WASHINGTON, D.C. 20549
Securities registered under Section 12(g) of the Exchange Act: Common Stock, $0.001 par value per share
Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
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Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes
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No
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Indicate by check mark whether the registrant (1) has filed all reports required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes
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Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files. Yes
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
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The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant, based upon the price at which the Company's common stock was sold as reported on the OTC-QB Market on June 30, 2016 was $2,806,147.
The number of shares of registrant's common stock outstanding, as of March 21, 2017 was 36,675,123.
Unless otherwise stated or the context requires otherwise, references in this annual report on Form 10-K to "Carbon Sciences," the "Company," "we," "us," or "our" refer to Carbon Sciences, Inc.
Introduction
In June 2014, Carbon Sciences entered into its first Sponsored Research Agreement with the University of California at Santa Barbara ("UCSB") to develop a low-cost method to produce graphene. At this time, we do not see an opportunity to commercialize the research findings from our first UCSB Sponsored Research Agreement and have terminated our joint venture through Transphene, Inc., our 50% owned subsidiary, and wound up and dissolved it in 2016.
In December 2015, Carbon Sciences entered into a second Sponsored Research Agreement with UCSB to develop a new graphene-based optical modulator, a critical fiber optics component for enabling ultrafast fiber optics communication in data centers for Cloud computing.
In March 2017, Carbon Sciences entered into a third Sponsored Research Agreement with UCSB to continue the development of a new graphene-based optical modulator.
In addition, on February 9, 2016, we announced a growth-by-acquisition strategy to extend our presence in the information technology ("IT") market. On March 7, 2016, we announced that Christopher S. Kelly joined the Company to serve as our Chief Executive Officer and help execute the growth-by-acquisition strategy.
Graphene is a naturally occurring sheet of pure carbon that is only one atom thick. It is flexible, transparent, impermeable to moisture, strong, and highly conductive. A Nobel Prize was awarded to the scientists who isolated graphene from graphite in 2010. Experts believe that graphene is a versatile material that can enable new applications such as bendable touchscreen displays, rapid charge batteries, super-capacitors, low cost solar cells, extreme high-speed semiconductors, biosensors, as well as water purification.
After research and development of methods to produce low cost graphene, Carbon Sciences focused on the research and development of graphene-based devices to enable ultrafast fiber optics communication in Cloud computing infrastructure.
Moore's Law has enabled computers to process information at extreme high speeds. The speed of data movement between computers on the Internet, also referred to as the "Cloud," is, however, bottlenecked by fundamental limitations of today's fiber optics technology. By exploiting the natural optical and electrical properties of graphene, we hope to develop the next generation fiber optics components that are ultrafast, low power and low cost.
We believe high speed and low cost graphene-based components, such as optical modulators (for sending) and photodetectors (for receiving), have the potential to unclog the bottlenecks in the Cloud. This advance would enable a global era of high-resolution video on demand, high fidelity music streaming, high volume e-commerce and many more Cloud-based services.
Our research program is expected to be secondary to the execution of our new growth-by-acquisition strategy. We intend to focus the majority of our resources on acquiring, integrating, and expanding high quality businesses in the IT industry. We believe that there is an excellent opportunity to consolidate profitable private companies engaged in the IT business on an accretive, synergistic basis.
Market Opportunity
Cloud computing allows application software and services to be delivered from large server farms in data centers over the Internet. Almost every web service we use today such as Netflix, Google and Amazon are all delivered from the Cloud. As more and more people use Cloud services, more and more data are created that need to be stored, transmitted and processed. This explosion of data requires larger and larger data centers – as big as one square mile. The size of current and future data centers is challenging the fundamental speed limits of today's cutting edge fiber optics technology.
According to a 2014 report by ACG Research, the growth of Cloud-based services in consumer and business applications during the past five years has been spectacular. By 2019, mobile network traffic is forecasted to increase tenfold. Fifty percent of this increase is expected to be in video services, and an additional 10% is expected to be in social networking applications. Over the same time, business Cloud computing services are expected to increase at a 40% average annual rate. By 2019 there are expected to be 60 percent more data centers in the world's major cities than there are today, and data center interconnect volumes are expected to increase by more than 400 percent.
We believe that graphene-based fiber optic components will be the next generation of devices to enable the transmission of large amounts of data, specifically between computer servers inside datacenters.
Business Model
We are in the early stages of researching and developing graphene-based technologies and devices. If successfully developed and commercialized, we plan to license our graphene manufacturing processes and device designs to other companies.
Research and Development
On June 18, 2014, we entered into a Sponsored Research Agreement ("SRA #1") with UCSB, pursuant to which UCSB performed research work for the mutual benefit of UCSB and the Company. The purpose of SRA #1 includes the development of a low-cost and scalable method to produce large-area graphene for transparent electrode applications. The term of SRA #1 commenced on July 1, 2014 and expired on June 30, 2015. The total cost to the Company was $387,730, which has been fully paid.
After successfully producing high quality graphene under SRA #1, we determined that the best way to commercialize graphene was to focus on complete devices that use graphene. Since February 2015, we have been engaged in researching commercial opportunities for graphene-based devices. In June 2015, we announced a plan to develop high-speed graphene-based photonics devices, such as photodetectors and modulators, for fiber optics communication.
On December 15, 2015, we entered into a second
Sponsored Research Agreement ("SRA #2" and collectively with SRA #1, "SRAs")
with UCSB,
pursuant to which UCSB will perform research work for the mutual benefit of UCSB and the Company. The purpose of SRA #2 included the development of a graphene based optical modulator for the high-speed transmission of digital data in fiber optic networks. The term of SRA #2 commenced on January 1, 2016 and expired on September 30, 2016. The total cost to the Company was $65,497, which has been fully paid.
On March 9, 2017, we entered into our third Sponsored Research Agreement (SRA #3) with UCSB, pursuant to which UCSB will continue the development of a graphene based optical modulator for the high-speed transmission of digital data in fiber optic networks. The term of SRA #3 will commence on April 1, 2017 and conclude on September 30, 2017. The total cost to the Company is $65,009.
For optical data to be transmitted through a fiber optic cable, light from a laser beam must be modulated, meaning changed or pulsed, to encode specific digital data. Otherwise, a constant beam of light does not communicate anything. The faster the light beam can be modulated, the more data can be encoded and transmitted. One of the very important attributes of graphene is extreme high speed and tunable conductivity. Incidentally, changing the conductivity of graphene also changes its optical properties, which means light passing through it will also be changed accordingly to encode digital data. It is these fundamental features of graphene that SRA #3 aims to exploit in developing an ultrafast, low cost, and low power, graphene-based optical modulator.
Intellectual Property
We have filed numerous patent applications with the United States Patent and Trademark Office ("USPTO") in the course of our business history. However, patent applications that are not related to the current business focus of graphene have all been abandoned.
We currently do not have any patent applications filed for graphene. Our SRAs with UCSB give us the first right to review any new inventions arising out of the SRAs, and negotiate a license or option agreement for such inventions.
On January 5, 2015, Carbon Sciences formed Transphene, Inc., a Nevada corporation ("Transphene"), of which the Company owns 50% of the total issued and outstanding capital stock. The remaining 50% is owned by Dr. Kaustav Banerjee ("Banerjee"), a director and Chief Technical Officer of Transphene. Transphene was formed to commercialize any technology that the Company licensed from UCSB as a result of SRA #1. In consideration for its interest in Transphene, the Company agreed to assign the intellectual property rights acquired by the Company from SRA #1 to Transphene. At this time, the Company does not see an opportunity to commercialize the research findings of SRA #1. As of the date of this report, the Company has not licensed any intellectual property from UCSB, and therefore has not assigned any intellectual property to Transphene. Therefore, we
terminated our joint venture through Transphene and wound up and dissolved Transphene in 2016.
Competition
Competition in the market for optical subsystems and components, such as photodetectors and optical modulators, are intense with large and well-capitalized companies. For example, large companies include Avago Technologies, Finisar, JDS Uniphase, Oclaro, GigaOptix, and Sumitomo. However, we do not see these companies as direct competitors because our business model is licensing our graphene technologies to original equipment manufacturers like them. To our knowledge, there are currently no commercially available graphene-based optical components on the market. Most of our direct competitors for that potential business are in the research and development phase.
Employees
We currently have two full-time employees. We have arrangements with various independent contractors and consultants to meet additional needs, including management, accounting, investor relations, research and development and other administrative functions.
ITEM 1A.
RISK FACTORS
RISKS RELATED TO OUR BUSINESS AND INDUSTRY
We are in the early stages of development and have limited operating history on which you can base an investment decision.
We were formed in August 2006 and have been developing a new technology for commercial use. We have generated no revenues, have no real operating history upon which you can evaluate our business strategy or future prospects, and have negative working capital. As a result, our auditor issued an opinion in connection with our December 31, 2016 financial statements, which expressed substantial doubt about our ability to continue as a going concern unless we obtain additional financing. Our ability to generate such revenues will depend on whether we can successfully develop, commercialize and license our technology and make the transition from a development stage company to an operating company. We expect to continue to incur losses. In making your evaluation of our business, you should consider that we are a start-up business focused on a new technology, are designing solutions that have no proven market acceptance, and operate in a rapidly evolving industry. As a result, we may encounter many expenses, delays, problems and difficulties that we have not anticipated and for which we have not planned. There can be no assurance that at this time we will successfully commercialize our technology, operate profitably or that we will have adequate working capital to fund our operations or meet our obligations as they become due.
Our proposed operations are subject to all of the risks inherent in the initial expenses, challenges, complications and delays frequently encountered in connection with the formation of any new business. Investors should evaluate an investment in our company in light of the problems and uncertainties frequently encountered by companies attempting to develop markets for new products, services and technologies. Despite best efforts, we may never overcome these obstacles to achieve financial success. Our business is speculative and dependent upon the implementation of our business plan, as well as our ability to successfully complete the development of our technology or enter into licensing agreements with third parties on terms that will be commercially viable for us. There can be no assurance that our efforts will be successful or result in revenue or profit. There is no assurance that we will earn significant revenues or that our investors will not lose their entire investment.
There is no assurance that our new growth-by-acquisition strategy will be successful.
We have hired a new Chief Executive Officer to implement our new strategy of growing the Company through the acquisition of other private operating companies engaged in the information technology business. While we will endeavor to acquire companies that are profitable and accretive, there is no assurance that any of our business acquisitions will be economically successful or perform as expected. We may acquire businesses that incur unexpected losses, or may not integrate well with the Company. We may not realize profits on our business acquisitions for a number of reasons, including but not limited to paying higher than fair value, unexpected operating deficits, change in the market, loss of customers, reduced demand, loss of management and other causes.
If we are unable to effectively manage the transition from a development stage company to an operating company, our financial results will be negatively affected.
For the period from our inception, August 25, 2006, through December 31, 2016, we incurred an aggregate net loss, and had an accumulated deficit, of $27,649,999. For the years ended December 31, 2016 and 2015, we incurred net losses of $277,663 and $5,218,161, respectively. Our losses are expected to continue to increase for at least the next 48 months as we commence full-scale development of our technology, if feasible. We believe we will require significant funding to make this transition, if full-scale development is commercially justified. If we do make such transition, we expect our business to grow significantly in size and complexity. This growth is expected to place significant additional demands on our management, systems, internal controls and financial and operational resources. As a result, we will need to expend additional funds to hire additional qualified personnel, retain professionals to assist in developing appropriate control systems and expand our operating infrastructures. Our inability to secure additional resources, as and when needed, or manage our growth effectively, if and when it occurs, would significantly hinder our transition to an operating company, as well as diminish our prospects of generating revenues and, ultimately, achieving profitability.
We may not be able to develop, commercialize or finance the development or commercialization of graphene-based devices.
We are in the early stages of the research and development for graphene-based devices to enable ultrafast fiber optics communication in Cloud computing infrastructure. There is no assurance that we will be able to successfully develop or commercialize graphene technology. If successfully developed and commercialized, we plan to license our graphene technology to other companies.
We may not be able to attract sufficient interest from prospective licensees of technology, or from private equity partners and banks to complete the project. If we are not able to fund the cost of developing the graphene technology, we may be forced to scale back our research and development plans.
Sufficient customer acceptance for our technology may never develop or may take longer to develop than we anticipate, and as a result, our revenues and profits, if any, may be insufficient to fund our operations.
The commercial market for graphene is still very much in its infancy.
Sufficient markets may never develop for our technology, may develop more slowly than we anticipate or may develop with economics that are not favorable for us. The development of sufficient markets for our technology at favorable pricing may be affected by cost competitiveness of our technology, customer reluctance to try new technology and emergence of more competitive technologies. Because our technology has not yet been used, potential customers may be skeptical about product stability, supply availability, quality control and our financial viability, which may prevent them from purchasing our technology or entering into long-term licensing agreements with us. We cannot estimate or predict whether a market for our technology will develop, whether sufficient demand for our technology will materialize at favorable prices, or whether satisfactory profit margins will be achieved. If such pricing levels are not achieved or sustained, or if our technologies and business approach to our markets do not achieve or sustain broad acceptance, our business, operating results and financial condition will be materially and adversely impacted.
The ability of our graphene technology to be utilized on a commercially sustainable basis is unproven, and until we can develop and prove our technology, we likely will not be able to generate or sustain sufficient revenues to continue operating our business.
As previously discussed, the commercial market for graphene is still very much in its infancy.
The research and development that we have conducted to date with respect to our technology have been performed in a limited scale environment, and the same or similar results may not be obtainable at competitive costs on a large-scale commercial basis.
We have never utilized our technology under the conditions or in the volumes that will be required for us to be profitable and cannot predict all of the difficulties that may arise. Our technology requires further research, development, regulatory approvals, environmental permits, design and testing prior to commercialization. Accordingly, our technology may not perform successfully on a commercial basis and may never generate any meaningful revenues or profits.
We likely will not be able to generate significant revenues until we can successfully validate the performance of our technology with customers.
To date, we have generated no revenues. Revenue generation could be impacted by any of the following:
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delays in demonstrating the technological advantages or commercial viability of our proposed technology;
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delays in developing our technology; and
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inability to interest early adopter customers in our technology.
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We may not be able to enter into agreements to license our technology at prices that will cover our costs. Potential customers may require lengthy or complex trials or long sampling periods before committing to license our technology.
The current credit and financial market conditions may exacerbate certain risks affecting our business.
Due to the continued disruption in the financial markets arising from the global recession and the slow pace of economic recovery, many of our potential customers are unable to access capital necessary to accommodate the use of our technology. Many are operating under austerity budgets that limit their ability to invest in new technology and that make it significantly more difficult to take risks. As a result, we may experience increased difficulties in convincing customers to adopt our technology as a viable alternative at this time.
We may not be able to generate revenues from licensing our technology.
Our business plan includes, as our main revenue stream, the collection of royalties through licensing our technology and intellectual property portfolio that we currently have and may build in the course of our business. Companies to which we grant licenses may not be able to produce, market, and sell enough products to pay us royalty fees or they may default on the payment of royalties. We may not be able to achieve profitable operations from collecting royalties from the licensing of our proprietary technology.
We do not maintain theft or casualty insurance, and only maintain modest liability and property insurance coverage and therefore we could incur losses as a result of an uninsured loss.
We cannot assure that we will not incur uninsured liabilities and losses as a result of the conduct of our business. Any such uninsured or insured loss or liability could have a material adverse effect on our results of operations.
If we lose key employees and consultants or are unable to attract or retain qualified personnel, our business could suffer.
Our success is highly dependent on our ability to attract and retain qualified scientific, engineering, and management personnel. Competition for these qualified personnel is intense. We are highly dependent on our management and key consultants who have been critical to the development of our business. The loss of the services of key employees and key consultants could have a material adverse effect on our operations. We do not have an employment agreement with any employees. Accordingly, there can be no assurance that any employees will remain associated with us. The efforts of key employees will be critical to us as we continue to develop our technology and as we attempt to transition from a development stage company to a company with commercialized products and services. If we were to lose key employees or consultants, we may experience difficulties in competing effectively, developing our technology and implementing our business strategies.
The strategic relationships upon which we may rely are subject to change.
Our ability to successfully test our technology and identify and enter into commercial arrangements with licensees will depend on developing and maintaining close working relationships with industry participants. These relationships will need to change and evolve over time, as we enter different phases of development. Our strategic relationships most often are not yet reflected in definitive agreements, or the agreements we have do not cover all aspects of the relationship. Our success in this area also will depend on our ability to select and evaluate new strategic relationships and to consummate transactions. To test our technology, we will be dependent on strategic partners for the use or construction of demonstration systems. Our inability to identify suitable companies or enter into and maintain strategic relationships may affect our ability to commercialize our technology and impair our ability to grow. The terms of relationships with strategic partners may require us to incur expenses or undertake activities we would not otherwise be inclined to incur or undertake in order to maintain these relationships.
Intellectual property development for graphene is very competitive, and failure to obtain the patents for our applications could prevent us from securing royalty payments in the future, if appropriate.
The commercial market for graphene is still very much in its infancy, but the rapidly growing number of graphene related patent applications suggests that intellectual property development is very competitive. Approximately 8,000 graphene-related patents have been filed, evidence of the huge investment and rich pipeline of products under development. Additionally, the European Union has committed one billion Euros over a decade to research on graphene and other 2D materials, while the Korean and United Kingdom governments have each, respectively, committed at least $40 and £24 million in the past two years.
There is no guarantee that we are not overlapping other competitive innovations that have not been publicly disclosed. We will not know for sure the value and protectability of our intellectual property until we file patents and prosecute them with patent offices globally.
If we do not obtain protection for our intellectual property rights, our competitors may be able to take advantage of our research and development efforts to develop competing technology.
Our success, competitive position, and future revenues will depend in part on our ability to obtain and maintain patent protection for our methods, processes, and other technologies, to preserve our trade secrets, to prevent third parties from infringing on our proprietary rights and to operate without infringing the proprietary rights of third parties.
We have yet to complete an infringement analysis and, even if such an analysis were available at the current time, we could not be certain that no infringement exists, particularly as our products have not yet been fully developed. We may need to acquire additional licenses from third parties in order to avoid infringement claims, and any required licenses may not be available to us on acceptable terms, or at all. To the extent infringement claims are made, we could incur substantial costs in the resulting litigation, and the existence of this type of litigation could impede the development of our business.
We anticipate filing patent applications both in the United States and in other countries, as appropriate. However, the patent process is subject to numerous risks and uncertainties, and there can be no assurance that we will be successful in protecting our technology by obtaining and defending patents. These risks and uncertainties include but are not limited to the following:
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Patents that may be issued or licensed may be challenged, invalidated, or circumvented, or otherwise may not provide any competitive advantage.
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Our competitors, many of which have substantially greater resources than us and many of which have made significant investments in competing technologies, may seek, or may already have obtained, patents that will limit, interfere with, or eliminate our ability to make, use, and sell our potential products either in the United States or in international markets.
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Countries other than the United States may have less restrictive patent laws than those upheld by United States courts, allowing foreign competitors the ability to exploit these laws to create, develop, and market competing products.
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In addition to patents, we also intend to rely on trade secrets and proprietary know-how. Although we take measures to protect this information by entering into confidentiality and inventions agreements with our employees, scientific advisors, consultants, and collaborators, we cannot provide any assurances that these agreements will not be breached, that we will be able to protect ourselves from the harmful effects of disclosure if they are breached, or that our trade secrets will not otherwise become known or be independently discovered by competitors. If any of these events occurs, or we otherwise lose protection for our trade secrets or proprietary know-how, the value of this information may be greatly reduced.
Patent protection and other intellectual property protection are important to the success of our business and prospects, and there is a substantial risk that such protections will prove inadequate.
Intellectual property disputes could require us to spend time and money to address such disputes and could limit our intellectual property rights.
We may become subject to infringement claims or litigation arising out of patents and pending applications of competitors, or additional proceedings initiated by third parties or the United States Patent and Trademark Office ("PTO") to reexamine the patentability of our licensed patents. The defense and prosecution of intellectual property suits, PTO proceedings, and related legal and administrative proceedings are costly and time-consuming to pursue, and their outcome is uncertain. Litigation may be necessary to enforce our intellectual property rights, to protect our trade secrets and know-how, or to determine the enforceability, scope, and validity of the proprietary rights of others. An adverse determination in litigation or PTO proceedings to which we may become a party could subject us to significant liabilities, require us to obtain licenses from third parties, restrict or prevent us from selling our technology in certain markets, or invalidate or render unenforceable our licensed or owned patents. Although patent and intellectual property disputes might be settled through licensing or similar arrangements, the costs associated with such arrangements may be substantial and could include our paying large fixed payments and ongoing royalties. Furthermore, the necessary licenses may not be available on satisfactory terms or at all.
If we infringe the rights of third parties we could be prevented from licensing our technologies and forced to pay damages, and defend against litigation.
If our methods, processes and other technologies infringe the proprietary rights of other parties, we could incur substantial costs and we may have to do one or more of the following:
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obtain licenses, which may not be available on commercially reasonable terms, if at all;
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redesign our processes to avoid infringement;
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stop using the subject matter claimed in the patents held by others;
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pay damages; or
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defend litigation or administrative proceedings, which may be costly whether we win or lose, and which could result in a substantial diversion of our financial and management resources.
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Any of these events could substantially harm our financial condition and operations.
Our technology may become ineffective or obsolete.
To be competitive in the industry, we may be required to continually enhance and update our technology. The costs of doing so may be substantial, and if we are unable to maintain the efficacy of our technology, our ability to compete may be impaired. In addition, interest in our technology may wane as alternative technologies gain market acceptance. If competitors develop, obtain or license technology that is superior to ours, we may lose our competitive edge which may have a material adverse effect on our business, financial condition, results of operations and prospects.
RISKS RELATING TO OUR COMMON STOCK
Our common stock is subject to volatility.
We cannot assure that the market price for our common stock will remain at its current level and a decrease in the market price could result in substantial losses for investors. The market price of our common stock may be significantly affected by one or more of the following factors:
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announcements or press releases relating to the industry or to our own business or prospects;
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regulatory, legislative, or other developments affecting us or the industry generally;
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sales by holders of restricted securities pursuant to effective registration statements or exemptions from registration; and
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market conditions specific to companies in our industry and the stock market generally.
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If our common stock remains subject to the SEC's penny stock rules, broker-dealers may experience difficulty in completing customer transactions and trading activity in our securities may be adversely affected.
Unless our common stock is listed on a national securities exchange, including the Nasdaq Capital Market, if we have stockholders' equity of $5,000,000 or less and our common stock has a market price per share of less than $4.00, transactions in our common stock will be subject to the SEC's "penny stock" rules. If our common stock remains subject to the "penny stock" rules promulgated under the Securities Exchange Act of 1934, broker-dealers may find it difficult to effectuate customer transactions and trading activity in our securities may be adversely affected.
In accordance with these rules, broker-dealers participating in transactions in low-priced securities must first deliver a risk disclosure document that describes the risks associated with such stocks, the broker-dealer's duties in selling the stock, the customer's rights and remedies and certain market and other information. Furthermore, the broker-dealer must make a suitability determination approving the customer for low-priced stock transactions based on the customer's financial situation, investment experience and objectives. Broker-dealers must also disclose these restrictions in writing to the customer, obtain specific written consent from the customer, and provide monthly account statements to the customer. The effect of these restrictions will probably decrease the willingness of broker-dealers to make a market in our common stock, decrease liquidity of our common stock and increase transaction costs for sales and purchases of our common stock as compared to other securities. Our management is aware of the abuses that have occurred historically in the penny stock market.
As a result, if our common stock becomes subject to the penny stock rules, the market price of our securities may be depressed, and you may find it more difficult to sell our securities.
If we fail to maintain effective internal controls over financial reporting, the price of our common stock may be adversely affected.
Our internal control over financial reporting may have weaknesses and conditions that could require correction or remediation, the disclosure of which may have an adverse impact on the price of our common stock. We are required to establish and maintain appropriate internal controls over financial reporting. Failure to establish those controls, or any failure of those controls once established, could adversely affect our public disclosures regarding our business, prospects, financial condition or results of operations.
Rules adopted by the SEC pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 require an annual assessment of internal controls over financial reporting, and for certain issuers an attestation of this assessment by the issuer's independent registered public accounting firm. The standards that must be met for management to assess the internal controls over financial reporting as effective are evolving and complex, and require significant documentation, testing, and possible remediation to meet the detailed standards. We expect to incur significant expenses and to devote resources to Section 404 compliance on an ongoing basis. It is difficult for us to predict how long it will take or costly it will be to complete the assessment of the effectiveness of our internal control over financial reporting for each year and to remediate any deficiencies in our internal control over financial reporting. As a result, we may not be able to complete the assessment and remediation process on a timely basis. In addition, management's assessment of internal controls over financial reporting may identify weaknesses and conditions that need to be addressed in our internal controls over financial reporting or other matters that may raise concerns for investors. Any actual or perceived weaknesses and conditions that need to be addressed in our internal control over financial reporting or disclosure of management's assessment of our internal controls over financial reporting may have an adverse impact on the price of our common stock.
We are authorized to issue shares of preferred stock without stockholder approval, which could adversely impact the rights of holders of our common stock.
Our Articles of Incorporation authorize our Company to issue up to 20,000,000 shares of preferred stock, of which 1,000 shares have been designated as Series A Preferred Stock and 30,000 shares have been designated as Series B Preferred Stock. Currently there are no shares of Series A Preferred Stock and 16,155 shares of Series B Preferred Stock issued and outstanding. We can issue additional shares of our preferred stock in one or more series and can set the terms of the preferred stock without seeking any further approval from our common stockholders. Any preferred stock that we issue may rank ahead of our common stock in terms of dividend priority or liquidation premiums and may have greater voting rights than our common stock. In addition, such preferred stock may contain provisions allowing those shares to be converted into shares of common stock, which could dilute the value of common stock to current stockholders and could adversely affect the market price, if any, of our common stock. In addition, the preferred stock could be utilized, under certain circumstances, as a method of discouraging, delaying or preventing a change in control of the Company. Although we have no present intention to issue any additional shares of authorized preferred stock, there can be no assurance that we will not do so in the future.
Shares eligible for future sale may adversely affect the market.
From time to time, certain of our stockholders may be eligible to sell all or some of their shares of common stock by means of ordinary brokerage transactions in the open market pursuant to Rule 144 promulgated under the Securities Act, subject to certain limitations. In general, pursuant to amended Rule 144, non-affiliate stockholders may sell freely after six months subject only to the current public information requirement. Affiliates may sell after six months subject to the Rule 144 volume, manner of sale (for equity securities), current public information and notice requirements. Of the 35,178,624 shares of our common stock outstanding as of December 31, 2016, approximately 34,631,460 shares are freely tradable without restriction. Any substantial sales of our common stock pursuant to Rule 144 may have a material adverse effect on the market price of our common stock.
We do not expect to pay dividends in the future and any return on investment may be limited to the value of our common stock.
We do not currently anticipate paying cash dividends in the foreseeable future. The payment of dividends on our common stock will depend on earnings, financial condition and other business and economic factors affecting it at such time as the board of directors may consider relevant. Our current intention is to apply net earnings, if any, in the foreseeable future to increasing our capital base and development and marketing efforts. There can be no assurance that we will ever have sufficient earnings to declare and pay dividends to the holders of our common stock, and in any event, a decision to declare and pay dividends is at the sole discretion of the our Board of Directors. If we do not pay dividends, our common stock may be less valuable because a return on investment will only occur if its stock price appreciates.
Our principal office is located at 5511C Ekwill Street, Santa Barbara, California 93111. We lease approximately 2,800 square feet.
We extended our lease for a period of five years, expiring on September 30, 2017. The base rent for the period of October 1, 2012 to September 30, 2013 was $2,884 per month, for the period October 1, 2014 to September 30, 2015 was $3,450 per month, for the period October 1, 2015 to September 30, 2016 was $3,533 per month, and for the remaining period commencing on October 1, 2016 to September 30, 2017 the base rent is $3,639 per month.
We sublease approximately 1,400 square feet to a short-term subtenant, which reduces our occupancy expense to approximately 50% of our lease amount.
ITEM 3.
LEGAL PROCEEDINGS.
We are not currently a party to, nor is any of our property currently the subject of, any pending legal proceeding that will have a material adverse effect on our business.
ITEM 4.
MINE SAFETY DISCLOSURES
Not applicable.
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE.
The following table sets forth information about our executive officers and directors:
|
Name
|
|
Age
|
|
Position
|
|
Byron Elton
|
|
63
|
|
Chairman of the Board of Directors
|
|
William E. Beifuss, Jr.
|
|
71
|
|
Director, President, Acting Chief Financial Officer and Secretary
|
|
Christopher S. Kelly
|
|
36
|
|
Director and Chief Executive Officer
|
Directors serve until the next annual meeting and until their successors are elected and qualified. The directors of our company are elected by the vote of a majority in interest of the holders of the voting stock of our company and hold office until the expiration of the term for which he or she was elected and until a successor has been elected and qualified.
A majority of the authorized number of directors constitutes a quorum of the Board for the transaction of business. The directors must be present at the meeting to constitute a quorum. However, any action required or permitted to be taken by the Board may be taken without a meeting if all members of the Board individually or collectively consent in writing to the action.
Directors may receive compensation for their services and reimbursement for their expenses as shall be determined from time to time by resolution of the Board. Our directors currently do not receive monetary compensation for their service on the Board of Directors.
Officers are appointed to serve for one year until the meeting of the board of directors following the annual meeting of stockholders and until their successors have been elected and qualified.
The principal occupations for the past five years (and, in some instances, for prior years) of each of our executive officers and directors, followed by our key employees, are as follows:
Byron Elton
— Chairman of the Board. Mr. Elton has been a director of the Company since March 16, 2009. He served as the President, Chief Operating Officer, acting Chief Financial Officer, and Secretary of the Company from January 5, 2009 to May 10, 2013. Mr. Elton is an experienced media and marketing professional with experience in crafting new business development strategies and building top-flight marketing organizations. From January 2014 to the present, he has served as Executive Vice President of 451 Marketing, a fully integrated marketing and communications agency with offices in Boston, New York and Los Angeles. From June 2013 to the present, he has served as a principal at PointClear Search, an executive search firm. He previously served as Senior Vice President of Sales for Univision Online from 2007 to 2008. Mr. Elton also served for eight years as an executive at AOL Media Networks from 2000 to 2007, where his assignments included Regional Vice President of Sales for AOL and Senior Vice President of E-Commerce for AOL Canada. His broadcast media experience includes leading the ABC affiliate in Santa Barbara, California from 1995 to 2000 and the CBS affiliate in Monterrey, California, from 1998 to 1999, in addition to serving as President of the Alaskan Television Network from 1995 to 1999. Mr. Elton's extensive senior level management experience specifically in new business development and partnership strategies made him qualified to serve on the Board of Directors.
William E. Beifuss, Jr.
— Director, President, Secretary and Acting Chief Financial Officer.
Mr. Beifuss has been the President, acting Chief Financial Officer, Secretary, and a director of the Company since May 10, 2013. Mr. Beifuss also served as the Chief Executive Officer of the Company from May 10, 2013 to March 7, 2016. Mr. Beifuss is a business executive and has served since February 2006 as the Chief Executive Officer of Cumorah Capital, Inc., a private investment company. Mr. Beifuss served as Chairman of the Board of Warp 9, Inc. from December 2008 to January 2013. From June 2010 to April 2012, Mr. Beifuss was the President of Warp 9. He served as the interim Chief Financial Officer of Warp 9, Inc. from June 2011 to April 2012. From April 1992 to January 2006, Mr. Beifuss was Chief Executive Officer of Coeur D'Alene French Baking Company. He served as a unit committee chairman of Boy Scouts of America.
Christopher S. Kelly
– Director and Chief Executive Officer. Mr. Kelly was appointed to serve as the Chief Executive Officer and a director of the Company effective March 7, 2016. Mr. Kelly is an experienced business executive with experience in the mergers and acquisitions field. From September 2014 until joining the Company, Mr. Kelly served as Chief Operating Officer of Esperer Holdings/Butler America, a private equity acquisition and management company, where he managed all aspects of the purchase and transition of numerous private equity acquisitions in a broad variety of industries. From July 2009 to September 2014, Mr. Kelly served as Vice President of Construction and Head of Business Development of MJB Construction, an oil and gas construction firm. Mr. Kelly holds a Juris Doctor degree from University of Denver Sturm College of Law and a Bachelor of Arts Degree in history with a minor in business management from Brigham Young University.
There are no family relationships among our executive officers and directors.
Board Leadership Structure and Role in Risk Oversight
Although we have not adopted a formal policy on whether the Chairman and Chief Executive Officer positions should be separate or combined, we have recently determined that it is in the best interests of the Company and its shareholders to separate these roles.
Our Board of Directors focuses on the most significant risks facing our company and our company's general risk management strategy, and also ensure that risks undertaken by our Company are consistent with the Board's appetite for risk. While the Board oversees our company's risk management, management is responsible for day-to-day risk management processes. We believe this division of responsibilities is the most effective approach for addressing the risks facing our company and that our Board leadership structure supports this approach.
Limitation of Liability and Indemnification of Officers and Directors
Under Nevada General Corporation Law and our articles of incorporation, our directors will have no personal liability to us or our stockholders for monetary damages incurred as the result of the breach or alleged breach by a director of his "duty of care." This provision does not apply to the directors' (i) acts or omissions that involve intentional misconduct or a knowing and culpable violation of law, (ii) acts or omissions that a director believes to be contrary to the best interests of the corporation or our shareholders or that involve the absence of good faith on the part of the director, (iii) approval of any transaction from which a director derives an improper personal benefit, (iv) acts or omissions that show a reckless disregard for the director's duty to the corporation or our shareholders in circumstances in which the director was aware, or should have been aware, in the ordinary course of performing a director's duties, of a risk of serious injury to the corporation or our shareholders, (v) acts or omissions that constituted an unexcused pattern of inattention that amounts to an abdication of the director's duty to the corporation or our shareholders, or (vi) approval of an unlawful dividend, distribution, stock repurchase or redemption. This provision would generally absolve directors of personal liability for negligence in the performance of duties, including gross negligence.
The effect of this provision in our articles of incorporation is to eliminate the rights of Carbon Sciences and our stockholders (through stockholder's derivative suits on behalf of Carbon Sciences) to recover monetary damages against a director for breach of his fiduciary duty of care as a director (including breaches resulting from negligent or grossly negligent behavior) except in the situations described in clauses (i) through (vi) above. This provision does not limit nor eliminate the rights of Carbon Sciences or any stockholder to seek non-monetary relief such as an injunction or rescission in the event of a breach of a director's duty of care. In addition, our Articles of Incorporation provide that if Nevada law is amended to authorize the future elimination or limitation of the liability of a director, then the liability of the directors will be eliminated or limited to the fullest extent permitted by the law, as amended. Nevada General Corporation Law grants corporations the right to indemnify their directors, officers, employees and agents in accordance with applicable law. Our bylaws provide for indemnification of such persons to the full extent allowable under applicable law. These provisions will not alter the liability of the directors under federal securities laws.
We intend to enter into agreements to indemnify our directors and officers, in addition to the indemnification provided for in our bylaws. These agreements, among other things, indemnify our directors and officers for certain expenses (including attorneys' fees), judgments, fines, and settlement amounts incurred by any such person in any action or proceeding, including any action by or in the right of Carbon Sciences, arising out of such person's services as a director or officer of Carbon Sciences, any subsidiary of Carbon Sciences or any other company or enterprise to which the person provides services at the request of Carbon Sciences. We believe that these provisions and agreements are necessary to attract and retain qualified directors and officers.
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling Carbon Sciences pursuant to the foregoing provisions, Carbon Sciences has been informed that in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.
Involvement in Certain Legal Proceedings
To our knowledge, during the past ten years, none of our directors, executive officers, promoters, control persons, or nominees has been:
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·
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the subject of any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time;
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·
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convicted in a criminal proceeding or is subject to a pending criminal proceeding (excluding traffic violations and other minor offenses);
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·
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subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction or any Federal or State authority, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities;
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·
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found by a court of competent jurisdiction (in a civil action), the Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law.
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·
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the subject of, or a party to, any Federal or State judicial or administrative order, judgment, decree, or finding, not subsequently reversed, suspended or vacated, relating to an alleged violation of (a) any Federal or State securities or commodities law or regulation; (b) any law or regulation respecting financial institutions or insurance companies including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease-and-desist order, or removal or prohibition order; or (c) any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or
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|
·
|
the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of the Exchange Act (15 U.S.C. 78c(a)(26))), any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act (7 U.S.C. 1(a)(29))), or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member.
|
Audit Committee.
Our board of directors has appointed an audit committee. During our fiscal year ended December 31, 2016, our audit committee is comprised of Byron Elton. Mr. Elton does not qualify as independent as defined in Rule 4200 of Nasdaq's listing standards. Our audit committee is authorized to:
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·
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appoint, compensate, and oversee the work of any registered public accounting firm employed by us;
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·
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resolve any disagreements between management and the auditor regarding financial reporting;
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·
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pre-approve all auditing and non-audit services;
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·
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retain independent counsel, accountants, or others to advise the audit committee or assist in the conduct of an investigation;
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·
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meet with our officers, external auditors, or outside counsel, as necessary; and
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·
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oversee that management has established and maintained processes to assure our compliance with all applicable laws, regulations and corporate policy.
|
The audit committee held four meetings during fiscal year ended December 31, 2015.
Compensation Committee.
Our compensation committee is comprised of Byron Elton. Our compensation committee is authorized to:
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·
|
discharge the responsibilities of the board of directors relating to compensation of the our directors, executive officers and key employees;
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·
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assist the board of directors in establishing appropriate incentive compensation and equity-based plans and to administer such plans;
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·
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oversee the annual process of evaluation of the performance of our management; and
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·
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perform such other duties and responsibilities as enumerated in and consistent with compensation committee's charter.
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Nominating Committee.
Our nominating committee is comprised of Byron Elton. Our nominating committee is authorized to:
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·
|
assist the board of directors by identifying qualified candidates for director nominees, and to recommend to the board of directors the director nominees for the next annual meeting of shareholders;
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·
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lead the board of directors in its annual review of its performance;
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·
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recommend to the board director nominees for each committee of the board of directors; and
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·
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develop and recommend to the board of directors corporate governance guidelines applicable to us.
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Report of the Audit Committee
Our audit committee has reviewed and discussed our audited financial statements for the fiscal year ended December 31, 2016 with senior management. The audit committee has also discussed with Liggett & Webb P.A. ("Liggett & Webb"), Certified Public Accountants, our independent auditors, the matters required to be discussed by the statement on Auditing Standards No. 61 (Communication with Audit Committees) and received the written disclosures and the letter from Liggett & Webb required by Independence Standards Board Standard No. 1 (Independence Discussion with Audit Committees). The audit committee has discussed with Liggett & Webb the independence of Liggett & Webb as our auditors. Finally, in considering whether the independent auditors provision of non-audit services to us is compatible with the auditors' independence for Liggett & Webb, our audit committee has recommended to the board of directors that our audited financial statements be included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016 for filing with the United States Securities and Exchange Commission. Our audit committee did not submit a formal report regarding its findings.
AUDIT COMMITTEE
Byron Elton
Notwithstanding anything to the contrary set forth in any of our previous or future filings under the United States Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, that might incorporate this report in future filings with the Securities and Exchange Commission, in whole or in part, the foregoing report shall not be deemed to be incorporated by reference into any such filing.
Indebtedness of Executive Officers
No executive officer, director or any member of these individuals' immediate families or any corporation or organization with whom any of these individuals is an affiliate is or has been indebted to us since the beginning of our last fiscal year.
We have adopted a Code of Ethics that applies to all of our directors, officers and employees. The text of the Code of Ethics has been posted on Carbon Science's Internet website and can be viewed at
www.carbonscience.com
. A copy of the Code of Ethics has also been filed as an exhibit to our Annual Report for the year ending December 31, 2007, filed with the SEC on March 26, 2008, and incorporated herein by reference. Any waiver of the provisions of the Code of Ethics for executive officers and directors may be made only by the Audit Committee and, in the case of a waiver for members of the Audit Committee, by the Board of Directors. Any such waivers will be promptly disclosed to our shareholders.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires the Company's directors, executive officers and persons who own more than 10% of the Company's stock (collectively, "Reporting Persons") to file with the SEC initial reports of ownership and changes in ownership of the Company's common stock. Reporting Persons are required by SEC regulations to furnish the Company with copies of all Section 16(a) reports they file. To the Company's knowledge, based solely on its review of the copies of such reports received or written representations from certain Reporting Persons that no other reports were required, the Company believes that during its fiscal year ended December 31, 2016 all Reporting Persons timely complied with all applicable filing requirements.
ITEM 11.
EXECUTIVE COMPENSATION.
Compensation Discussion and Analysis
The following Compensation Discussion and Analysis describes the material elements of compensation for our executive officers identified in the Summary Compensation Table ("Named Executive Officers"), and executive officers that we may hire in the future. As more fully described below, our board of directors makes all decisions for the total direct compensation of our executive officers, including the Named Executive Officers. We do not have a compensation committee, so all decisions with respect to management compensation are made by the whole board.
Compensation Program Objectives and Rewards
Our compensation philosophy is based on the premise of attracting, retaining, and motivating exceptional leaders, setting high goals, working toward the common objectives of meeting the expectations of customers and stockholders, and rewarding outstanding performance. Following this philosophy, in determining executive compensation, we consider all relevant factors, such as the competition for talent, our desire to link pay with performance in the future, the use of equity to align executive interests with those of our stockholders, individual contributions, teamwork and performance, and each executive's total compensation package. We strive to accomplish these objectives by compensating all executives with total compensation packages consisting of a combination of competitive base salary and incentive compensation.
While we have only hired two executives since inception because our business has not grown sufficiently to justify additional hires, we expect to grow and hire in the future. To date, we have not applied a formal compensation program to determine the compensation of the Named Executives Officers. In the future, as we and our management team expand, our board of directors expects to add independent members, form a compensation committee comprised of independent directors, and apply the compensation philosophy and policies described in this section of the Form 10-K.
The primary purpose of the compensation and benefits described below is to attract, retain, and motivate highly talented individuals when we do hire, who will engage in the behaviors necessary to enable us to succeed in our mission while upholding our values in a highly competitive marketplace. Different elements are designed to engender different behaviors, and the actual incentive amounts which may be awarded to each Named Executive Officer are subject to the annual review of the board of directors. The following is a brief description of the key elements of our planned executive compensation structure.
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Base salary and benefits are designed to attract and retain employees over time.
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Incentive compensation awards are designed to focus employees on the business objectives for a particular year.
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Equity incentive awards, such as stock options and non-vested stock, focus executives' efforts on the behaviors within the recipients' control that they believe are designed to ensure our long-term success as reflected in increases to our stock prices over a period of several years, growth in our profitability and other elements.
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·
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Severance and change in control plans are designed to facilitate a company's ability to attract and retain executives as we compete for talented employees in a marketplace where such protections are commonly offered. We currently have not given separation benefits to any of our Name Executive Officers.
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Benchmarking
We have not yet adopted benchmarking but may do so in the future. When making compensation decisions, our board of directors may compare each element of compensation paid to our Named Executive Officers against a report showing comparable compensation metrics from a group that includes both publicly-traded and privately-held companies. Our board believes that while such peer group benchmarks are a point of reference for measurement, they are not necessarily a determining factor in setting executive compensation as each executive officer's compensation relative to the benchmark varies based on scope of responsibility and time in the position. We have not yet formally established our peer group for this purpose.
The Elements of Carbon Sciences' Compensation Program
Base Salary
Executive officer base salaries are based on job responsibilities and individual contribution. The board reviews the base salaries of our executive officers, including our Named Executive Officers, considering factors such as corporate progress toward achieving objectives (without reference to any specific performance-related targets) and individual performance experience and expertise. None of our Named Executive Officers have employment agreements with us. Additional factors reviewed by the board of directors in determining appropriate base salary levels and raises include subjective factors related to corporate and individual performance. For the year ended December 31, 2016, all executive officer base salary decisions were approved by the board of directors.
Our board of directors determines base salaries for the Named Executive Officers at the beginning of each fiscal year, and the board proposes new base salary amounts, if appropriate, based on its evaluation of individual performance and expected future contributions. We do not have a 401(k) Plan, but if we adopt one in the future, base salary would be the only element of compensation that would be used in determining the amount of contributions permitted under the 401(k) Plan.
Incentive Compensation Awards
The Named Executives have not been paid bonuses and our board of directors has not yet established a formal compensation policy for the determination of bonuses. If our revenue grows and bonuses become affordable and justifiable, we expect to use the following parameters in justifying and quantifying bonuses for our Named Executive Officers and other officers of Carbon Sciences: (1) the growth in our revenue, (2) the growth in our earnings before interest, taxes, depreciation and amortization, as adjusted ("EBITDA"), and (3) our stock price. The board has not adopted specific performance goals and target bonus amounts for any of our fiscal years, but may do so in the future.
Equity Incentive Awards
In November 2011, our board adopted a stock option plan (the "2011 Plan") under which 2,000,000 shares of common stock have been reserved for issuance. No stock option awards have yet been made to any of our Named Executives or other officers or employees of Carbon Sciences under the 2011 Plan. Our board has granted a total of 1,400,000 stock options to our current President and a former Chief Executive Officer outside of our 2011 Plan. These equity incentive awards, we believe, motivate our employees to work to improve our business and stock price performance, thereby further linking the interests of our senior management and our stockholders. The board considers several factors in determining whether awards are granted to an executive officer, including those previously described, as well as the executive's position, his or her performance and responsibilities, and the amount of options or other awards, if any, currently held by the officer and their vesting schedule. Our policy prohibits backdating options or granting them retroactively.
Benefits and Prerequisites
At this stage of our business we have limited benefits and no prerequisites for our employees other than health insurance and vacation benefits that are generally comparable to those offered by other small private and public companies or as may be required by applicable state employment laws. We do not have a 401(k) Plan or any other retirement plan for our Named Executive Officers. We may adopt these plans and confer other fringe benefits for our executive officers in the future if our business grows sufficiently to enable us to afford them.
Separation and Change in Control Arrangements
We do not have any employment agreements with our Named Executive Officers or any other executive officer or employee of Carbon Sciences. None of them are eligible for specific benefits or payments if their employment or engagement terminates in a separation or if there is a change of control.
Executive Officer Compensation
The following table sets forth the annual compensation for years ended December 31, 2016 and 2015 to our Chief Executive Officer, our President and our most highly compensated officers other than the Chief Executive Officer at December 31, 2016 whose total compensation exceeded $100,000, which we refer to as our "Named Executive Officers."
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Name and
Principal Position
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Year
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Salary ($)
|
Bonus
($)
|
Stock Awards ($)
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Option Awards ($)
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Non-Equity Incentive Plan Compensation ($)
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Change in Pension Value and Non-Qualified Deferred Compensation Earnings ($)
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All Other Compensation ($) (1)
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Total ($)
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Christopher S. Kelly Jr. Chief Executive Officer
(2)
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2016
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180,090
|
-
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-
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-
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-
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-
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12,627
|
192,717
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|
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William E. Beifuss, Jr. President, Acting Chief Financial Officer, Secretary, and Former Chief Executive Officer
(3)
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2016
2015
|
-
-
|
-
-
|
-
-
|
-
-
|
-
-
|
-
-
|
70,000
60,000
|
70,000
60,000
|
|
(1)
|
Other compensation for Mr. Kelly consists of medical insurance premiums paid by the Company. Other compensation for Mr. Beifuss consists of consulting fees paid.
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(2)
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Mr. Kelly was appointed Chief Executive Officer effective March 7, 2016.
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(3)
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Mr. Beifuss was appointed President, Chief Executive Officer, and acting Chief Financial Officer of the Company effective May 10, 2013. He resigned as our Chief Executive Officer on March 7, 2016.
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Commencing on March 7, 2016, Mr. Kelly is serving as the Chief Executive Officer of the Company on an "at-will," full-time basis. Mr. Kelly's base salary is $18,333.33 per month, equivalent to an annual salary of $220,000. He is entitled to participate in all benefits that the Company has or will implement, including covering all of Mr. Kelly's health insurance premiums. Mr. Kelly executed the Company's standard Employment Confidentiality and Inventions Agreement.
We have a written consulting agreement dated May 31, 2013 with William E. Beifuss, Jr., our former Chief Executive Officer, and current President and Acting Chief Financial Officer, for the payment of monthly compensation of $5,000 per month beginning in June 2013. The agreement was amended, effective November 1, 2016, to increase the monthly compensation to $10,000. The agreement may be cancelled by either party with 30 days' notice.
Grants of Equity Awards – Fiscal Year 2016
We did not grant any equity awards to our Named Executive Officers in fiscal year 2016.
Outstanding Equity Awards
The following table sets forth information with respect to grants of options to purchase our common stock to our Named Executive Officers at December 31, 2016.
Outstanding Equity Awards at Fiscal Year-End
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Name
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Number of Securities Underlying Unexercised Options Exercisable
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Number of Securities Underlying Unexercised Options Unexercisable
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Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options
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Option Exercise Price
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Option Expiration Date
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William E. Beifuss, Jr., President, Acting Chief Financial Officer, Secretary, and Former Chief Executive Officer(1)
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1,200,000
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-
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-
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$0.06
|
9/23/2020
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|
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Byron Elton, Former Chief Executive Officer, Former President, Former Acting Chief Financial Officer and Former Secretary(2)
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200,000
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-
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-
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$0.06
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9/23/2020
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(1)
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On September 23, 2013, Mr. Beifuss was granted nonqualified stock options to purchase 1,200,000 shares of our common stock at an exercise price of $0.06 per share exercisable until September 23, 2020 in consideration for his services to us. These stock options vest 1/25th per month, commencing on October 23, 2013, on a monthly basis for as long as Mr. Beifuss is an employee or consultant of Carbon Sciences.
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(2)
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On September 23, 2013, Mr. Elton was granted nonqualified stock options to purchase 200,000 shares of our common stock at an exercise price of $0.06 per share exercisable until September 23, 2020 in consideration for his services to us. These stock options vest 1/25th per month, commencing on October 23, 2013, on a monthly basis for as long as Mr. Elton is an employee or consultant of Carbon Sciences.
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Option Exercises and Stock Vested
None of our executive officers exercised any stock options or acquired stock through vesting of an equity award during the fiscal year ended December 31, 2016.
Non-employee directors may receive compensation for their services and reimbursement for their expenses as shall be determined from time to time by resolution of the Board.
No director compensation was paid to our non-employee directors during the fiscal year ended December 31, 2015. Our employee directors currently do not receive cash compensation for their service on the Board of Directors.
On June 4, 2013, Daniel Nethercott, a former director who resigned, effective January 3, 2015, was issued a convertible promissory note in the amount of $25,000 in exchange for services. The maturity date of the note is June 4, 2016 and the note bears interest at a rate of 5% per annum. Mr. Nethercott has the right, at his election, to convert all or part of the outstanding and unpaid principal and accrued interest into shares of our common stock. The conversion price is the lesser of $0.035 per share or the closing price per share of our common stock on the trading day immediately preceding the date of conversion. We have entered into an agreement to repay this note in 12 equal monthly payments of principal and interest of $2,352, commencing in June 2016. The note had a principal balance of $10,417 and accrued interest payable of $1,328 at December 31, 2016.
Stock Option and Other Long-Term Incentive Plan
On November 2, 2011, our Board of Directors adopted the 2011 Equity Incentive Plan, or the 2011 Plan. Under the 2011 Plan, options may be granted which are intended to qualify as Incentive Stock Options under Section 422 of the Internal Revenue Code of 1986,as amended, or the Code, or which are not intended to qualify as Incentive Stock Options thereunder. In addition, direct grants of stock or restricted stock may be awarded. There are 2,000,000 shares of common stock reserved for issuance under the 2011 Plan. A summary of the terms and provisions of the 2011 Plan are described below.
The primary purpose of the 2011 Plan is to attract and retain the best available personnel in order to promote the success of our business and to facilitate the ownership of our stock by employees and others who provide services to us. Under the 2011 Plan, options may be granted to employees, officers, directors or consultants of ours. The term of each option granted under the 2011 Plan will be contained in a stock option agreement between the optionee and us and such terms shall be determined by a committee of the board of directors consistent with the provisions of the 2011 Plan, including the following:
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•
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The purchase price of the common stock subject to each incentive stock option will not be less than the fair market value (as set forth in the 2011 Plan), or in the case of the grant of an incentive stock option to a principal stockholder, not less than 110% of fair market value of such common stock at the time such option is granted.
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•
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The dates on which each option (or portion thereof) will be exercisable and the conditions precedent to such exercise, if any, shall be fixed by the committee delegated by the board of directors, in its discretion, at the time such option is granted. Unless otherwise provided in the grant agreement, in the event of a change of control (as set forth in the Incentive Stock Plan), the committee delegated by the board may accelerate the vesting and exercisability of outstanding options all unvested shares shall immediately become vested;
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•
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Any option granted to an employee of ours will become exercisable over a period of no longer than five years. No option will in any event be exercisable after ten years from, and no Incentive Stock Option granted to a ten percent stockholder will become exercisable after the expiration of five years from, the date of the option;
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|
•
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No option will be transferable, except by will or the laws of descent and distribution, and any option may be exercised during the lifetime of the optionee only by such optionee. No option granted under the 2011 Plan will be subject to execution, attachment or other process;
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•
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In the event of any change in our outstanding common stock by reason of a stock split, stock dividend, combination or reclassification of shares, recapitalization, merger, or similar event, the board of directors or the committee delegated by the board may adjust proportionally (a) the number of shares of common stock (i) reserved under the 2011 Plan, (ii) available for Incentive Stock Options and Non-statutory Options and (iii) covered by outstanding stock awards or restricted stock purchase offers; (b) the exercise prices related to outstanding grants so that each optionee's proportionate interest is maintained as immediately before such event; and (c) the appropriate fair market value and other price determinations for such grants. In the event of a corporate merger, consolidation, acquisition of property or stock, separation, reorganization or liquidation, the board of directors or the committee delegated by the board of directors will be authorized to issue or assume stock options, whether or not in a transaction to which Section 424(a) of the Code, applies, and other grants by means of substitution of new grant agreements for previously issued grants or an assumption of previously issued grants.
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The board of directors may, insofar as permitted by law, from time to time, suspend or terminate the 2011 Plan or revise or amend it in any respect whatsoever, except that without the approval of our stockholders, no such revision or amendment will (i) increase the number of shares subject to the 2011 Plan, (ii) reduce the exercise price of outstanding options or effect repricing through cancellations and re-grants of new options, (iii) materially increase the benefits to participants, (iv) materially change the class of persons eligible to receive grants under the 2011 Plan; (v) decrease the exercise price of any grant to below 100% of the fair market value on the date of grant; or (vi) extend the term of any options beyond that provided in the 2011 Plan; provided, however, no such action will alter or impair the rights and obligations under any option, or stock award, or restricted stock purchase offer outstanding as of the date thereof without the written consent of the participant thereunder. As of the date of this report, 100,000 stock options are currently outstanding under our 2011 Plan.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth, as of March 8, 2017, the number of and percent of our common stock beneficially owned by:
|
•
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each of our named executive officers;
|
|
•
|
our directors and executive officers as a group, and persons or groups known by us to own beneficially 5% or more of our common stock:
|
Unless otherwise specified, we believe that all persons named in the table have sole voting and investment power with respect to all shares of common stock beneficially owned by them. The address for our executive officers and directors is the same as our address.
A person is deemed to be the beneficial owner of securities that can be acquired by him within 60 days of March 8, 2017 upon the exercise of options, warrants or convertible securities. Each beneficial owner's percentage ownership is determined by assuming that options, warrants or convertible securities that are held by him, but not those held by any other person, and which are exercisable within 60 days of March 8, 2017 have been exercised and converted.
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Common Stock Beneficially Owned
|
|
Name of Beneficial Owner
|
Shares
|
Percent (1)
|
|
|
|
|
|
Executive Officers and Directors:
|
|
|
|
William E. Beifuss, Jr., President, Acting Chief Financial Officer, Secretary and Director (2)
|
1,295,538
|
3.42%
|
|
|
|
|
|
Byron Elton, Chairman (3)
|
206,250
|
0.56%
|
|
|
|
|
|
Christopher S. Kelly, Chief Executive Officer and Director (4)
|
-
|
-
|
|
|
|
|
|
All Executive Officers and Directors as a Group (3 persons)
|
1,501,788
|
3.94%
|
|
(1)
|
Based upon 36,675,123 shares issued and outstanding as of March 8, 2017.
|
|
(2)
|
Includes 1,200,000 shares subject to stock options that are currently exercisable or exercisable within 60 days of March 8, 2017.
|
|
(3)
|
Includes 200,000 shares subject to stock options that are currently exercisable or exercisable within 60 days of March 8, 2017.
|
|
(4)
|
In a separate transaction with an unaffiliated holder of 12,615 shares of the Company's Series B Preferred Stock, Mr. Kelly purchased an option to buy up to 2,700 shares of the Series B Preferred Stock from the holder having an aggregate face amount of up to $270,000. Mr. Kelly paid $2,700 to the holder for the option. See Item 13 of this Report for a detailed description of Mr. Kelly's option.
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
Certain Relationships and Related Transactions
On December 31, 2012, we entered into a convertible promissory note with Byron Elton, the Chairman of our Board of Directors and our former Chief Executive Officer, in exchange for services valued at $185,852. On July 27, 2016, we entered into a Settlement and Release Agreement with the Chairman for full extinguishment of the convertible promissory note with a principal balance of $185,852, plus accrued interest. We agreed to pay the Chairman $100 in cash and arranged for him to enter into an option agreement with our principal lender and a principal holder of our Series B Preferred Stock ("Lender") to acquire 225 shares of our Series B Preferred Stock from the Lender upon the occurrence of certain events defined in the agreement. Due to the related party nature of this transaction, the extinguishments of the note principal of $185,752, accrued interest payable of $33,199 and associated derivative liability of $106,858 were recorded to additional paid-in capital as a contribution to capital totaling $325,809.
On June 4, 2013, Daniel Nethercott, a former director who resigned effective January 3, 2015, was issued a convertible promissory note in the amount of $25,000 in exchange for services. The original maturity date of the note was June 4, 2016 and the note bears interest at a rate of 5% per annum. Mr. Nethercott has the right, at his election, to convert all or part of the outstanding and unpaid principal and accrued interest into shares of our common stock. The conversion price is the lesser of $0.035 per share or the closing price per share of our common stock on the trading day immediately preceding the date of conversion. We have extended the maturity date of the note by entering into an agreement to repay the note with 12 equal monthly payments of principal and interest of $2,352 beginning in June 2016. The note had a principal balance of $10,417 and accrued interest payable of $1,328 at December 31, 2016.
On March 7, 2016, in a transaction with an unaffiliated holder of 12,615 shares of the Company's Series B Preferred Stock, Mr. Christopher Kelly, our new Chief Executive Officer, purchased an option to buy up to 2,700 shares of the Series B Preferred Stock from the holder having an aggregate face amount of up to $270,000. Mr. Kelly paid $2,700 to the holder for the option. Mr. Kelly is eligible to exercise the option according to the following criteria:
|
Eligible Option Parts (Face Amount)
|
Company Fundamental Event
|
|
$135,000.00 (50%)
|
The Company's consolidated gross revenue, calculated in accordance with generally accepted accounting principles, consistently applied, equals or exceeds $10,000,000 for the trailing twelve-month period as reported in the Company's quarterly or annual financial statements.
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|
|
|
|
$135,000.00 (50%)
|
The Company's consolidated EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization), calculated in accordance with generally accepted accounting principles, consistently applied, equals or exceeds $1,000,000 for the trailing twelve-month period as reported in the Company's quarterly or annual financial statements.
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After a Company Fundamental Event(s) has occurred, then Mr. Kelly may exercise the Eligible Option Part(s), after the occurrence of either of the following liquidity events (the "Liquidity Events"):
(a) If the Company is acquired in a transaction valued in excess of $10 million, then Mr. Kelly may exercise the Eligible Option Part(s), shall convert the underlying Preferred Stock into shares of the Company's Common Stock, and shall tender the shares in exchange for the consideration offered to the Company's common stockholders; or
(b) If the shares of the Company's Common Stock are uplisted to a national securities exchange, then twelve (12) months after the uplisting, Mr. Kelly may exercise the Eligible Option Part(s) and, in his sole discretion, convert the underlying Series B Preferred Stock into shares of the Company's Common Stock. Mr. Kelly's sale of such shares of the Company's Common Stock is limited to the following every ninety (90) days:
|
(i)
|
1% of the shares of the Company's Common Stock outstanding as shown by the most recent report or statement published by the Company if the shares of the Company's Common Stock are subsequently delisted and quoted on the over-the-counter market, including the OTCQB, or
|
|
(ii)
|
The average weekly reported volume of trading in the shares of the Company's Common Stock on a national securities exchange during the previous four calendar weeks, if the shares of the Company's Common Stock are traded on a national securities exchange.
|
For the purpose of the option agreement, a "national securities exchange" is the NASDAQ Capital Market, the NASDAQ Global Market, the NASDAQ Global Select Market, the NYSE MKT or the NYSE and any successor to them.
Mr. Kelly forfeits all rights to exercise any remaining Eligible Option Part(s) immediately after the occurrence of the acquisition event described above, or twenty-four (24) months after the above described uplist.
The exercise price for each share of Series B Preferred Stock for which the option is exercised is $100.
If Mr. Kelly ceases to provide any services to the Company as officer, director, employee or consultant, for any reason before the occurrence of any Company Fundamental Event, then the Eligible Option Part(s) associated with Company Fundamental Events that have not occurred as of the date of such cessation of services shall immediately be forfeited as of the date of such cessation of services. The Eligible Option Part(s) associated with any Company Fundamental Event that occurred prior to the date that Mr. Kelly ceases to provide any services to the Company will continue to be available for Mr. Kelly to exercise until forfeiture occurs.
During the term of the option agreement, the current holder will have the sole right to negotiate with the Company (i) to amend the Series B Preferred Stock to fix an absolute conversion price, or (ii) to amend the Series B Preferred Stock in any manner in the current holder's best interests.
During the term of the option agreement, the current holder agrees not to hypothecate, assign, sell, convert, redeem or otherwise dispose of the face amount or accruing dividend, if any, of the Series B Preferred Stock held by it, or take any enforcement action with respect to the Series B Preferred Stock that corresponds to the Eligible Option Part(s), without the express prior written approval of Mr. Kelly; provided, however, that the current holder may accept payments of accrued dividends, if any, from the Company.
As a potential owner of a portion of the Series B Preferred Stock, Mr. Kelly is subject to all of the same limitations on conversions contained in Section 3(e) of the Certificate of Designation for the Series B Preferred Stock; provided, that Mr. Kelly is not, and unless otherwise required by law, shall not be deemed to be an affiliate of the current holder of the Series B Preferred Stock, nor are the current holder and Mr. Kelly acting as a "group", as defined under Rule 13(d) of the Securities Exchange Act of 1934, as amended, and Schedules 13D and 13G promulgated thereunder.
Mr. Kelly agrees in connection with any registration of the Company's securities that, upon the request of the Company or the underwriters managing any public offering of the Company's securities, Mr. Kelly will not sell or otherwise dispose of any securities received from the conversion of the Series B Preferred Stock, without the prior written consent of the Company or such underwriters, as the case may be, for such period of time (not to exceed one hundred eighty (180) days) after the effective date of such registration requested by such underwriters and subject to all restrictions as the Company or the underwriters may specify.
During the past three fiscal years, there have been no transactions other than those described above, and there are no currently proposed transactions in which the Company is a participant in which any related person has or will have a direct or indirect material interest which exceeds the lesser of $120,000 or one percent of the Company's total assets at year end for the last two completed fiscal years.
We currently have no independent directors as that term is defined in Rule 4200 of Nasdaq's listing standards.
ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES.
Audit Fees
The aggregate fees billable to us by Liggett & Webb P.A. in 2016 for the audit and reviews of our 2016 and 2015 financial statements total approximately $42,000 and $30,000.
Fees incurred to HJ Associates & Consultants, LLP for the reviews of our 2015 financial statements were $17,225.
We incurred no audit-related fees during 2016 and 2015 to Liggett & Webb, P.A. and HJ Associates & Consultants, LLP.
We incurred fees of $1,750 to Liggett & Webb, P. A. for tax compliance services for the year ended December 31, 2016 and $1,025 to HJ Associates & Consultants, LLP for tax compliance services for the year ended December 31, 2015.
There were no fees billed to us by Liggett & Webb, P.A. or HJ Associates & Consultants, LLP for services other than the services described above under "Audit Fees," "Audit-Related Fees" and "Tax Fees" during the years ended December 31, 2016 and 2015.
Pre-Approval Policies and Procedures of Audit and Non-Audit Services of Independent Registered Public Accounting Firm
The audit committee's policy is to pre-approve, typically at the beginning of our fiscal year, all audit and non-audit services, other than de minimis non-audit services, to be provided by an independent registered public accounting firm. These services may include, among others, audit services, audit-related services, tax services and other services and such services are generally subject to a specific budget. The independent registered public accounting firm and management are required to periodically report to the full board of directors regarding the extent of services provided by the independent registered public accounting firm in accordance with this pre-approval, and the fees for the services performed to date. As part of the board's review, the board will evaluate other known potential engagements of the independent auditor, including the scope of work proposed to be performed and the proposed fees, and approve or reject each service, taking into account whether the services are permissible under applicable law and the possible impact of each non-audit service on the independent auditor's independence from management. At audit committee meetings throughout the year, the auditor and management may present subsequent services for approval. Typically, these would be services such as due diligence for an acquisition, that would not have been known at the beginning of the year.
The audit committee has considered the provision of non-audit services provided by our independent registered public accounting firm to be compatible with maintaining their independence. The audit committee will continue to approve all audit and permissible non-audit services provided by our independent registered public accounting firm.
As of the date of this filing, our current policy is to not engage Liggett & Webb P.A. to provide, among other things, bookkeeping services, appraisal or valuation services, or international audit services. The policy provides that we engage Liggett & Webb P.A. to provide audit, tax compliance, and other assurance services, such as review of SEC reports or filings.
Notes to Financial Statements
Years Ended December 31, 2016 and 2015
1. ORGANIZATION AND LINE OF BUSINESS
Organizational History
Carbon Sciences, Inc. (the "Company") was incorporated in the State of Nevada on August 25, 2006 as Zingerang, Inc. On April 2, 2007, the Company changed its name to Carbon Sciences, Inc.
Overview of Business
The Company was initially in the business of offering real-time and interactive mobile communication services to businesses and consumers under the Zingerang trade name. Through two Sponsored Research Agreements ("SRA") with the University of California, Santa Barbara ("UCSB"), we have performed research work to develop graphene-based technologies and devices. Subsequent to December 31, 2016, we entered into our third SRA with UCSB to further develop a graphene-based device (see Note 13). Graphene is a naturally occurring sheet of pure carbon that is only one atom thick. It is flexible, transparent, impermeable to moisture, strong and highly conductive. Experts believe that graphene is a very versatile material that can enable new applications such as bendable touchscreen displays, rapid charge batteries, super-capacitors, low cost solar cells, extreme high-speed semiconductors, biosensors, as well as water purification. If successfully developed and commercialized, we plan to license our graphene technology to other companies. The technology is intended to commercialize graphene for optical modulator applications to potentially enhance the speed and performance of fiber optic systems.
On January 5, 2015, Carbon Sciences formed Transphene, Inc., a Nevada corporation ("Transphene"), of which the Company owns 50% of the total issued and outstanding capital stock. The remaining 50% is owned by Dr. Kaustav Banerjee ("Banerjee"), a director and Chief Technical Officer of Transphene. Transphene was formed to commercialize any technology that the Company licensed from UCSB as a result of SRA #1. In consideration for its interest in Transphene, the Company agreed to assign the intellectual property rights acquired by the Company from SRA #1 to Transphene. At this time, the Company does not see an opportunity to commercialize the research findings of SRA #1, has not licensed any intellectual property from UCSB, and therefore has not assigned any intellectual property to Transphene. Therefore, we terminated our joint venture through Transphene and wound up and dissolved Transphene in 2016. There have been no financial transactions in Transphene and no impact on our financial statements.
On February 9, 2016, we announced a growth-by-acquisition strategy to extend our presence in the information technology ("IT") market.
Going Concern
The accompanying financial statements have been prepared on a going concern basis of accounting, which contemplates continuity of operations, realization of assets and liabilities, and commitments in the normal course of business. The accompanying financial statements do not reflect any adjustments that might result if the Company is unable to continue as a going concern. The Company does not generate any revenue, and has negative cash flows from operations, which raise substantial doubt about the Company's ability to continue as a going concern. The ability of the Company to continue as a going concern is dependent upon, among other things, raising additional capital. Since its inception through December 31, 2016, the Company has obtained funds primarily from the issuance of common stock and debt. Management believes this funding will continue, and is continually seeking new investors. Management believes the existing shareholders and lenders and prospective new investors will provide the additional cash needed to meet the Company's obligations as they become due, and will allow the development of its core of business.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This summary of significant accounting policies is presented to assist in understanding our financial statements. The financial statements and notes are representations of the Company's management, which is responsible for their integrity and objectivity. These accounting policies conform to accounting principles generally accepted in the United States of America and have been consistently applied in the preparation of the financial statements.
Revenue Recognition
We will recognize revenue when services are performed, and at the time of shipment of products, provided that evidence of an arrangement exists, title and risk of loss have passed to the customer, fees are fixed or determinable, and collection of the related receivable is reasonably assured. To date, we have had no revenues.
Cash and Cash Equivalents
We consider all highly liquid investments with an original maturity of three months or less to be cash equivalents.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the accompanying financial statements. Significant estimates made in preparing these financial statements include the estimate of useful lives of property and equipment, the deferred tax valuation allowance, the fair value of stock options and derivative liabilities. Actual results could differ from those estimates.
Property and Equipment
Property and equipment are stated at cost, and are depreciated using the straight line method over the following estimated useful lives:
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|
Computer equipment
|
3 Years
|
|
|
Machinery and equipment
|
7 Years
|
Depreciation expense for the years ended December 31, 2016 and 2015 was $617 and $208, respectively.
Derivative Liabilities
We have identified the conversion features of our convertible notes payable and our Series B preferred stock as derivatives. We estimate the fair value of the derivatives associated with our convertible notes payable using the Black-Scholes pricing model and estimate the fair value of the derivatives associated with our Series B preferred stock using a multinomial lattice model based on projections of various potential future outcomes. We estimate the fair value of the derivative liabilities at the inception of the financial instruments, at the date of conversions to equity and at each reporting date, recording a derivative liability, debt discount, additional paid-in capital and a gain or loss on change in derivative liabilities as applicable. These estimates are based on multiple inputs, including the market price of our stock, interest rates, our stock price volatility, variable conversion prices based on market prices as defined in the respective agreements and probabilities of certain outcomes based on management projections. These inputs are subject to significant changes from period to period and to management's judgment; therefore, the estimated fair value of the derivative liabilities will fluctuate from period to period, and the fluctuation may be material.
Fair Value of Financial Instruments
Disclosures about fair value of financial instruments require disclosure of the fair value information, whether or not recognized in the balance sheet, where it is practicable to estimate that value. As of December 31, 2016 and 2015, the amounts reported for cash, accrued interest, accrued expenses and other current liabilities, and notes payable approximate fair value because of their short maturities.
We adopted ASC Topic 820 (originally issued as SFAS 157, "Fair Value Measurements") as of January 1, 2008 for financial instruments measured as fair value on a recurring basis. ASC Topic 820 defines fair value, established a framework for measuring fair value in accordance with accounting principles generally accepted in the United States, and expands disclosures about fair value measurements.
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC Topic 820 established a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1measurements) and the lowest priority to unobservable inputs (level 3 measurements). These tiers include:
|
·
|
Level 1, defined as observable inputs such as quoted prices for identical instruments in active markets;
|
|
·
|
Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable such as quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active; and
|
|
·
|
Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions, such as valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.
|
We measure certain financial instruments at fair value on a recurring basis. Assets and liabilities measured at fair value on a recurring basis are as follows at December 31, 2016 and 2015:
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|
|
Total
|
Level 1
|
Level 2
|
Level 3
|
|
December 31, 2016:
|
|
|
|
|
|
|
Derivative liabilities
|
|
$ 6,690,697
|
$ -
|
$ -
|
$ 6,690,697
|
|
|
|
|
|
|
|
|
Total liabilities measured at fair value
|
|
$ 6,690,697
|
$ -
|
$ -
|
$ 6,690,697
|
|
|
|
|
|
|
|
|
December 31, 2015:
|
|
|
|
|
|
|
Derivative liabilities
|
|
$ 13,184,369
|
$ -
|
$ -
|
$ 13,184,369
|
|
|
|
|
|
|
|
|
Total liabilities measured at fair value
|
|
$ 13,184,369
|
$ -
|
$ -
|
$ 13,184,369
|
During the years ended December 31, 2016 and 2015, the Company had the following activity in its derivative liabilities account:
|
|
Convertible Notes
|
Series B
|
|
|
|
Payable
|
Preferred Stock
|
Total
|
|
|
|
|
|
|
Derivative liabilities at December 31, 2014
|
$ 9,476,605
|
$ -
|
$ 9,476,605
|
|
Addition to liability for new debt issued
|
557,000
|
-
|
557,000
|
|
Elimination of liability on conversion
|
(691,907)
|
-
|
(691,907)
|
|
Change in fair value
|
3,842,671
|
-
|
3,842,671
|
|
|
|
|
|
|
Derivative liabilities at December 31, 2015
|
13,184,369
|
-
|
13,184,369
|
|
Addition to liability for new debt/shares issued
|
707,000
|
3,908,211
|
4,615,211
|
|
Elimination of liability on conversion to common shares
|
(33,756)
|
-
|
(33,756)
|
|
Elimination of liability on conversion to preferred shares
|
(9,750,930)
|
-
|
(9,750,930)
|
|
Contribution of liability to capital on settlement of related party debt
|
(106,858)
|
-
|
(106,858)
|
|
Change in fair value
|
(663,919)
|
(553,420)
|
(1,217,339)
|
|
|
|
|
|
|
Derivative liabilities at December 31, 2016
|
$ 3,335,906
|
$ 3,354,791
|
$ 6,690,697
|
Loss per Share Calculations
Basic net income or loss per common share is computed by dividing net income or loss by the weighted average number of common shares outstanding. Diluted net income or loss per common share is computed by dividing net income or loss by the sum of the weighted average number of common shares outstanding and the dilutive potential common share equivalents then outstanding. Potential dilutive common share equivalents consist of shares issuable upon the exercise of outstanding stock options and warrants to acquire common stock using the treasury stock method and the average market price per share during the period, and shares issuable upon exercise of convertible notes payable and convertible preferred stock.
Since we had no dilutive effect of stock options and warrants for the years ended December 31, 2016 and 2015, our basic weighted average number of common shares outstanding is the same as our diluted weighted average number of common shares outstanding. For the year ended December 31, 2016, the Company has excluded 1,410,000 common shares for exercisable options, 46,000 common shares for exercisable warrants, approximately 157,269,000 shares issuable upon conversion of convertible notes payable and approximately
367,000,000 common shares upon conversion of convertible Series B preferred stock. For the year ended December 31, 2015, the Company has excluded
1,410,000 common shares for exercisable options, 46,000 common shares for exercisable warrants and approximately 3,738,502,000 shares issuable upon conversion of convertible notes payable.
Income Taxes
We account for income taxes using the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
Research and Development
Research and development costs are expensed as incurred. Total research and development costs were $65,497 and $298,865 for the years ended December 31, 2016 and 2015, respectively.
Advertising Costs
We expense the cost of advertising and promotional materials when incurred. We incurred no advertising costs for the years ended December 31, 2016 and 2015.
Stock-Based Compensation
Stock-based compensation is measured at the grant date based on the value of the award granted using the Black-Scholes option pricing model, and recognized over the period in which the award vests. For stock awards no longer expected to vest, any previously recognized stock compensation expense is reversed in the period of termination. The stock-based compensation expense is included in general and administrative expenses.
Comprehensive Loss
Comprehensive loss is the same as net loss for all years presented.
Reclassifications
Certain amounts in the prior years have been reclassified to conform to the current year presentation.
Recently Issued Accounting Pronouncements
In January 2017, the FASB issued Accounting Standards Update ("ASU") No. 2017-4, "Intangibles – Goodwill and Other (Topic 350): "Simplifying the Test for Goodwill Impairment." This update simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit's goodwill with the carrying amount of that goodwill. Instead, under the amendments in this update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value. An entity should apply the amendments in this update on a prospective basis. An entity is required to disclose the nature of and reason for the change in accounting principle upon transition. That disclosure should be provided in the first annual period and in the interim period within the first annual period when the entity initially adopts the amendments in this update. A public business entity that is an SEC filer should adopt the amendments in this Update for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. The Company is currently unable to determine the impact on its financial statements of the adoption of this new accounting pronouncement.
In January 2017, the FASB issued ASU No. 2017-1, "Business Combinations (Topic 805): Clarifying the Definition of a Business." The amendments in this update clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. The amendments of this ASU are effective for public business entities for annual periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019. The amendments in this Update are to be applied prospectively on or after the effective date. The Company is currently unable to determine the impact on its financial statements of the adoption of this new accounting pronouncement.
In October 2016, the FASB issued Accounting Standards Update ("ASU") No. 2016-17, "Consolidation (Topic 810): Interests Held Through Related Parties That are Under Common Control." This update amends the consolidation guidance on how a reporting entity that is the single decision maker of a variable interest entity ("VIE") should treat indirect interests in the entity held through related parties that are under common control with the reporting entity when determining whether it is the primary beneficiary of that VIE. The primary beneficiary of a VIE is the reporting entity that has a controlling financial interest in a VIE and, therefore, consolidates the VIE. A reporting entity has an indirect interest in a VIE if it has a direct interest in a related party that, in turn, has a direct interest in the VIE. The amendments in this ASU are effective for public business entities for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The Company is currently unable to determine the impact on its financial statements of the adoption of this new accounting pronouncement.
In August 2016, the FASB issued ASU No. 2016-15, "Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments." This ASU addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. The amendments in this ASU are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. The Company is currently unable to determine the impact on its financial statements of the adoption of this new accounting pronouncement.
Although there are several other new accounting pronouncements issued or proposed by the FASB, which the Company has adopted or will adopt, as applicable, the Company does not believe any of these accounting pronouncements has had or will have a material impact on its financial position or results of operations.
3. CAPITAL STOCK
At December 31, 2016, the Company's authorized stock consisted of 2,000,000,000 shares of common stock, with a par value of $0.001 per share. The Company is also authorized to issue 20,000,000 shares of preferred stock, with a par value of $0.001 per share. The rights, preferences and privileges of the holders of the preferred stock will be determined by the Board of Directors prior to issuance of such shares.
Series A Preferred Stock
On February 12, 2016, the Company filed a Certificate of Designation for its Series A Preferred Stock (the "Series A Certificate") with the Secretary of State of Nevada designating 1,000 shares of its authorized preferred stock as Series A Preferred Stock. The shares of Series A Preferred Stock have a par value of $0.001 per share. The Series A Preferred Shares do not have a dividend rate or liquidation preference and are not convertible into shares of common stock.
On February 12, 2016, the Board of Directors of the Company authorized the issuance of 1,000 shares of Series A Preferred Stock, par value $0.001 per share, to the Company's President and director, William E. Beifuss, Jr., for services rendered.
For so long as any shares of the Series A Preferred Stock remain issued and outstanding, the holders thereof, voting separately as a class, shall have the right, on or after February 12, 2016, to vote in an amount equal to 51% of the total vote (representing a super majority voting power) with respect to any proposal relating to (a) increasing the authorized share capital of the Company, and (b) effecting any reverse stock split of the Company's issued and outstanding shares of capital stock. Such vote shall be determined by the holder(s) of a majority of the then issued and outstanding shares of Series A Preferred Stock. For example, if there are 10,000 shares of the Company's common stock issued and outstanding at the time of such shareholder vote, the holders of the Series A Preferred Stock, voting separately as a class, will have the right to vote an aggregate of 10,408 shares, out of a total number of 20,408 shares voting.
Additionally, the Company is prohibited from adopting any amendments to the Company's Bylaws, Articles of Incorporation, as amended, making any changes to the Series A Certificate, or effecting any reclassification of the Series A Preferred Stock, without the affirmative vote of at least 66-2/3% of the outstanding shares of Series A Preferred Stock. However, the Company may, by any means authorized by law and without any vote of the holders of shares of Series A Preferred Stock, make technical, corrective, administrative or similar changes to the Series A Certificate that do not, individually or in the aggregate, adversely affect the rights or preferences of the holders of shares of Series A Preferred Stock.
The shares of the Series A Preferred Stock were automatically redeemed by the Company at their par value on a date 90 days after the effective date of the Series A Certificate.
Series B Preferred Stock
On March 2, 2016, the Company filed a Certificate of Designation for its Series B Preferred Stock (the "Series B Certificate") with the Secretary of State of Nevada designating 30,000 shares of its authorized preferred stock as Series B Preferred Stock. The shares of Series B Preferred Stock have a par value of $0.001 per share.
Effective March 3, 2016, the Board of Directors of the Company authorized the issuance of 16,155 shares of Series B Preferred Stock, with a face value of $1,615,500, to holders of convertible promissory notes in the aggregate principal amount of $1,615,362 payable by the Company (the "Prior Notes"), in exchange for the redemption and cancellation of the Prior Notes, including all outstanding principal of $1,615,362 and unpaid interest, which has been accruing at 10% per annum.
At the date of conversion, the Prior Notes and accrued interest payable consisted of the following:
|
Effective Date
|
Principal
|
Accrued Interest
|
|
|
|
|
|
December 12, 2012
|
$ 198,912
|
$ 71,929
|
|
February 22, 2013
|
34,450
|
9,607
|
|
May 29, 2013
|
97,000
|
27,461
|
|
October 7, 2013
|
58,000
|
13,609
|
|
April 18, 2014
|
500,000
|
82,677
|
|
October 1, 2014
|
500,000
|
50,749
|
|
July 13, 2015
|
227,000
|
8,498
|
|
|
|
|
|
Total
|
$ 1,615,362
|
$ 264,530
|
In the conversion, we decreased derivative liabilities related to the convertible debt by $9,750,930, increased Series B preferred stock by $16 and increased additional paid-in capital by $11,630,806. We also increased derivative liabilities related to the Series B preferred stock issued and decreased additional paid-in capital by $3,908,211.
On March 2, 2016, the Company filed a Certificate of Designation for its Series B Preferred Stock (the "Series B Certificate") with the Secretary of State of Nevada designating 30,000 shares of its authorized preferred stock as Series B Preferred Stock. The shares of Series B Preferred Stock have a par value of $0.001 per share.
The total face value of this entire series is three million dollars ($3,000,000). Each share of Series B Preferred Stock has a stated face value of One Hundred Dollars ($100) ("Share Value"), and is convertible into shares of fully paid and non-assessable shares of common stock ("Common Stock") of the Company.
The holders of outstanding shares of the Series B Preferred Stock (the "Holders") are entitled to receive dividends pari passu with the holders of Common Stock, except upon a liquidation, dissolution and winding up of the Company, in which case the Series B Preferred Stock has a preference. Such dividends will be paid equally to all outstanding shares of Series B Preferred Stock and Common Stock, on an as-if-converted basis with respect to the Series B Preferred Stock. The Holders may elect to use the most favorable conversion price for the purpose of determining the as-if-converted number of shares.
In the event of any liquidation, dissolution or winding up of the Company, either voluntary or involuntary, the Holder of each outstanding share of the Series B Preferred Stock shall be entitled to receive, out of the assets of the Company available for distribution to its shareholders upon such liquidation, whether such assets are capital or surplus of any nature, an amount equal to one hundred dollars ($100) for each such share of the Series B Preferred Stock (as adjusted for any combinations, consolidations, stock distributions, stock splits or stock dividends with respect to such shares), plus all dividends, if any, declared and unpaid thereon as of the date of such distribution, before any payment is made or any assets distributed to the holders of the Common Stock. After such payment, the remaining assets of the Company will be distributed to the holders of Common Stock.
If the assets to be distributed to the Holders of the Series B Preferred Stock are insufficient to permit the receipt by such Holders of the full preferential amounts, then all of such assets will be distributed among such Holders ratably in accordance with the number of such shares then held by each such Holder.
The sale of all or substantially all of the Company's assets, any consolidation or merger of the Company with or into any other entity or person, or any other corporate reorganization, in which the stockholders of the Company immediately prior to such consolidation, merger or reorganization, own less than fifty percent (50%) of the Company's voting power immediately after such consolidation, merger or reorganization, or any transaction or series of related transactions to which the Company is a party in which in excess of fifty percent (50%) of the Company's voting power is transferred, excluding any consolidation or merger effected exclusively to change the domicile of the Company, is deemed to be a liquidation, dissolution or winding up.
The Series B Preferred Stock is convertible into Common Stock.
The Holder has the right, at any time, at its election, to convert all or part of the Share Value into shares of Common Stock. The conversion price is the lesser of (1) Fifty Percent (50%) of the lowest trade price of Common Stock recorded on any trade day after December 12, 2012 or (2) the lowest effective price per share granted to any person or entity, including the Holder but excluding officers and directors of the Company, to acquire Common Stock, or adjusted, whether by operation of purchase price adjustment, settlement agreements, exchange agreements, reset provision, floating conversion or otherwise, any outstanding warrant, option or other right to acquire Common Stock or outstanding Common Stock equivalents (the "Conversion Price").
The conversion formula is as follows: The number of shares receivable upon conversion equals the Share Value divided by the Conversion Price. A conversion notice (the "Conversion Notice") may be delivered to Company by any method of Holder's choice (including but not limited to email, facsimile, mail, overnight courier, or personal delivery), and all conversions will be cashless and not require further payment from the Holder. If no objection is delivered from the Company to the Holder, with respect to any variable or calculation reflected in the Conversion Notice, within 24 hours of delivery of the Conversion Notice, the Company will thereafter be deemed to have irrevocably confirmed and ratified such notice of conversion and waived any objection. The Company will deliver the shares of Common Stock from any conversion to the Holder (in any name directed by the Holder) within three (3) business days of Conversion Notice delivery. If the Company is participating in the Depository Trust Company ("DTC") Fast Automated Securities Transfer ("FAST") program, then upon request of the Holder and provided that the shares to be issued are eligible for transfer under Rule 144 of the Securities Act of 1933, as amended (the "Securities Act"), or are effectively registered under the Securities Act, the Company will cause its transfer agent to electronically issue the Common Stock issuable upon conversion to the Holder through the DTC Direct Registration System ("DRS"). If the Company is not participating in the DTC FAST program, then the Company agrees in good faith to apply and cause the approval for participation in the DTC FAST program.
The Conversion Price is subject to equitable adjustments for stock splits, stock dividends or rights offerings by the Company relating to the Company's securities or the securities of any subsidiary of the Company, combinations, recapitalization, reclassifications, extraordinary distributions and similar events. No fractional shares of the Common Stock shall be issuable upon the conversion of shares of the Series B Preferred Stock and the Company shall pay the cash equivalent of any fractional share upon such conversion.
If the Company fails to deliver shares in accordance with the required time frame, then for each conversion, a penalty of $1,500 per day will be assessed for each day after the third business day (inclusive of the day of the conversion) until share delivery is made. Such penalty may be converted into Common Stock at the Conversion Price or payable in cash, at the sole option of the Holder (under the Holder's and the Company's expectations that any penalty amounts shall tack back to the original date of the issuance of Series B Preferred Stock, consistent with applicable securities laws).
In no event will the Holder be entitled to convert any Series B Preferred Stock, such that upon conversion the sum of (1) the number of shares of Common Stock beneficially owned by the Holder and its affiliates (other than shares of Common Stock which may be deemed beneficially owned through the ownership of the unconverted portion of this Series B Preferred Stock or the unexercised or unconverted portion of any other security of the Company subject to a limitation on conversion or exercise analogous to these limitations), and (2) the number of shares of Common Stock issuable upon the conversion of Series B Preferred Stock, would result in beneficial ownership by the Holder and its affiliates of more than 4.99% of the outstanding shares of Common Stock. The limitations on conversion may be waived by the Holder upon, at the election of the Holder, not less than 61 days prior notice to the Company, and the provisions of the conversion limitation shall continue to apply until such 61st day (or such later date, as determined by the Holder, as may be specified in such notice of waiver).
Except as required by law, the Holders of Series B Preferred Stock are not entitled to vote, as a separate class or otherwise, on any matter presented to the stockholders of the Company for their action or consideration at any meeting of stockholders of the Company (or by written consent of stockholders in lieu of meeting). Each Holder of outstanding shares of Series B Preferred Stock will be entitled, on the same basis as holders of Common Stock, to receive notice of such action or meeting.
So long as any shares of the Series B Preferred Stock remain outstanding, the Company will not, without first obtaining the approval (by vote or written consent, as provided by law) of the holders of at least a majority of the then outstanding shares of Series B Preferred Stock voting together as one class: (a) alter or change the rights, preferences or privileges of the shares of the Series B Preferred Stock so as to affect materially and adversely such shares; or (b) create any new class of shares having preference over the Series B Preferred Stock.
The Holder has the right, at its sole discretion, to elect a fixed conversion price for the Series B Preferred Stock. The Fixed Conversion Price may not be lower than the Conversion Price. The Company will not, by amendment of its Certificate of Incorporation, bylaws or through any reorganization, transfer of assets, consolidation, merger, scheme of arrangement, dissolution, issue or sale of securities, or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of the Series B Certificate, and will at all times carry out all the provisions of the Series B Certificate.
Common Stock
On April 20, 2016, the Company amended its articles of incorporation to reduce the number of authorized shares of common stock from 1,000,000,000 to 100,000,000 and to affect a one-for-ten reverse stock split of its authorized, issued and outstanding shares of common stock. The Company has given retroactive affect for the reverse stock split in all periods presented in the accompanying financial statements.
On April 29, 2016, our Board of Directors and the holder of a majority of the total issued and outstanding voting stock of the Company authorized and approved an amendment to the Company's articles of incorporation to increase the number of authorized shares of common stock from 100,000,000 to 2,000,000,000.
During the year ended December 31, 2016, the Company issued a total of 3,028,018 shares of common stock at fair value in conversion of $10,450 of convertible promissory notes, accrued interest payable of $3,176 and derivative liability of $33,756. We recognized a loss of $39,005 on conversion of the notes. The Company also increased the number of outstanding common shares by 816 shares pursuant to the reverse stock split, increasing common stock by $1 and decreasing additional paid-in capital by $1.
During the year ended December 31, 2015, the Company issued a total of 8,031,172 shares of common stock at fair value in conversion of $29,200 of convertible promissory notes, accrued interest payable of $6,940 and derivative liability of $691,907. We recognized a gain of $5,660 on the conversion of the notes.
4. STOCK OPTIONS, WARRANTS AND RESTRICTED STOCK AWARDS
Stock Options
As of December 31, 2016, the Board of Directors of the Company had granted non-qualified stock options exercisable for a total of 1,410,000 shares of common stock to its employees, officers, and consultants. Stock-based compensation cost is measured at the grant date based on the value of the award granted using the Black-Scholes option pricing model, and recognized over the period in which the award vests, which is generally 25 months. Stock-based compensation expense included in general and administrative expense was $0 and $28,000 for the years ended December 31, 2016 and 2015, respectively. As of December 31, 2016, we had no unrecognized stock-based compensation expense.
A summary of the Company's stock option awards as of December 31, 2016, and changes during the year then ended is as follows:
|
|
|
Shares
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted Average
Remaining
Contract Term
(Years)
|
|
|
Aggregate
Intrinsic
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2015
|
|
|
1,410,000
|
|
|
$
|
0.19
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding and exercisable at December 31, 2016
|
|
|
1,410,000
|
|
|
$
|
0.19
|
|
|
|
3.72
|
|
|
$
|
-
|
|
The aggregate intrinsic value in the preceding table represents the total pretax intrinsic value, based on the closing price of our common stock of $0.0254 as of December 31, 2016, which would have been received by the holders of in-the-money options had the option holders exercised their options as of that date.
Warrants
As of December 31, 2016 and December 31, 2015, the Company had 46,000 common stock purchase warrants outstanding, with an exercise price of $5.00 per share and expiring on various dates in 2017 and 2018.
5. CONVERTIBLE PROMISSORY NOTES PAYABLE
Convertible Promissory Note - $299,212
Effective October 24, 2013, the remaining principal balance of certain notes payable totaling $291,443 and accrued interest of $7,769 were combined in a new 10% convertible promissory note in the aggregate amount of $299,212, which originally matured on October 24, 2014. The maturity date was subsequently extended to June 30, 2016. The new note was convertible into shares of our common stock at a conversion price equal to (a) the lesser of $0.06 per share or (b) 50% of the lowest trade price recorded on any trade date after the effective date, or (c) the lowest effective price per share granted to any person through the issuance of securities after the effective date. After conversions to our common stock during 2013 and 2014, and the three months ended March 31, 2016, the note had a principal balance of $198,912. This principal balance and related accrued interest payable of $71,929 were converted into shares of Series B preferred stock on March 3, 2016.
Convertible Promissory Notes - Services of $244,452
On December 31, 2012, we entered into 5% convertible promissory notes with three individuals in exchange for services rendered in the aggregate amount of $244,452, including $185,852 with the Chairman of our Board of Directors and our former Chief Executive Officer ("Chairman"). The notes are convertible into shares of our common stock at a conversion price equal to the lesser of $2.00 per share or the closing price per share of common stock recorded on the trading day immediately preceding the date of conversion. We recorded a debt discount of $237,742 related to the conversion feature of the notes, which has been fully amortized to interest expense, along with a derivative liability at inception. One of the notes with a principal balance of $25,980 at December 31, 2016, matured on December 31, 2014 and is currently in default. The maturity date of a second note with a principal balance of $32,619 at December 31, 2016, has been extended to December 31, 2017.
On July 27, 2016, we entered into a Settlement and Release Agreement with the Chairman for full extinguishment of the above described convertible promissory note with a principal balance of $185,852, plus accrued interest. We agreed to pay the Chairman $100 in cash and arranged for him to enter into an option agreement with our principal lender and a principal holder of our Series B preferred stock ("Lender") to acquire 225 shares of our Series B preferred stock from the Lender upon the occurrence of certain events defined in the agreement. Due to the related party nature of this transaction, the extinguishments of the note principal of $185,752, accrued interest payable of $33,199 and associated derivative liability of $106,858 were recorded to additional paid-in capital as a contribution to capital totaling $325,809.
Convertible Promissory Note - $100,000
During 2013, we received total proceeds of $40,000 pursuant to a securities purchase agreement for the sale of 10% convertible promissory notes in the aggregate principal amount of $100,000. The notes are convertible into shares of our common stock at a price equal to a variable conversion price of the lesser of $0.90 per share or fifty percent (50%) of the lowest trade price recorded after the effective date. The notes were to mature one year from their effective date. The maturity dates were extended to June 30, 2016. We recorded a debt discount of $40,000 related to the beneficial conversion feature of the notes, which has been fully amortized to interest expense. During the three months ended March 31, 2016, $5,550 principal and $1,660 accrued interest payable were converted into shares of common stock and the remaining principal of $34,450 and accrued interest payable of $9,607 were converted into shares of Series B preferred stock on March 3, 2016.
Convertible Promissory Note – Accounts Payable of $29,500
On March 14, 2013, we entered into a 5% convertible promissory note in the principal amount of $29,500, which is convertible into shares of our common stock at a conversion price equal to the lesser of $1.50 per share or the closing price per share of common stock recorded on the trading day immediately preceding the date of conversion. The note matured two years from its effective date, or March 14, 2015, and is currently in default.
Convertible Promissory Note – $97,000
On May 29, 2013, we exchanged $97,000 in demand promissory notes for a 10% convertible promissory note in the aggregate principal amount of $97,000. The note was convertible into shares of our common stock at a price equal to a conversion price of the lesser of $0.28 per share or fifty percent (50%) of the lowest trade price recorded after the effective date. The maturity date of the note was extended to June 30, 2016. We recorded a debt discount of $97,000 related to the beneficial conversion feature of the note, which has been fully amortized to interest expense. The principal balance of $97,000 and accrued interest payable of $27,461 were converted into shares of Series B preferred stock on March 3, 2016.
Convertible Promissory Note – Services of $25,000
On June 4, 2013, we entered into a 5% convertible promissory note with a former member of our Board of Directors in exchange for services rendered in the amount of $25,000. The note is convertible into shares of common stock of the Company at a conversion price equal to the lesser of $0.35 per share or the closing price per share of common stock recorded on the trading day immediately preceding the date of conversion. We have entered into an agreement to repay this note with 12 equal monthly payments of principal and interest of $2,352 beginning in June 2016. The note had a principal balance of $10,417 and accrued interest payable of $1,328 at December 31, 2016.
Convertible Promissory Note – $5,000 Exchanged Note
On September 6, 2013, we exchanged a $5,000 promissory note for a 10% convertible promissory note in the aggregate principal amount of $5,000. The note is convertible into shares of our common stock at a price equal to a conversion price of the lesser of $0.042 per share or fifty percent (50%) of the lowest trade price recorded after the effective date. The note was converted in full to shares of our common stock in February 2017 (Note 13). We recorded a debt discount of $2,536, which has been fully amortized to interest expense, along with a derivative liability at inception.
Convertible Promissory Note – $250,000
On October 8, 2012, we entered into to a 10% convertible promissory note in the aggregate principal amount of $250,000. The note is convertible into shares of common stock of the Company at a price equal to the lesser of $0.06 or 50% of the lowest trade price subsequent to the effective date of the note and prior to the conversion. The maturity date of this note was extended to June 30, 2016.
The lender previously advanced a total of $11,000 in August and September 2013 that was transferred to this promissory note. We recorded a debt discount of $11,000, which has been fully amortized to interest expense, along with a derivative liability upon transfer.
On October 21, 2013, we received additional proceeds of $22,000 on this promissory note. We recorded a debt discount of $22,000, which has been fully amortized to interest expense, along with a derivative liability at inception.
On November 22, 2013, we received additional proceeds of $25,000 on this promissory note agreement. We recorded a debt discount of $25,000, which has been fully amortized to interest expense, along with a derivative liability at inception.
The total principal balance of $58,000 and total accrued interest payable of $13,609 were converted into shares of Series B preferred stock on March 3, 2016.
April 2014 Convertible Promissory Note – $500,000
On April 18, 2014, we entered into a 10% convertible promissory note with an aggregate principal amount of $500,000 (the "April 2014 $500,000 CPN"). The advance amounts received were at the lender's discretion. The note was convertible into shares of our common stock at a price per share equal to the lesser of: $0.03; or 50% of the lowest trade price subsequent to the effective date of the note and prior to the conversion; or the lowest effective price per share granted to any person or entity to acquire common stock subsequent to the effective date of the note. The note matured, with respect to each advance, eighteen months from the effective date of each advance.
On April 18, 2014, we received proceeds of $60,000 pursuant to the April 2014 $500,000 CPN. We recorded a debt discount of $60,000 related to the conversion feature of the note, along with a derivative liability at inception. During the year ended December 31, 2015, amortization of debt discount was recorded to interest expense in the amount of $31,861 and the debt discount was fully amortized to interest expense.
On May 20, 2014, we received proceeds of $45,000 pursuant to the April 2014 $500,000 SPA. We recorded a debt discount of $45,000 related to the conversion feature of the note, along with a derivative liability at inception. During the year ended December 31, 2015, amortization of debt discount was recorded to interest expense in the amount of $26,557 and the debt discount was fully amortized to interest expense.
On June 30, 2014, we received proceeds of $200,000 pursuant to the April 2014 $500,000 CPN. We recorded a debt discount of $200,000 related to the conversion feature of the note, along with a derivative liability at inception. During the year ended December 31, 2015, amortization of debt discount was recorded to interest expense in the amount of $132,847 and the debt discount was fully amortized to interest expense.
On July 18, 2014, we received proceeds of $25,000 pursuant to the April 2014 $500,000 CPN. We recorded a debt discount of $25,000 related to the conversion feature of the note, along with a derivative liability at inception. During the years ended December 31, 2016 and 2015, amortization of debt discount was recorded to interest expense in the amount of $820 and $16,621, respectively, and the debt discount was fully amortized to interest expense.
On August 6, 2014, we received proceeds of $65,000 pursuant to the April 2014 $500,000 CPN. We recorded a debt discount of $65,000 related to the conversion feature of the note, along with a derivative liability at inception. During the years ended December 31, 2016 and 2015, amortization of debt discount was recorded to interest expense in the amount of $4,381 and $43,215, respectively, and the debt discount was fully amortized to interest expense.
On August 18, 2014, we received proceeds of $25,000 pursuant to the April 2014 $500,000 CPN. We recorded a debt discount of $25,000 related to the conversion feature of the note, along with a derivative liability at inception. During the years ended December 31, 2016 and 2015, amortization of debt discount was recorded to interest expense in the amount of $2,231 and $16,621, respectively, and the debt discount was fully amortized to interest expense.
On September 9, 2014, we received proceeds of $56,000 pursuant to the April 2014 $500,000 CPN. We recorded a debt discount of $56,000 related to the conversion feature of the note, along with a derivative liability at inception. During the years ended December 31, 2016 and 2015, amortization of debt discount was recorded to interest expense in the amount of $7,064 and $37,367, respectively, and the debt discount was fully amortized to interest expense.
On October 8, 2014, we received proceeds of $24,000 pursuant to the April 2014 $500,000 CPN. We recorded a debt discount of $24,000 related to the conversion feature of the note, along with a derivative liability at inception. During the years ended December 31, 2016 and 2015, amortization of debt discount was recorded to interest expense in the amount of $4,336 and $15,985, respectively, and the debt discount was fully amortized to interest expense.
The total principal balance of $500,000 of the April 2014 $500,000 CPN and total accrued interest payable of $82,677 were converted into shares of Series B preferred stock on March 3, 2016.
October 2014 Convertible Promissory Note – $500,000
On October 1, 2014, we entered into a 10% convertible promissory note with an aggregate principal amount of $500,000 (the "October 2014 $500,000 CPN"). The advance amounts received were at the lender's discretion. The note was convertible into shares of our common stock at a price per share equal to the lesser of: $0.03; or 50% of the lowest trade price subsequent to the effective date of the note and prior to the conversion; or the lowest effective price per share granted to any person or entity to acquire common stock subsequent to the effective date of the note. The note was to mature, with respect to each advance, eighteen months from the effective date of each advance.
On October 1, 2014, we received proceeds of $65,000 pursuant to the October 2014 $500,000 CPN. We recorded a debt discount of $65,000 related to the conversion feature of the note, along with a derivative liability at inception. During the years ended December 31, 2016 and 2015, amortization of debt discount was recorded to interest expense in the amount of $10,912 and $43,294, respectively, and the debt discount was fully amortized to interest expense.
On November 7, 2014, we received proceeds of $30,000 pursuant to the October 2014 $500,000 CPN. We recorded a debt discount of $30,000 related to the conversion feature of the note, along with a derivative liability at inception. During the years ended December 31, 2016 and 2015, amortization of debt discount was recorded to interest expense in the amount of $7,020 and $20,018, respectively, and the debt discount was fully amortized to interest expense.
On December 9, 2014, we received proceeds of $25,000 pursuant to the October 2014 $500,000 CPN. We recorded a debt discount of $25,000 related to the conversion feature of the note, along with a derivative liability at inception. During the years ended December 31, 2016 and 2015, amortization of debt discount was recorded to interest expense in the amount of $7,345 and $16,651, respectively, and the debt discount was fully amortized to interest expense.
On January 14, 2015, we received proceeds of $92,000 pursuant to the October 2014 $500,000 CPN. We recorded a debt discount of $92,000 related to the conversion feature of the note, along with a derivative liability at inception. During the years ended December 31, 2016 and 2015, amortization of debt discount was recorded to interest expense in the amount of $32,965 and $59,035, respectively, and the debt discount was fully amortized to interest expense.
On February 10, 2015, we received proceeds of $30,000 pursuant to the October 2014 $500,000 CPN. We recorded a debt discount of $30,000 related to the conversion feature of the note, along with a derivative liability at inception. During the years ended December 31, 2016 and 2015, amortization of debt discount was recorded to interest expense in the amount of $12,230 and $17,770, respectively, and the debt discount was fully amortized to interest expense.
On March 16, 2015, we received proceeds of $30,000 pursuant to the October 2014 $500,000 CPN. We recorded a debt discount of $30,000 related to the conversion feature of the note, along with a derivative liability at inception. During the years ended December 31, 2016 and 2015, amortization of debt discount was recorded to interest expense in the amount of $14,182 and $15,818, respectively, and the debt discount was fully amortized to interest expense.
On April 17, 2015, we received proceeds of $45,000 pursuant to the October 2014 $500,000 CPN. We recorded a debt discount of $45,000 related to the conversion feature of the note, along with a derivative liability at inception. During the years ended December 31, 2016 and 2015, amortization of debt discount was recorded to interest expense in the amount of $23,852 and $21,148, respectively, and the debt discount was fully amortized to interest expense.
On May 5, 2015, we received proceeds of $65,000 pursuant to the October 2014 $500,000 CPN. We recorded a debt discount of $65,000 related to the conversion feature of the note, along with a derivative liability at inception. During the years ended December 31, 2016 and 2015, amortization of debt discount was recorded to interest expense in the amount of $36,636 and $28,364, respectively, and the debt discount was fully amortized to interest expense.
On May 11, 2015, we received proceeds of $40,000 pursuant to the October 2014 $500,000 CPN. We recorded a debt discount of $40,000 related to the conversion feature of the note, along with a derivative liability at inception. During the years ended December 31, 2016 and 2015, amortization of debt discount was recorded to interest expense in the amount of $22,982 and $17,018, respectively, and the debt discount was fully amortized to interest expense.
On June 22, 2015, we received proceeds of $35,000 pursuant to the October 2014 $500,000 CPN. We recorded a debt discount of $35,000 related to the conversion feature of the note, along with a derivative liability at inception. During the years ended December 31, 2016 and 2015, amortization of debt discount was recorded to interest expense in the amount of $22,760 and $12,240, respectively, and the debt discount was fully amortized to interest expense.
On June 23, 2015, we received proceeds of $20,000 pursuant to the October 2014 $500,000 CPN. We recorded a debt discount of $20,000 related to the conversion feature of the note, along with a derivative liability at inception. During the years ended December 31, 2016 and 2015, amortization of debt discount was recorded to interest expense in the amount of $13,042 and $6,958, respectively, and the debt discount was fully amortized to interest expense.
On July 9, 2015, we received proceeds of $23,000 pursuant to the October 2014 $500,000 CPN. We recorded a debt discount of $23,000 related to the conversion feature of the note, along with a derivative liability at inception. During the years ended December 31, 2016 and 2015, amortization of debt discount was recorded to interest expense in the amount of $15,682 and $7,318, respectively, and the debt discount was fully amortized to interest expense.
The total principal balance of $500,000 of the October 2014 $500,000 CPN and total accrued interest payable of $50,748 were converted into shares of Series B preferred stock on March 3, 2016.
July 2015 Convertible Promissory Note – $500,000
On July 13, 2015, we entered into a 10% convertible promissory note with an aggregate principal amount of $500,000 (the "July 2015 $500,000 CPN"). The advance amounts received were at the lender's discretion. The note was convertible into shares of our common stock at a price per share equal to the lesser of: $0.03; or 50% of the lowest trade price subsequent to the effective date of the note and prior to the conversion; or the lowest effective price per share granted to any person or entity to acquire common stock subsequent to the effective date of the note. The note was to mature, with respect to each advance, eighteen months from the effective date of each advance.
On July 13, 2015, we received proceeds of $12,000 pursuant to the July 2015 $500,000 CPN. We recorded a debt discount of $12,000 related to the conversion feature of the note, along with a derivative liability at inception. During the years ended December 31, 2016 and 2015, amortization of debt discount was recorded to interest expense in the amount of $8,269 and $3,731, respectively, and the debt discount was fully amortized to interest expense.
On August 7, 2015, we received proceeds of $65,000 pursuant to the July 2015 $500,000 CPN. We recorded a debt discount of $65,000 related to the conversion feature of the note, along with a derivative liability at inception. During the years ended December 31, 2016 and 2015, amortization of debt discount was recorded to interest expense in the amount of $47,745 and $17,255, respectively, and the debt discount was fully amortized to interest expense.
On September 10, 2015, we received proceeds of $25,000 pursuant to the July 2015 $500,000 CPN. We recorded a debt discount of $25,000 related to the conversion feature of the note, along with a derivative liability at inception. During the years ended December 31, 2016 and 2015, amortization of debt discount was recorded to interest expense in the amount of $19,881 and $5,119, respectively, and the debt discount was fully amortized to interest expense.
On October 13, 2015, we received proceeds of $25,000 pursuant to the July 2015 $500,000 CPN. We recorded a debt discount of $25,000 related to the conversion feature of the note, along with a derivative liability at inception. During the years ended December 31, 2016 and 2015, amortization of debt discount was recorded to interest expense in the amount of $21,389 and $3,611, respectively, and the debt discount was fully amortized to interest expense.
On November 13, 2015, we received proceeds of $25,000 pursuant to the July 2015 $500,000 CPN. We recorded a debt discount of $25,000 related to the conversion feature of the note, along with a derivative liability at inception. During the years ended December 31, 2016 and 2015, amortization of debt discount was recorded to interest expense in the amount of $22,806 and $2,194, respectively, and the debt discount was fully amortized to interest expense.
On December 9, 2015, we received proceeds of $25,000 pursuant to the July 2015 $500,000 CPN. We recorded a debt discount of $25,000 related to the conversion feature of the note, along with a derivative liability at inception. During the years ended December 31, 2016 and 2015, amortization of debt discount was recorded to interest expense in the amount of $23,995 and $1,005, respectively, and the debt discount was fully amortized to interest expense.
On January 14, 2016, we received proceeds of $25,000 pursuant to the July 2015 $500,000 CPN. We recorded a debt discount of $25,000 related to the conversion feature of the note, along with a derivative liability at inception. During the year ended December 31, 2016, amortization of debt discount was recorded to interest expense in the amount of $25,000 and the debt discount was fully amortized to interest expense.
On February 9, 2016, we received proceeds of $25,000 pursuant to the July 2015 $500,000 CPN. We recorded a debt discount of $25,000 related to the conversion feature of the note, along with a derivative liability at inception. During the year ended December 31, 2016, amortization of debt discount was recorded to interest expense in the amount of $25,000 and the debt discount was fully amortized to interest expense.
The total principal balance of $227,000 of the July 2015 $500,000 CPN and total accrued interest payable of $8,498 were converted into shares of Series B preferred stock on March 3, 2016.
March 2016 Convertible Promissory Note – $1,000,000
On March 4, 2016, we entered into a convertible promissory note in the aggregate principal amount of $1,000,000 (the "March 2016 $1,000,000 CPN"). The lender may advance the Company consideration in such amounts as the lender may choose in its sole discretion. The note is convertible into shares of our common stock at a price per share equal to the lesser of: $0.03; 50% of the lowest trade price of our common stock subsequent to the effective date of the note; or the lowest effective price per share granted to any person or entity (exclusive of our officers and directors) to acquire common stock subsequent to the effective date of the note. The note initially matured, with respect to each advance, one year from the effective date of each advance. Subsequently, the Lender extended the maturity date, with the note payable upon demand, but in no event later than 60 months from March 4, 2016.
On March 4, 2016, we received proceeds of $25,000 pursuant to the March 4, 2016 $1,000,000 CPN. We recorded a debt discount of $25,000 related to the conversion feature of the note, along with a derivative liability at inception. During the year ended December 31, 2016, amortization of debt discount was recorded to interest expense in the amount of $20,685, resulting in a remaining discount of $4,315 at December 31, 2016.
On March 14, 2016, we received proceeds of $27,000 pursuant to the March 4, 2016 $1,000,000 CPN. We recorded a debt discount of $27,000 related to the conversion feature of the note, along with a derivative liability at inception. During the year ended December 31, 2016, amortization of debt discount was recorded to interest expense in the amount of $21,600, resulting in a remaining discount of $5,400 at December 31, 2016.
On March 17, 2016, we received proceeds of $33,000 pursuant to the March 4, 2016 $1,000,000 CPN. We recorded a debt discount of $33,000 related to the conversion feature of the note, along with a derivative liability at inception. During the year ended December 31, 2016, amortization of debt discount was recorded to interest expense in the amount of $21,608, resulting in a remaining discount of $11,392 at December 31, 2016.
On April 11, 2016, we received proceeds of $90,000 pursuant to the March 4, 2016 $1,000,000 CPN. We recorded a debt discount of $90,000 related to the conversion feature of the note, along with a derivative liability at inception. During the year ended December 31, 2016, amortization of debt discount was recorded to interest expense in the amount of $65,096, resulting in a remaining discount of $24,904 at December 31, 2016.
On May 20, 2016, we received proceeds of $60,000 pursuant to the March 4, 2016 $1,000,000 CPN. We recorded a debt discount of $60,000 related to the conversion feature of the note, along with a derivative liability at inception. During the year ended December 31, 2016, amortization of debt discount was recorded to interest expense in the amount of $36,986, resulting in a remaining discount of $23,014 at December 31, 2016.
On June 22, 2016, we received proceeds of $50,000 pursuant to the March 4, 2016 $1,000,000 CPN. We recorded a debt discount of $50,000 related to the conversion feature of the note, along with a derivative liability at inception. During the year ended December 31, 2016, amortization of debt discount was recorded to interest expense in the amount of $36,301, resulting in a remaining discount of $23,699 at December 31, 2016.
On July 6, 2016, we received proceeds of $87,000 pursuant to the March 4, 2016 $1,000,000 CPN. We recorded a debt discount of $87,000 related to the conversion feature of the note, along with a derivative liability at inception. During the year ended December 31, 2016, amortization of debt discount was recorded to interest expense in the amount of $42,427, resulting in a remaining discount of $44,573 at December 31, 2016.
On August 8, 2016, we received proceeds of $60,000 pursuant to the March 4, 2016 $1,000,000 CPN. We recorded a debt discount of $60,000 related to the conversion feature of the note, along with a derivative liability at inception. During the year ended December 31, 2016, amortization of debt discount was recorded to interest expense in the amount of $23,836, resulting in a remaining discount of $36,164 at December 31, 2016.
On September 13, 2016, we received proceeds of $55,000 pursuant to the March 4, 2016 $1,000,000 CPN. We recorded a debt discount of $55,000 related to the conversion feature of the note, along with a derivative liability at inception. During the year ended December 31, 2016, amortization of debt discount was recorded to interest expense in the amount of $16,425, resulting in a remaining discount of $38,575 at December 31, 2016.
On October 17, 2016, we received proceeds of $55,000 pursuant to the March 4, 2016 $1,000,000 CPN. We recorded a debt discount of $55,000 related to the conversion feature of the note, along with a derivative liability at inception. During the year ended December 31, 2016, amortization of debt discount was recorded to interest expense in the amount of $11,301, resulting in a remaining discount of $43,699 at December 31, 2016.
On November 8, 2016, we received proceeds of $55,000 pursuant to the March 4, 2016 $1,000,000 CPN. We recorded a debt discount of $55,000 related to the conversion feature of the note, along with a derivative liability at inception. During the year ended December 31, 2016, amortization of debt discount was recorded to interest expense in the amount of $7,986, resulting in a remaining discount of $47,014 at December 31, 2016.
On December 6, 2016, we received proceeds of $60,000 pursuant to the March 4, 2016 $1,000,000 CPN. We recorded a debt discount of $60,000 related to the conversion feature of the note, along with a derivative liability at inception. During the year ended December 31, 2016, amortization of debt discount was recorded to interest expense in the amount of $3,767, resulting in a remaining discount of $56,233 at December 31, 2016.
The total loss on settlement of debt, including conversions of notes payable, was $33,561 for the year ended December 31, 2016. The total gain on settlement of debt was $5,660 for the year ended December 31, 2015.
6. DERIVATIVE LIABILITIES
The fair value of the Company's derivative liabilities is estimated at the issuance date and is revalued at each subsequent reporting date.
For purpose of estimating the fair value of the derivative liabilities associated with our convertible notes payable, we used the Black Scholes option valuation model. The significant assumptions used in the Black Scholes valuation of the derivative liabilities at December 31, 2016 and 2015 are as follows:
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
Stock price on the valuation date
|
|
$
|
0.0254
|
|
|
$
|
0.004
|
|
|
Conversion price for the debt
|
|
$
|
0.0763 - $0.0045
|
|
|
$
|
0.004 - $0.0045
|
|
|
Dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
Years to maturity
|
|
|
.20 – 1.00
|
|
|
|
1.00 – 1.44
|
|
|
Risk free rate
|
|
|
.51% - .85
|
%
|
|
|
.65-.86
|
%
|
|
Expected volatility
|
|
|
115.06% - 189.59
|
%
|
|
|
103.67-151.10
|
%
|
The value of the derivative liabilities associated with our convertible notes payable at December 31, 2016 and December 31, 2015 was estimated at $3,335,906 and $13,184,369, respectively. These inputs are subject to significant changes and market fluctuations from period to period; therefore, the estimated fair value of the derivative liability will fluctuate from period to period and the fluctuation may be material.
For purpose of estimating the fair value of the derivative liability associated with our Series B preferred stock, we used a multinomial lattice model based on projections of various potential future outcomes. The significant assumptions used in the valuation of the derivative liability at December 31, 2016 are as follows:
|
Conversion to stock
|
|
Monthly
|
|
|
Stock price on the valuation date
|
|
$
|
0.0254
|
|
|
Conversion price
|
|
$
|
0.0045
|
|
|
Years to maturity
|
|
|
15.0
|
|
|
Expected volatility
|
|
|
245.3
|
%
|
The value of the derivative liability associated with our Series B convertible preferred stock at December 31, 2016 was estimated at $3,354,791. These inputs are subject to significant changes from period to period and to management's judgment; therefore, the estimated fair value of the derivative liability will fluctuate from period to period, and the fluctuation may be material.
7. RESEARCH AGREEMENTS AND FORMATION OF SUBSIDIARY
On June 18, 2014, we entered into a Sponsored Research Agreement ("SRA #1") with UCSB, pursuant to which UCSB performed research work for the mutual benefit of UCSB and the Company. The purpose of SRA #1 included the development of a low-cost and scalable method to produce large-area graphene for transparent electrode applications. The term of SRA #1 commenced on July 1, 2014 and expired on June 30, 2015. The total cost to the Company was $387,730, which has been fully paid. The Company amortized the SRA #1 payments over the life of the contract. Research and development expenses for the year ended December 31, 2015 included $193,865 related to the SRA #1.
On December 15, 2015, we entered into a second Sponsored Research Agreement ("SRA #2") with UCSB, pursuant to which UCSB will perform research work for the mutual benefit of UCSB and the Company. The purpose of SRA #2 includes the development of a graphene based optical modulator for the high-speed transmission of digital data in fiber optic networks. The term of SRA #2 commenced on January 1, 2016 and expired on June 30, 2016. The total cost to the Company was $65,497, which is reported as research and development expenses for the year ended December 31, 2016.
Subsequent to December 31, 2016, we entered into our third SRA with UCSB to further develop a graphene-based device (see Note 13).
On January 5, 2015, the Company formed Transphene, Inc., a Nevada corporation ("Transphene"), of which the Company owns 50% of the total issued and outstanding capital stock. The remaining 50% is owned by Dr. Kaustav Banerjee ("Banerjee"), a director and Chief Technical Officer of Transphene. Transphene is formed to commercialize any technology that the Company licenses out of SRA #1. In consideration for its interest in Transphene, the Company assigned to Transphene the intellectual property rights acquired by the Company from SRA #1. The Company and Banerjee also entered into a Shareholders' Agreement pursuant to which the Company and Banerjee agreed to (i) vote their shares to elect Mr. William E. Beifuss, Jr., President and Chief Executive Officer of the Company, and Banerjee as the directors of Transphene and (ii) not sell or transfer shares until the selling shareholder first offers its shares to the other shareholder. At this time, the Company does not see an opportunity to commercialize the research findings of SRA #1, has not licensed any intellectual property from UCSB, and therefore has not assigned any intellectual property to Transphene. Therefore, we terminated our joint venture through Transphene and wound up and dissolved Transphene in 2016. There have been no financial transactions in Transphene and no impact on our financial statements.
8. SUPPLEMENTAL STATEMENT OF CASH FLOWS INFORMATION
During the years ended December 31, 2016 and 2015, we paid no amounts for income taxes.
During the years ended December 31, 2016 and 2015, we paid cash for interest expense of $1,860 and $0, respectively.
During the year ended December 31, 2016, the Company had the following non-cash investing and financing activities:
The Company issued a total of 3,028,018 shares of common stock for the conversion of $10,450 in convertible notes payable, plus $3,176 of accrued interest payable, increasing common stock by $3,028, increasing additional paid-in capital by $83,359, decreasing derivative liabilities by $33,756 and recording a loss on settlement of debt of $39,005.
The Company increased debt discount and derivative liabilities by $707,000 for the issuance of new convertible debt.
The Company issued a total of 16,155 shares of Series B preferred stock for the conversion of $1,615,362 in convertible notes payable, plus $264,530 of accrued interest payable, increasing Series B preferred stock by $16, increasing additional paid-in capital by $11,630,806 and decreasing derivative liabilities by $9,750,930.
The Company increased derivative liabilities and decreased additional paid-in capital by $3,908,211 for derivative liabilities associated with the issuance of Series B preferred stock.
The Company increased common stock and decreased additional paid-in capital by $1 for the par value of additional shares of common stock issued in the reverse stock split.
The Company decreased convertible notes payable by $185,752, accrued interest payable by $33,199 and derivative liabilities by $106,858 and increased additional paid-in capital by $325,809 for settlement of related party debt recorded as a contribution to capital.
During the year ended December 31, 2015, the Company had the following non-cash investing and financing activities:
The Company issued a total of 80,311,720 shares of common stock for the conversion of $29,200 in convertible notes payable, plus $6,940 of accrued interest payable, increasing common stock by $80,313, increasing additional paid-in capital by $642,074, decreasing derivative liability by $691,907 and recording a gain on settlement of debt of $5,660.
The Company increased debt discount and derivative liability by $557,000 for the issuance of new convertible debt.
9. INCOME TAXES
A reconciliation of the income tax provision (benefit) that would result from applying a combined U.S. federal and state rate of 43% to loss before income taxes with the provision (benefit) for income taxes presented in the financial statements is as follows:
|
|
|
Years Ended December 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit at statutory rate
|
|
$
|
(119,400
|
)
|
|
$
|
(2,243,800
|
)
|
|
State income taxes, net of federal benefit
|
|
|
(300
|
)
|
|
|
(300
|
)
|
|
Nondeductible stock deductions
|
|
|
61,900
|
|
|
|
1,928,300
|
|
|
Other
|
|
|
(12,200
|
)
|
|
|
-
|
|
|
Valuation allowance
|
|
|
70,000
|
|
|
|
315,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Deferred tax assets (liabilities) are comprised of the following:
|
|
|
December 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
Net operating loss carryforward
|
|
$
|
3,839,800
|
|
|
$
|
3,782,600
|
|
|
Research and development credit carryforward
|
|
|
125,200
|
|
|
|
100,100
|
|
|
Related party accrued expenses
|
|
|
600
|
|
|
|
13,400
|
|
|
Accrued compensated absences
|
|
|
900
|
|
|
|
400
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation allowance
|
|
|
(3,966,500
|
)
|
|
|
(3,896,500
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
-
|
|
|
$
|
-
|
|
The ultimate realization of our deferred tax assets is dependent, in part, upon the tax laws in effect, our future earnings, and other events. As of December 31, 2016, we recorded a valuation allowance of $3,966,500 against net current deferred tax. In recording the valuation allowance, we were unable to conclude that it is more likely than not that our deferred tax assets will be realized.
As of December 31, 2016, we had a net operating loss carryforward available to offset future taxable income of approximately $8,930,000, which begins to expire at dates that have not been determined. If substantial changes in the Company's ownership should occur, there would be an annual limitation of the amount of the net operating loss carryforward that could be utilized.
We perform a review of our material tax positions in accordance with recognition and measurement standards established by authoritative accounting literature, which requires a company to determine whether it is more likely than not that a tax position will be sustained upon examination based upon the technical merits of the position. If the more-likely-than-not threshold is met, a company must measure the tax position to determine the amount to recognize in the financial statements. Based upon our review and evaluation, during the years ended December 31, 2016 and 2015, we concluded the Company had no unrecognized tax benefit that would affect its effective tax rate if recognized.
We file income tax returns in the U.S. federal jurisdiction and in the state of California. With few exceptions, we are no longer subject to U.S. federal, state or local income tax examinations by tax authorities for years before 2011.
We classify any interest and penalties arising from the underpayment of income taxes in our statements of operations and comprehensive loss in other income (expense). As of December 31, 2016 and 2015, we had no accrued interest or penalties related to uncertain tax positions.
10. RELATED PARTY TRANSACTIONS
See Note 3 for a discussion regarding the issuance of 1,000 shares of Series A Preferred Stock to the Company's President and director, William E. Beifuss, Jr., for services rendered. The shares were subsequently automatically redeemed on the date 90 days after the effective date of the Series A Certificate.
See Note 5 for discussion of convertible notes payable with related parties, including multiple lenders who are also shareholders of the Company.
On December 12, 2012, we entered into a 5% convertible note with the Chairman of our Board of Directors and our former Chief Executive Officer in exchange for services valued at $185,852. The principal balance of this related party note was $185,852 as of December 31, 2015 and 2014, with accrued interest payable of $27,878 and $18,585 as of December 31, 2015 and 2014, respectively. The note was to mature on December 31, 2016. On July 27, 2016, we entered into a Settlement and Release Agreement with the Chairman for full extinguishment of the above described convertible promissory note with a principal balance of $185,852, plus accrued interest. We agreed to pay the Chairman $100 in cash and arranged for him to enter into an option agreement with our principal lender and a principal holder of our Series B preferred stock ("Lender") to acquire 225 shares of our Series B preferred stock from the Lender upon the occurrence of certain events defined in the agreement. Due to the related party nature of this transaction, the extinguishments of the note principal of $185,752, accrued interest payable of $33,199 and associated derivative liability of $106,858 were recorded to additional paid-in capital as a contribution to capital totaling $325,809.
On June 4, 2013, we entered into a convertible note with a former member of our Board of Directors in exchange for services valued at $25,000. As of December 31, 2015 and 2014, the principal balance of this related party note was $25,000, with accrued interest payable of $3,219 and $1,969 as of December 31, 2015 and 2014, respectively. The note was to mature on June 4, 2016. We have entered into an agreement to repay this note in 12 equal monthly payments of principal and interest of $2,352, beginning in June 2016. The note had a principal balance of $10,417 and accrued interest payable of $1,328 at December 31, 2016.
11. COMMITMENTS AND CONTINGENCIES - OPERATING LEASE
We extended our facility lease for a period of five years, expiring on September 30, 2017. The base rent for the period of October 1, 2012 to September 30, 2013 was $2,884 per month, for the period October 1, 2014 to September 30, 2015 was $3,450 per month, for the period October 1, 2015 to September 30, 2016 was $3,533 per month, and for the remaining period commencing on October 1, 2016 to September 30, 2017 the base rent is $3,639 per month. Rent expense for the years ended December 31, 2016 and 2015 was $53,026 and $45,646, respectively. Minimum rental payments for the year ended December 31, 2017 will be $26,739.
12. CONSULTING AGREEMENT
We have a written consulting agreement dated May 31, 2013 with William E. Beifuss, Jr., our President, Acting Chief Financial Officer, and former Chief Executive Officer for the payment of monthly compensation of $5,000 per month beginning in June 2013. The agreement may be cancelled by either party with 30 days' notice.
13. SUBSEQUENT EVENTS
Management has evaluated subsequent events according to the requirements of ASC TOPIC 855, and has reported the following:
Debt Conversion
Subsequent to December 31, 2016, we issued a lender 1,496,499 shares of our common stock for the conversion of debt in the principal amount of $5,000 and accrued interest of $1,734.
Subsequent Borrowings
We received proceeds of $60,000 in each of January and February 2017 from the March 2016 $1,000,000 CPN.
Extension of Maturity Dates of Convertible Promissory Notes
Subsequent to December 31, 2016, the maturity dates of certain convertible promissory notes were extended to various dates in 2017. See Note 5.
