any decision of the Company relating to a contract or transaction with a supplier or customer of the Company if the director or a close relative of the director.
|
●
|
Perform services as a consultant, employee, officer, director, advisor or in any other capacity for such supplier or customer.
|
●
|
Have a financial interest in such supplier or customer, other than an investment representing less than one percent of the outstanding shares of a publicly-held company.
|
●
|
Supervise, review or influence the job evaluation or compensation of a member of his or her immediate family.
|
●
|
Engage in any other activity or have any other interest that the Board of Directors of the Company determines to constitute a conflict of interest.
|
Name
|
Approximate Percentage of Outstanding Voting
Shares Held
|
|||
Coates Hi-Tech Engines, Ltd.
|
67 | % | ||
Coates Oklahoma Engine Manufacturing, Ltd.
|
67 | % |
Date: April 15, 2013
|
By:
|
/s/ George J. Coates | |
George J. Coates
|
|||
President and Chief Executive Officer
|
|||
(Principal Executive Officer)
|
Date: April 15, 2013
|
By: | /s/ Barry C. Kaye | |
Barry C. Kaye
|
|||
Chief Financial Officer
|
|||
(Principal Accounting Officer)
|
1.
|
the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
|
2.
|
the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
|
Date: April 15, 2013
|
/s/
George J. Coates
|
||
George J. Coates
|
|||
President and Chief Executive Officer
|
|||
( Principal Executive Officer) |
1.
|
the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
|
2.
|
the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
|
Date: April 15, 2013
|
/s/ Barry C. Kaye | ||
Barry C. Kaye
|
|||
Treasurer and Chief Financial Officer
|
|||
(Principal Accounting Officer) |