ITEM 1. BUSINESS.
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
We are currently developing a technology to make transportation fuels and other valuable products from natural gas methane (CH4) and carbon dioxide (CO2). Our highly scalable, clean-tech process will enable the world to reduce its dependence on petroleum by transforming abundant and affordable natural gas into gasoline, diesel and jet fuel, and other products, such as hydrogen, methanol, ammonia, solvents, plastics and detergent alcohols. The key to this process is a breakthrough catalyst that can reduce the cost of reforming natural gas into synthetic gas (syngas), the most costly step in making products from natural gas.
Our goal is to help reduce the world’s dependence on petroleum by developing technology to enable the cost effective use of natural gas as a feedstock to produce clean and green liquid fuels for use in the existing transportation infrastructure.
We believe that natural gas is the world’s next primary source of fuel. While found in abundant supply at affordable prices in the U.S. and throughout the world, natural gas cannot be used directly in cars, trucks, trains and planes without a massive overhaul of the existing liquid fuels infrastructure. We intend to address this problem by developing an industrial clean-tech process to enable the transformation of natural gas into liquid transportation fuels such as gasoline, diesel, jet fuel and other valuable products. The key to our technology is a patented catalyst that reacts carbon dioxide (CO2) with natural gas methane (CH4) to produce a synthesis gas mixture of hydrogen and carbon monoxide (CO + H2), often referred to as syngas. This syngas can be fed into existing industrial scale gas-to-liquids (GTL) processes to produce liquid fuels.
We believe our competitive advantage over other natural gas reforming technologies is that our processes can significantly lower the cost of reforming natural gas into synthetic gas (syngas), the most costly step in the gas-to-liquids (GTL) process for making liquid transportation fuels from natural gas. As part of our business plan, we intend to demonstrate and prove this point. Based on original laboratory testing results and validated in commercial testing facilities, we believe that we have a very robust reforming catalyst to enable cost effective syngas production.
Our business model is to develop and license technologies related to our catalyst such as but not limited to methods of manufacturing, integration into existing syngas processes and new process designs. We do not intend to manufacture or sell catalyst, syngas or any final products in the market place. We will seek to license our intellectual property portfolio to catalyst manufacturers, as well as to energy, chemical and engineering firms throughout the world for the purposes of syngas and fuel production.
While natural gas is currently the largest source of methane for gas-to-liquids production, other renewable sources of methane such as landfill gas, algae biomass, flare gas, and livestock gas can be captured and used as the methane feedstock for our technology.
We were incorporated in the State of Nevada on August 25, 2006, as Zingerang, Inc. Our name was changed to Carbon Sciences, Inc on April 9, 2007. Our principal executive offices are located at 5511-C Ekwill Street, Santa Barbara, CA 93111, and our telephone number is (805)456-7000. Our fiscal year end is December 31.
Market Opportunity
In the International Energy Outlook 2010 report, the EIA predicts that worldwide energy consumption will increase by 49% from 2007 to 2035. This increase translates to a requirement of over 114 million barrels of crude oil per day in 2035, up from 86 million barrels per day in 2007. The EIA reports that the biggest use of crude oil, making up nearly 80% of the increase, is in the production of liquid fuels for the transportation sector.
The 2010 World Energy Outlook report published by the IEA stated that 2006 was the year that the world’s conventional oil production reached its peak of 70 million barrels per day.
In the World Energy Outlook 2011 report, the IEA postulates that the world is entering a “Golden Age of Gas.” Management believes that while the supply of world crude oil is declining, the global natural gas resource base is vast and widely dispersed geographically. The IEA estimates that conventional recoverable gas resources are equivalent to more than 120 years of current global consumption, while total recoverable resources could sustain today’s production for over 250 years.
The current global market for hydrogen exceeds $150 billion/year with methanol at more than $20 billion/year. Steam reforming of natural gas into syngas (CO+H2) is the most common way to make hydrogen and methanol. In fact, 95% of the hydrogen in the U.S. is produced by steam reforming. The 2,000 existing steam reforming plans in the world usually replace their catalysts every 3-5 years. Many of these catalyst replacements cost as much as $5-$10MM.
Carbon Sciences is developing one version of its proprietary catalyst to be a drop-in replacement for existing steam reforming catalyst. Our catalyst will benefit operators by delivering more output at a lower cost. This is accomplished by reducing the amount of steam required, which directly translates to lower energy costs, lower CO2 emissions, and higher profits from greater processing throughput.
We believe that we can apply our technology to natural gas resources to enable the production of non-petroleum liquid fuels to meet the world’s growing demand for use in cars, trucks, planes and ships. Additionally, because our technology consumes CO2, we believe we can help reduce the amount of CO2 emissions being released into the atmosphere, which we believe is harmful to the environment and may contributes to climate change.
Most of the world’s natural gas reserves contain some amount of CO2, which must be removed before the natural gas methane is marketable. If the CO2 content is high, then the removal process is prohibitively expensive, therefore leaving those natural gas reserves uneconomical to develop. Since our technology uses CO2 and methane as feedstocks, it can utilize high CO2 natural gas reserves directly. Natural gas containing as much as 50% CO2 by volume is suitable for our syngas technology. We believe this is a specific GTL market opportunity that existing technologies cannot address.
Gas to Liquids Overview
Many natural gas proponents are proposing the use of compressed natural gas (CNG) or liquefied natural gas (LNG) for use in new trucks and other vehicles. We believe this is a step in the right direction, but new engines mean new and expensive infrastructure. We believe a better solution is the direct transformation of natural gas into gasoline, diesel and jet fuel for use in existing engines and fuel delivery infrastructure.
We believe there are four main reasons why natural gas should be the new feedstock for liquid fuels:
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Energy independence from petroleum;
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Resulting liquid fuels can be used directly in the existing infrastructure;
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Natural gas is abundant and affordable; and
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Reduction of greenhouse gas emissions.
Current industrial scale gas-to-liquids (GTL) technology, invented by German chemists Franz Fischer and Hans Tropsch in the 1920’s, can convert a gas mixture of hydrogen (H2) and carbon monoxide (CO) into liquid fuels without using petroleum. However, H2 and CO do not exist naturally and must be manufactured synthetically. There are a number of ways to make this synthesis gas, or syngas, but the most promising and scalable approach is the reforming of natural gas, which is primarily methane (CH4).
There are four (4) known processes to reform natural gas (methane) into syngas:
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Steam Reforming - Reacts steam with methane.
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Partial Oxidation - Reacts pure oxygen with methane.
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Autothermal Reforming - A combination of steam and partial oxidation reforming.
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Dry Reforming - Reacts carbon dioxide with methane, without steam or oxygen.
To our knowledge, there are no commercial dry reforming syngas technologies available for GTL applications. In addition, none of the other natural gas reforming technologies can be utilized with natural gas fields that contain high CO2 contents.
Our Syngas Technology
The following diagram illustrates how our processes compare to a conventional reforming system.
We are developing two versions of our breakthrough catalyst that can reduce the cost of reforming natural gas into synthetic gas (syngas), the most costly step in making products from natural gas.
I.
Dry Reforming. Another version of our catalyst can be used with captured CO2 or high CO2 content natural gas to make syngas.
We believe that with the help of a catalyst such as the one we are developing, a cost effective commercial grade dry reforming front end can be implemented, and will result in lower capital and operating costs when compared to other reforming processes for the following reasons: (i) does not use oxygen or steam, both of which require large co-production plants that consume large amounts of energy, (ii) is expected to require less capital because of reduced need for oxygen or steam plants, (iii) consumes CO2, an inexpensive product often already in natural gas reserves. We cannot predict whether the catalyst will be engineered as a drop-in catalyst for certain existing syngas plants or whether there may be a need to build new plants optimized to take advantage of our catalyst.
Current commercial dry reforming catalysts are made from rare noble metals, such as palladium and ruthenium, which are expensive and not suitable for mass-market applications, such as fuel production. To our knowledge, there are no commercial dry reforming technologies that are used in GTL applications. Based on our research, we believe that the reason for this is the lack of a low cost catalyst capable of running for a long period of time. We believe the catalyst we are developing will be an innovative catalyst which will address these issues.
Our currently patented catalyst has the following characteristics that we believe are not available from other known dry reforming catalysts:
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Made from inexpensive, readily available metals, such as nickel and aluminum
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High conversion efficiency of CO2 and CH4 into syngas
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Minimum coking. Coking is the deposition of carbon on the catalyst surface that inhibits the catalyst activity and performance.
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Over 1,000 hours of runtime. Long runtime eliminates the need for frequent and costly system shutdowns to reload the catalysts.
II.
Steam Reforming. One version of our catalyst can be used as a drop-in replacement for existing steam reforming catalyst to reduce the cost and increase the production of syngas, primarily for the production of hydrogen and methanol.
Steam reforming of natural gas to syngas is the primary method for making valuable, large volume products, such as hydrogen, methanol, ammonia, solvents, plastics and detergent alcohols. Our highest priority is developing a drop-in replacement catalyst to increase the output and lower the cost of steam reforming. Minimal equipment and plant changes will be needed by existing operators to use the steam reforming version of our catalyst.
Our patented catalyst is currently in a powdered form not yet suitable for industrial use. Our plan is to develop an industrial form of this catalyst, such as pellets, which may include adding new materials or designing new manufacturing methods. We are in the early research and development phase of this process. We intend to enter into discussions with catalyst manufacturers regarding possible co-development arrangements for developing the commercial catalyst. We expect to complete the commercial form of our catalyst by the end of 2012. By the end of 2013, we expect to complete the design of an industrial syngas production process optimized for our catalyst. After that we expect to build a demonstration system in 2014, either by ourselves or in conjunction with strategic partners. Once our commercial catalyst is proven in a demonstration system, we intend to aggressively expand our business development efforts and seek customers and strategic partners to license our technology.
Business Model
We are a technology development and licensing company. We do not intend to manufacture and market syngas or fuel as a final product. Instead, we will seek to license our intellectual property portfolio to catalyst manufacturers, as well as to major energy, chemical and engineering firms throughout the world for the purposes of syngas and fuel production.
For example, we will seek to license our catalyst technology to existing catalyst manufacturing companies who will be responsible for the manufacturing and sale of the physical catalysts. We may charge the manufacturer a royalty fee based on its catalyst sales. Likewise, we will seek to license or jointly develop various industrial syngas generation process designs based on our catalyst with engineering and construction firms. We may charge these firms a royalty fee based on their revenues received in the engineering and construction of syngas plants using our technology.
Marketing Strategy
We expect that our marketing strategy will include media and analyst communication, blogs, and selected trade show attendance. We intend to utilize appropriate opportunities to place our brand in general and industry specific publications, using press releases, white papers and authored articles and Internet publications.
Research and Development
We have hired technical personnel and have retained a number of scientific advisors and part-time technical contractors, to help us develop and commercialize our technology. We have purchased and developed research apparatus that enables us to refine our methodology and demonstrate our technology. Using computer-aided process engineering tools, we plan to develop a detailed computer simulation model that will allow us to demonstrate the commercial viability of our system.
In addition, we have entered into a consulting agreement with Emerging Fuels Technology or EFT based in Tulsa, OK to provide laboratory services to support the development of our process to convert CO2 and methane into syngas. EFT’s core competency is in the areas of Fischer-Tropsch and related synthesis and hydroprocessing chemistry. Pursuant to the agreement with EFT, we agreed to pay standard rates for time spent by EFT of $200 per hour for consulting services performed by their principals, and $50 per hour to $400 per day for laboratory services, and to reimburse EFT for the reasonable expenses incurred during the term of the agreement. The consulting agreement may be terminated at any time by either party by giving notice.
We have also entered into a consulting agreement with Dr. Howard Fong pursuant to which he is serving as our chief scientific advisor. The agreement with Dr. Fong provides for a monthly fee of $15,000. The consulting agreement runs through December 2012. However, we have an option to extend the term for an additional year through December 2013. See “Management -Key Consultants”
Government Regulation
We are a technology development and licensing company and do not intend to sell, manufacture or produce any products. We are currently not subject to any government regulations that have a material effect on our operations. Additionally, we are not aware of any pending legislation or regulations that would have a material effect on our operations.
Manufacturing and Distribution
As a technology licensing company, we do not intend on manufacturing and distributing any products as our primary business operation. However, we may build demonstration systems, either by ourselves or in conjunction with strategic partners.
Intellectual Property
We have filed numerous patent applications with the United States Patent and Trademark Office in the course of our business history.
On December 23, 2010, we entered in to a License Agreement with the University of Saskatchewan or UOS, pursuant to which we have an exclusive, worldwide, sub-licensable, royalty-bearing right and license to make, have made, use, offer for sale, sell, reproduce, distribute, incorporate into other technology, or otherwise exploit certain patent-pending technology and relevant improvements from UOS, for a high performance catalyst for the dry reforming of methane with carbon dioxide for the production of synthesis gas. This License Agreement commenced on December 23, 2010, and will continue until the expiration date of the last of the licensed patents. In consideration for the grant of the patents, we are required to pay license fee of $20,000 a year for the term of the license Agreement. In addition, we are obligated to pay UOS $50,000 upon the first application of a licensed product in a pilot-scale or commercial facility and $50,000 upon the first sale of a licensed product. We are also required to pay royalties ranging from 0.9% to 3.6% of the sales revenue from a customer that uses a tangible licensed product or system made by us. In the event that we sublicense the licensed patents, we shall pay UOS sublicense compensation ranging from 6.25% to 12.5% of the sublicense fees that we receive. Under the License Agreement, we are also required to maintain general liability insurance with policy limits of no less than $2,000,000 during the term of the License Agreement and products liability insurance coverage with policy limits of no less than $5,000,000 to protect against our activities in relation to the license agreement.
The License Agreement may be terminated upon the party’s mutual consent or upon the expiration of six months after notice of termination to the UOS. In addition, the License Agreement may be terminated upon the occurrence of an event of default under the agreement.
The patent subject to the license agreement was issued by the PTO on July 26, 2011 as patent No.7,985,710.
We intend to continue our research and development efforts in dry reforming. Based on the UOS catalyst and new developments in the course of our business, we intend to file additional applications and build a global patent portfolio related to methods of catalyst preparation, commercial form of the catalyst, application of the catalyst, process design and optimizations. Until patent protection is granted, we must rely on trade secret protection, which requires reasonable steps to preserve secrecy. Therefore, we require that our personnel, contractors and sublicensees not disclose the trade secrets and confidential information pertaining to the technology. In addition, trade secret protection does not provide any barrier to a third party “reverse engineering” fuel made with the technology, to the extent that the technology is readily ascertainable by proper means. Neither the patent, if it issues, nor trade secret protection will preclude third parties from asserting that the technology, or the products we or our sub-licensees commercialize using the technology, infringes upon their proprietary rights.
Competition
The market for liquid fuel is large, as is the number of competitors providing technology to the fuel industry. For example, companies that offer fuel production technologies include UOP LLC (A Honeywell Company), Chevron Corp, Royal Dutch Shell plc, BP plc, and ExxonMobil Corp.
We do not compete directly with other firms in the production of fuel from natural gas. Instead, we compete with technology firms that offer natural gas reforming technologies such as steam reforming, partial oxidation and autothermal. We are not aware of any commercially available dry reforming technology for GTL applications. There can be no assurance that companies are not currently developing or will develop technology similar to the one we are developing. There are, however, commercial dry reforming catalysts made from rare earth metals, but they are not used for GTL applications.
We believe our main competitive advantage over the current natural gas proponents is the cost of adapting equipment to use natural gas. Since the vast majority of trucks and vehicles are designed for consumption of petroleum-based fuels, many natural gas proponents often experience a second cost disadvantage - the expense of adopting new engines for these vehicles. We believe the ability of our technology to transform natural gas directly to gasoline, diesel and jet fuel for use in existing engines and fuel delivery infrastructure improves our ability to compete with the current natural gas proponents.
Technology Development Partners
We have entered into an agreement with Emerging Fuels Technology based in Tulsa, OK to provide laboratory and consulting services to support the development of our dry reforming technology. We may enter into technology development partnerships with other companies.
Employees
As of March 30, 2012 we had 3 full-time employees. We have not experienced any work stoppages and we consider relations with our employees to be good. We have used an outsourced work-for-hire development model to date. We intend to increase our internal research and development staffing with the proceeds of this offering.
ITEM 1A.
ITEM 1A. RISK FACTORS
RISKS RELATED TO OUR BUSINESS AND INDUSTRY
We are in the early stages of development and have limited operating history which you can base an investment decision.
We were formed in August 2006 and are currently developing a new technology that is still being developed 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, 2010 financial statements, which expressed substantial doubt about our ability to continue as a going concern unless we obtain additional financing. While this offering addresses such concern and is expected to see us through until we begin to generate revenues, 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 until approximately 2015 when we estimate we may begin to generate revenues. In making your evaluation of our prospects, 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.
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, 2011, we incurred an aggregate net loss, and had an accumulated deficit, of $7,678,672. For the years ended December 31, 2011 and 2010, we incurred net losses of $1,861,490 and $2,302,583. Our losses are expected to continue to increase for at least the next 48 months as we commence full scale development of our technology. We believe we will require at least the net proceeds of this offering to make this transition and do not expect to transition from a development stage company to an operating company until 2015. As 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.
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.
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 out technology has not yet been used to manufacture syngas or liquid fuels, 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 catalyst 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.
While producing syngas is not a new technology, our dry reforming catalyst is not currently suitable for commercial use and has never been utilized on a commercially sustainable basis. The tests 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. While industrial processes exist to convert syngas into liquid fuels, we have not conducted end-to-end tests on the ability of our technology to produce liquid gas.
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.
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 infrastructure necessary to use alternative fuels and that make it significantly more difficult to take risks with new fuel sources. 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 intellectual property portfolio that we currently have and will 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, including Mr. Byron Elton, who has been critical to the development of our business. The loss of the services of Mr. Elton could have a material adverse effect on our operations. We do not have an employment agreement with Mr. Elton. Accordingly, there can be no assurance that he will remain associated with us. His efforts 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 Mr. Elton or any other 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.
Failure to obtain the patents for our applications could prevent us from securing royalty payments in the future, if appropriate.
In addition to our license to the patented UOS catalyst, we intend to file new patent applications and build a global patent portfolio related to the methods of catalyst preparation, commercial form of the catalyst, application of the catalyst, process design and optimizations, in the normal course of our business. We cannot be certain that patents will be granted nor can we be certain that other companies will not file for patent protection for the similar technology before us. Even if we are granted patent protection for our technology, there is no assurance that we will be in a position to enforce our patent rights. Failure to be granted patent protection for our technology could result in greater competition or in limited royalty payments. This could result in inadequate revenue and cause us to cease operations.
We may never fully realize the value of our technology license agreement, which presently is the principal asset reflected on our balance sheet.
We may not be successful in realizing the expected benefits from our Exclusive License Agreement with the UOS. We intend to incorporate the licensed technology in our development of a high performance catalyst for the dry reforming of methane with carbon dioxide for the production of synthesis gas. To date, we have incurred approximately $915,867 in research and development costs separate from our license payments, and we are continuing to incur additional research and development costs to commercialize the catalyst and optimize the process.
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 U.S. 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.
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, or 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.
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 fuels and other energy sources 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.
Competition resulting from advances in alternative fuels may reduce the demand for our technology.
Alternative fuels and other energy sources are continually under development. A wide array of entities, including automotive, industrial and power generation manufacturers, the federal government, academic institutions and small private concerns are seeking to develop alternative clean-power systems. These technologies include using fuel cells or clean-burning gaseous fuels that, like biodiesel, may address increasing worldwide energy costs, the long-term availability of petroleum reserves and environmental concerns. Additionally, there is significant research and development being undertaken regarding the production of ethanol from cellulosic biomass, the production of methane from anaerobic digestors, and the production of electricity from wind and tidal energy systems, among other potential sources of renewable energy. If these alternative fuels continue to expand and gain broad acceptance, there may not be sufficient interest in our technology.
If we breach or default under our license agreement with the UOS, the licensor will have the right to terminate the license agreement, which termination may materially harm our business.
The success of our business will depend in part on the maintenance of our license agreement with UOS. Pursuant to the terms of the license agreement, we are required to pay UOS an additional $20,000 in cash per year until the expiration date of the last of the licensed patents. In addition, we are required to pay an aggregate of $100,000 if we hit certain commercialization milestones. The license agreement also provides that UOS may terminate the agreement if we file an assignment in bankruptcy or apply for reorganization or other similar proceedings. To the extent we default on any of the required payments or breach any other material provisions of the license agreement, UOS could terminate the agreement and pursue any remedy available to it in law or in equity, in which event we would lose our rights to commercialize our technology covered by the license, which loss may materially harm our business.
Our current and potential competitors, some of whom have greater resources than we do, may develop products and technologies that may cause demand for, and the prices of, our products to decline.
While we are not aware of any direct competitors offering commercial dry reforming technology to produce liquid fuels from natural gas, our potential customers may choose to buy or build their own systems instead of licensing our technology. Furthermore, our competitors may combine with each other, and other companies may enter our markets by acquiring or entering into strategic relationships with our competitors. Current and potential competitors have established, or may establish, cooperative relationships among themselves or with third parties to increase the abilities of their products to address the needs of our prospective customers.
Many of our current and potential competitors have longer operating histories, significantly greater financial, technical, product development and marketing resources, greater name recognition and larger customer bases than we do. Our present or future competitors may be able to develop technology comparable or superior to those we offer, adapt more quickly than we do to new technologies, evolving industry trends and standards or customer requirements, or devote greater resources to the development, promotion and sale of their technology than we do. Accordingly, we may not be able to compete effectively in our markets, competition may intensify and future competition may harm our business.
RISKS RELATING TO OUR COMMON STOCK
Our common stock is subject to volatility.
There can be no assurance 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:
·
announcements or press releases relating to the industry or to our own business or prospects;
·
regulatory, legislative, or other developments affecting us or the industry generally;
·
sales by holders of restricted securities pursuant to effective registration statements or exemptions from registration; and
·
market conditions specific to biopharmaceutical companies, the healthcare industry and the stock market generally.
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 or 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 "blank check" 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 blank check preferred stock. Currently no preferred shares are issued; however, we can issue 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 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 approximately 9,594,567 shares of our common stock outstanding as of December 31, 2011, approximately 2,221,568 shares are freely tradable without restriction, as of December 31, 2011. 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 your investment will only occur if its stock price appreciates.
Our management will have broad discretion over the use of the net proceeds from this offering and we may use the net proceeds in ways with which you disagree.
We currently intend to use the net proceeds from this offering for general corporate purposes and working capital. We have not allocated specific amounts of the net proceeds from this offering for any of the foregoing purposes. Accordingly, our management will have significant discretion and flexibility in applying the net proceeds of this offering. You will be relying on the judgment of our management with regard to the use of these net proceeds, and you will not have the opportunity, as part of your investment decision, to assess whether the proceeds are being used appropriately. It is possible that the net proceeds will be invested in a way that does not yield a favorable, or any, return for us or our stockholders. The failure of our management to use such funds effectively could have a material adverse effect on our business, prospects, financial condition, and results of operation.
We are controlled by our current officers, directors and principal stockholders.
Our directors, executive officers and principal stockholders and their affiliates beneficially own approximately 8.24% of outstanding shares of common stock. Accordingly, our executive officers, directors, principal stockholders and certain of their affiliates will have the ability to control matters requiring shareholder approval, including the election of our Board of Directors and approval of significant corporate transactions, such as merger or other sale of our company or assets. Thus, actions might be taken even if other stockholders, including those who purchase shares in this offering, oppose them. This concentration of ownership might also have the effect of delaying or preventing a change of control of our company, which could cause our stock price to decline.
ITEM 2.
ITEM 2. PROPERTIES.
Our principal office is located at 5511C Ekwill Street, Santa Barbara, California 93111. We lease approximately 2,800 square feet. Our lease provides for a monthly base rent of $2,800 per month through September 30, 2011. Commencing October 1, 2011, our monthly base rent increased to $2,884 and shall increase annually thereafter by 3%. The current term of the lease expires September 30, 2012.
ITEM 3.
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.
ITEM 4. MINE SAFETY DISCLOSURES
N/A
PART II
ITEM 5.
ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Market Information
Our common stock has been quoted on the OTC Bulletin Board under the symbol “CABN” since September 28, 2007. The following table provides, for the periods indicated, the range of high and low bid prices for our common stock. These over-the-counter market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not represent actual transactions. Where applicable, the prices set forth below give retroactive effect to our one-for-forty reverse stock split which was effected on May 9, 2011.
On March 30, 2012 there were 106 holders of record of our common stock. This number does not include stockholders for whom shares were held in “nominee” or “street” name.
Dividend Policy
We have not declared or paid any cash dividends on our common stock and do not anticipate declaring or paying any cash dividends in the foreseeable future. We currently expect to retain future earnings, if any, for the development of our business.
Common Stock
Our Articles of Incorporation, as amended, authorize the issuance of 100,000,000 shares of common stock, $.001 par value per share. Holders of shares of common stock are entitled to one vote for each share on all matters to be voted on by the stockholders. Holders of common stock have cumulative voting rights. Holders of shares of common stock are entitled to share ratably in dividends, if any, as may be declared, from time to time by the Board of Directors in its discretion, from funds legally available therefor. In the event of a liquidation, dissolution, or winding up of our company, the holders of shares of common stock are entitled to share pro rata all assets remaining after payment in full of all liabilities. Holders of common stock have no preemptive or other subscription rights, and there are no conversion rights or redemption or sinking fund provisions with respect to such shares.
As of March 30, 2012, our common stock was held by 106 stockholders of record and we had 9,893,138 shares of common stock issued and outstanding. We believe that the number of beneficial owners is substantially greater than the number of record holders because a significant portion of our outstanding common stock is held of record in broker street names for the benefit of individual investors. The transfer agent of our common stock is Computershare Investor Services, 250 Royall Street Canton, MA 02021.
Equity Compensation Plan Information
The following table shows information with respect to each equity compensation plan under which our common stock is authorized for issuance as from inception (April 24, 2006) through December 31, 2011.
EQUITY COMPENSATION PLAN INFORMATION
Recent Sales of Unregistered Securities
None.
Issuer Purchases of Equity Securities
None.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
Not applicable.
ITEM 7.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OR FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion and analysis should be read together with our financial statements and the related notes appearing elsewhere in this filing. This discussion contains forward-looking statements reflecting our current expectations that involve risks and uncertainties. See “Forward-Looking Statements” for a discussion of the uncertainties, risks and assumptions associated with these statements. Actual results and the timing of events could differ materially from those discussed in our forward-looking statements as a result of many factors, including those set forth under “Risk Factors” and elsewhere in this prospectus.
Our Company
Innovating at the forefront of chemical engineering, Carbon Sciences is developing a breakthrough technology to make cleaner and greener transportation fuels and other valuable, large volume products from natural gas. Our highly scalable, clean-tech process will enable the world to reduce its dependence on petroleum by transforming abundant and affordable natural gas into gasoline, diesel and jet fuel, and other products, such as hydrogen, methanol, ammonia, solvents, plastics and detergent alcohols. The key to this process is a breakthrough catalyst that can reduce the cost of reforming natural gas into synthetic gas (syngas), the most costly step in making products from natural gas.
Our goal is to help reduce the world’s dependence on petroleum by developing technology to enable the cost effective use of natural gas as a feedstock to produce clean and green liquid fuels for use in the existing transportation infrastructure.
We believe that natural gas is the world’s next primary source of fuel. While found in abundant supply at affordable prices in the U.S. and throughout the world, natural gas cannot be used directly in cars, trucks, trains and planes without a massive overhaul of the existing liquid fuels infrastructure. We intend to address this problem by developing an industrial clean-tech process to enable the transformation of natural gas into liquid transportation fuels such as gasoline, diesel, jet fuel and other valuable products. Our competitive advantage over other natural gas reforming technologies is that our processes can significantly lower the cost of reforming natural gas into synthetic gas (syngas), the most costly step in the gas-to-liquids (GTL) process for making liquid transportation fuels from natural gas. As part of our business plan, we intend to demonstrate and prove this point. Based on original laboratory testing results and validated in commercial testing facilities, we believe that we have a very robust reforming catalyst to enable cost effective syngas production.
We have not yet generated revenues. We currently have negative working capital and, in connection with our December 31, 2010 financial statements, we received an opinion from our auditors that expressed substantial doubt about our ability to continue as a going concern without additional financing. Subsequent to December 31, 2010, we obtained $1,482,000 in private placements. We believe that the financings received by us after December 31, 2010 and the net proceeds of this offering will fully address such concern and enable us to complete development of our catalyst and commercially deploy our technology, and implement our business plan through such time as revenues support our operations. If additional funds are required because our plans, expectations or assumptions change, we may also seek funding through additional equity or debt financing. There can be no assurance that such financing will be available or upon such terms that are acceptable to us, if at all.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America or GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to impairment of property, plant and equipment, intangible assets, deferred tax assets and fair value computation using the Black Scholes option pricing model. We base our estimates on historical experience and on various other assumptions, such as the trading value of our common stock and estimated future undiscounted cash flows, that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions; however, we believe that our estimates, including those for the above-described items, are reasonable.
Use of Estimates
In accordance with GAAP, management utilizes estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. These estimates and assumptions relate to recording net revenue, collectability of accounts receivable, useful lives and impairment of tangible and intangible assets, accruals, income taxes, inventory realization, stock-based compensation expense and other factors. Management believes it has exercised reasonable judgment in deriving these estimates. Consequently, a change in conditions could affect these estimates.
Fair Value of Financial Instruments
The Company's cash, cash equivalents, investments, accounts receivable and accounts payable are stated at cost which approximates fair value due to the short-term nature of these instruments.
Recently Issued Accounting Pronouncements
Management reviewed accounting pronouncements issued during the three months ended September 30, 2011, and no pronouncements were adopted during the period.
Results of Operations
Year ended December 31, 2011 compared to the year ended December 31, 2010
General and Administrative Expenses
G&A expenses decreased by $(661,722) to $1,436,727 for the year ended December 31, 2011, compared to $2,098,449 for the year ended December 31, 2010. This decrease in G&A expenses was primarily due to the decrease of $(1,012,239) in non-cash stock compensation expense compared to the prior year. This was partially offset by the increase in other G&A expenses of $350,517.
Research and Development
R&D costs increased by $209,649 to $402,160 for the year ended December 31, 2011 compared to $192,511 for the year ended December 31, 2010. This increase in R&D costs was the result of an increase in outside consulting fees and supplies for testing and research of product development.
Net Loss
Net loss decreased by $(441,093) to $1,861,490 for the year ended December 31, 2011, compared to $2,302,583 for the year ended December 31, 2010. This decrease in net loss was the result of a decrease in non-cash stock compensation expense of $1,012,239, and the overall increase in operating expenses of $571,146. We had no revenues.
Liquidity and Capital Resources
As of December 31, 2011, we had a working deficit of $(230,854) compared to a working deficit of $(10,365) for the year ended December 31, 2010. The decrease of $(220,489) in working capital was due primarily to more current liabilities.
During the year ended December 31, 2011, we used $(1,509,968) of cash for operating activities, as compared to $(1,052,481) for the prior period December 31, 2010. The increase of $457,487 in the use of cash for operating activities was primarily due to an increase in operating net loss, in prepaid expenses, and in accounts payable.
Cash used by investing activities was $(78,189) for the year ended December 31, 2011, as compared to cash used of $(30,659) for the prior period ended December 31, 2010. The net increase of $(47,530) in cash used by investing activities in the current period was due to more funds used to purchase tangible and intangible assets as compared to the prior period ended December 31, 2010, which used fewer funds to purchase tangible and intangible assets, and received proceeds from the sale of a vehicle.
Cash provided from financing activities during the year ended December 31, 2011 was $1,557,000 as compared to $851,000 for the prior period ended December 31, 2010. Our capital needs have primarily been met from the proceeds of equity financings, and investor loans, as we are currently in the development stage and had no revenues.
Our financial statements as of December 31, 2011 have been prepared under the assumption that we would continue as a going concern. Our independent registered public accounting firm issued their report dated March 30, 2011 that included an explanatory paragraph expressing substantial doubt in our ability to continue as a going concern as the Company does not generate significant revenue and has negative cash flows from operations. Our ability to continue as a going concern ultimately is dependent on our ability to generate a profit which is dependent upon our ability to obtain additional equity or debt financing, attain further operating efficiencies and, ultimately, to achieve profitable operations. Our financial statements do not include any adjustments that might result from the outcome of this uncertainty.
During the first quarter of 2011, we issued Units comprising of an aggregate of 400,000 shares of common stock and warrants to purchase 1,600,000 shares of our common stock at a price of $1.00 per Unit for aggregate gross cash proceeds of $400,000. Each Unit consisted of 1 share and a warrant to purchase 4 shares of the Company’s common stock. The warrants were exercisable at a price of $1.00 for a term of five years. The net proceeds of the sales were used for working capital purposes. The warrants were subsequently exercised on a cashless basis for 1,333,335 shares of common stock.
During the second quarter of 2011, we issued Units comprising an aggregate of 800,000 shares of common stock and warrants to purchase 3,200,000 shares of our common stock at a price of $1.00 per Unit for aggregate gross cash proceeds of $800,000. Each Unit consisted of 1 share and a warrant to purchase 4 shares of the Company’s common stock. The warrants were exercisable at a price of $1.00 for a term of five years. The net proceeds of the sales were used for working capital purposes. The warrants were subsequently exercised on a cashless basis for 1,333,335 shares of common stock.
During the third quarter of 2011, we issued 341,000 shares of our common stock at a price of $2.00 per share for aggregate gross cash proceeds of $682,000. The net proceeds of the sales were used for working capital purposes.
Through this offering, we will increase funds available for the development of our business plan and working capital. For the next 48 months, we expect cash needs of up to $3,000,000 to allow us to increase our technical staff and outside laboratory services, increase our business development staff and to cover our ongoing working capital needs. We believe that the net proceeds from this offering will provide us with the capital needed for these plans.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
All financial information required by this Item is attached hereto at the end of this report beginning on page and is hereby incorporated by reference.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES.
(a) Evaluation of Disclosure Controls and Procedures. Based on an evaluation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended) required by paragraph (b) of Rule 13a-15 or Rule 15d-15, as of December 31, 2011, our Chief Executive Officer and Acting Chief Financial Officer has concluded that our disclosure controls and procedures were effective in ensuring that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms. Our Chief Executive Officer and Acting Chief Financial Officer also concluded that, as of December 31, 2011, our disclosure controls and procedures were effective in ensuring that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Acting Chief Financial Officer, to allow timely decisions regarding required disclosure.
(b) Changes in Internal Controls. During the three months ended December 31, 2011, there were no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 or Rule 15d-15 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Management’s Report on Internal Control over Financial Reporting.
We are responsible for establishing and maintaining adequate internal control over financial reporting in accordance with Exchange Act Rule 13a-15. With the participation of our Chief Executive Officer and Acting Chief Financial Officer, our management conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2011 based on the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that our internal control over financial reporting was effective as of December 31, 2011, based on those criteria. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.
The annual report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the Company's independent registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission.
ITEM 9B.
ITEM 9B. OTHER INFORMATION.
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE.
The following table sets forth information about our executive officers, key employees and directors:
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- Chief Executive Officer, President, Acting Chief Financial Officer and Chairman of the Board. Mr. Elton has been President and Chief Operating Officer of the Company since January 5, 2009 and a director of the Company since March 16, 2009. Mr. Elton is an experienced media and marketing executive with a proven record in pioneering new business development strategies and building top-flight marketing organizations. 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 in 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.
Roland F. Bryan - Director. Roland F. Bryan has been the President, Chief Executive Officer, Chief Financial Officer, and Chairman of the Board of Directors of MachineTalker, Inc. (MTI) since its inception in January 2002 and the Secretary of MTI since May 2006. For the six years prior to founding MTI, Mr. Bryan was self-employed as an independent advisor to several high-tech companies on corporate organization, management, marketing and product development. Mr. Bryan’s professional background is in the areas computer science research and process control through computer automation. During the last 25 years he has built up and sold several high-tech companies in the fields of telecommunications networking, military computer systems and commercial equipment for network access. In 1974, he founded Associated Computer Consultants, Inc. ("ACC"), a company that implemented interconnections to the first packet network for many United States government agencies. In 1983 the name of the company was changed to Advanced Computer Communications, Inc. and continued to produce networking products for both military and commercial applications. ACC made the Inc. 500 List of Fastest Growing Companies in 1984. In 1991 the company was split into two separate businesses, one to concentrate on military products, the other to concentrate on commercial products. Ericsson acquired ACC in 1998 for $265 million. In September 1994, WIRED MAGAZINE honored Mr. Bryan and 18 others, as the "Creators of the Internet." Since October 2010 Mr. Bryan has been involved with Solar 3D, Inc., a company developing a 3 dimensional approach to gathering sunlight to improve the efficiency of solar cells. Mr. Bryan is presently Chairman of the Board and Chief Financial Officer of Solar 3D, Inc. Mr. Bryan’s long and successful career in building and growing technology companies made him qualified to serve on the Board of Directors.
Daniel Nethercott - Director. Mr. Nethercott has been a real estate professional for more than two decades. He is currently the President of Redfern Development and acts as the principal liaison to investors, partnerships and directing boards, both public and private. Before forming Redfern Development in 2004 he spent the majority of his career in executive management positions, including over 10 years as a Senior Vice President and Partner for the Grupe Company from 1995 to 2004, one of the largest commercial and residential developers in Northern California. His extensive entrepreneurial experience also includes being a founding partner of NEKO Industries and an investor and founding board member of InMotx Robotics, a world leader in automated handling of natural products. Mr. Nethercott received his BA in Finance from Brigham Young University prior to attending graduate school at the Arizona State University School of Business. Mr. Nethercott’s experience as board member and board consultant to technology companies combined with his executive management experience in strategic and financial planning made him qualified to serve on the Board of Directors.
Key Consultants
Dr. Howard Fong -Dr. Fong currently serves as our chief scientific advisor pursuant to a consulting agreement. Dr. Fong received his Bachelor of Science in Chemical Engineering from San Jose State University in 1971, and Ph.D. in Chemical Engineering from the University of California, Berkeley in 1975. Dr. Fong joined Shell Development Company (Shell Oil Company) at the Westhollow Technology Center in Houston, Texas in 1975, and rose to the rank of Managing Engineer, where he was responsible for the assessment and commercialization of new technologies. Dr. Fong retired from Shell in April 2010 and has served as a consultant to the Company since January 2011. Dr. Fong has experience working with start-up companies, providing critical techno-economic evaluations and charting the path for successful commercialization
Family Relationships
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 traditionally determined that it is in the best interests of the Company and its shareholders to combine these roles. Due to the small size and early stage of the Company, we believe it is currently most effective to have the Chairman and Chief Executive Officer positions partially combined.
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.
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:
·
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;
·
convicted in a criminal proceeding or is subject to a pending criminal proceeding (excluding traffic violations and other minor offenses);
·
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;
·
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.
·
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
·
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.
COMMITTEES OF THE BOARD
Committees of the Board
Audit Committee. Our audit committee is comprised of Roland Bryan and Daniel Nethercott. Mr. Bryan qualifies as an audit committee financial expert. Each member of the audit committee qualifies as independent under Nasdaq Marketplace Rules. Our audit committee is authorized to:
Compensation Committee. Our compensation committee is comprised of Roland Bryan, as Chairman, and Daniel Nethercott, and is authorized to:
Nominating Committee., Our nominating committee is comprised of Daniel Nethercott, as Chairman, and Roland Bryan and is authorized to:
INDEBTEDNESS OF EXECUTIVE OFFICERS AND DIRECTORS
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.
FAMILY RELATIONSHIPS
There are no family relationships among our executive officers and directors.
CODE OF ETHICS
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.
ITEM 11.
ITEM 11.EXECUTIVE COMPENSATION.
The following table sets forth the annual compensation for years ended December 31, 2011 and 2010 to our Chief Executive Officer and our most highly compensated officers other than the Chief Executive Officer at December 31, 2010 whose total compensation exceeded $100,000, which we refer to as our named executive officers.
*
Mr. Elton was appointed President and Chief Operating Officer on January 5, 2009 and as Chief Executive Officer and Chairman on May 20, 2009. The fair value of the stock option award to Mr. Elton was estimated using the Black-Scholes option pricing model. The estimated fair value was determined based on the market price of the Company’s stock on the date of grant.
**
Dr. Aslam was appointed Chief Technology Officer on January 7, 2009. On December 24, 2010, the Company accepted the resignation of Dr. Aslam effective as of December 31, 2010.
Outstanding Equity Awards at Fiscal Year-End Table.
The following table sets forth information with respect to grants of options to purchase our common stock to the named executive officers at December 31, 2011.
Director Compensation
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 compensation was paid to non-employee directors during the fiscal year ended December 31, 2011. Our employee directors currently do not receive cash compensation for their service on the Board of Directors.
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:
• 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.
• 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;
• 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;
• 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;
• 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.
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.
Employment Agreements
We currently have no employment agreements with our executive officers.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth, as of March 30, 2012, the number of and percent of our common stock beneficially owned by:
·
each of our directors,
·
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.
A person is deemed to be the beneficial owner of securities that can be acquired by him within 60 days from March 30, 2012 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 30, 2012 have been exercised and converted.
The address for our executive officers and directors is the same as our address.
*Less than one percent.
(1)
Based upon 9,893,138 shares issued and outstanding as of March 30, 2012.
(2)
Pursuant to the Stock Option Agreement with Derek McLeish, a former officer of the Company, Mr. Elton has the right to acquire 375,000 shares of common stock held by Mr. McLeish at a price of $4.00, all of which will become vested and exercisable in the next 60 days. Includes (a) an option to purchase 375,000 shares of the Company’s common stock at a price of $2.92 which is currently exercisable and which expires on April 23, 2017, and (b) 65,000 will become vested and exercisable in the next 60days under an option to purchase shares of the Company’s common stock at a price of $4.30 per share which expires on July 11, 2018.
(3)
Mr. McLeish has granted an option to Mr. Elton to purchase 375,000 shares to at a price of $4.00 per share.
(4)
Gregory Boden has the voting and dispositive power over the shares held by Bountiful Capital, LLC.
(5)
Jonathan Lei has the voting and dispositive power over the shares held by NewQuest Ventures, LLC.
(6)
Karen M. Graham has the voting and dispositive power over the shares held by Wings Fund, Inc.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
Certain Relationships and Related Transactions
During the past three fiscal years, there have been no transactions 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.
Director Independence
Roland Bryan and Daniel Nethercott are independent as that term is defined under the Nasdaq Marketplace Rules.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
Audit Fees
The aggregate fees billable to us by HJ Associates & Consultants, LLP during 2011 and 2010 for the audits of our annual financial statements for the fiscal year totaled approximately $30,700 and $41,265, respectively.
Audit-Related Fees
We incurred assurance and audit-related fees during 2011 and 2010 of $0 and $0 respectively, to HJ Associates & Consultants, LLP in connection with the audit of the financial statements of the Company for the years ended December 31, 2011 and December 31, 2010.
Tax Fees
We incurred fees of $1,177and $1,300 billed to us by HJ Associates & Consultants, LLP for services rendered to us for tax compliance, tax advice, or tax planning for the fiscal year ended December 31, 2011 and December 31, 2010, respectively.
All Other Fees
There were no fees billed to us by HJ Associates & Consultants, LLP for services rendered to us during the last two fiscal years, other than the services described above under “Audit Fees” and “Audit-Related Fees.”
As of the date of this filing, our current policy is to not engage HJ Associates & Consultants, LLP to provide, among other things, bookkeeping services, appraisal or valuation services, or international audit services. The policy provides that we engage HJ Associates & Consultants, LLP to provide audit, tax, and other assurance services, such as review of SEC reports or filings.
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULES.
EXHIBIT INDEX
*Filed herewith
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated:
SIGNATURE
TITLE
DATE
/s/ Byron Elton
CHIEF EXECUTIVE OFFICER, PRESIDENT (PRINCIPAL EXECUTIVE OFFICER),
March 30, 2012
Byron Elton
ACTING CHIEF FINANCIAL OFFICER (PRINCIPAL ACCOUNTING
AND FINANCIAL OFFICER) AND CHAIRMAN OF THE BOARD
/s/ Roland F. Bryan
DIRECTOR
March 30, 2012
Roland F. Bryan
/s/ Daniel Nethercott
DIRECTOR
March 30, 2012
Daniel Nethercott
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders
Carbon Sciences, Inc.
(A Development Stage Company)
Santa Barbara, California
We have audited the accompanying balance sheets of Carbon Sciences, Inc. as of December 31, 2011 and 2010, and the related statements of operations, shareholders' equity/(deficit), and cash flows for the years then ended, and from inception on August 25, 2006 through December 31, 2011. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Carbon Sciences, Inc. as of December 31, 2011 and 2010, and the results of its operations and its cash flows for the years then ended, and from inception on August 25, 2006 through December 31, 2011, in conformity with U.S. generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As disclosed in Note 1 to the financial statements, the Company does not generate significant revenue, and has negative cash flows from operations. This raises substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ HJ Associates & Consultants, LLP
HJ Associates & Consultants, LLP
Salt Lake City, Utah
March 30, 2012
CARBON SCIENCES, INC.
(A Development Stage Company)
BALANCE SHEETS
The accompanying notes are an integral part of these financial statements
CARBON SCIENCES, INC.
(A Development Stage Company)
STATEMENTS OF OPERATIONS
The accompanying notes are an integral part of these financial statements
CARBON SCIENCES, INC.
(A Development Stage Company)
STATEMENTS OF SHAREHOLDERS' EQUITY/(DEFICIT)
The accompanying notes are an integral part of these financial statements
CARBON SCIENCES, INC.
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of these financial statements
CARBON SCIENCES, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2011 and 2010
1. ORGANIZATION AND LINE OF BUSINESS
Organizational History
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 a real-time and interactive mobile communication services to businesses and consumers under the Zingerang trade name. The Company is now pursuing a new line of business. The company is developing a technology to convert earth destroying carbon dioxide (CO2) into a useful form that will not contribute to green house gases. This technology is based on a patent filed by the company and developed under the brand name, GreenCarbon™ Technology. By eliminating harmful CO2 from human created sources, such as power plants and industrial factories, the technology will provide a partial solution to the problem of global warming. GreenCarbon™ Technology is initially targeted at electrical power plants. CO2 makes up nearly 80% of all greenhouse gases. More than a quarter of that CO2 comes from electrical power plants.
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 significant revenue, and has negative cash flows from operations, which raise substantial doubt about the Company’s ability to continue as a going concern. The ability of the Company to continue as a going concern and appropriateness of using the going concern basis is dependent upon, among other things, additional cash infusion. As discussed in Note 3, the Company has obtained funds from its shareholders since it’s’ inception through December 31, 2011. Management believes this funding will continue, and is also actively seeking new investors. Management believes the existing shareholders and the prospective new investors will provide the additional cash needed to meet the Company’s obligations as they become due, and will allow the development of its core of business.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This summary of significant accounting policies of Carbon Sciences, Inc. is presented to assist in understanding the Company’s financial statements. The financial statements and notes are representations of the Company’s management, which is responsible for their integrity and objectivity. These accounting policies conform to accounting principles generally accepted in the United States of America and have been consistently applied in the preparation of the financial statements.
Development Stage Activities and Operations
The Company has been in its initial stages of formation and for the year ended December 31, 2011, had no revenues. A development stage activity is one in which all efforts are devoted substantially to establishing a new business and even if planned principal operations have commenced, revenues are insignificant.
Revenue Recognition
The Company will recognize revenue when services are performed, and at the time of shipment of products, provided that evidence of an arrangement exists, title and risk of loss have passed to the customer, fees are fixed or determinable, and collection of the related receivable is reasonably assured. To date, the Company has had no revenues and is in the development stage.
CARBON SCIENCES, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2011 and 2010
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Cash and Cash Equivalent
The Company considers 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, and the fair value of stock options. 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 its estimated useful lives:
Depreciation expense as of December 31, 2011 and 2010 was $19,429 and $15,579 respectively.
Fair Value of Financial Instruments
Fair Value of Financial Instruments, requires disclosure of the fair value information, whether or not recognized in the balance sheet, where it is practicable to estimate that value. As of December 31, 2011 and 2010, the amounts reported for cash, prepaid expenses, accounts payable, and accrued expenses, approximate the fair value because of their short maturities.
Loss per Share Calculations
Loss per Share dictates the calculation of basic earnings per share and diluted earnings per share. Basic earnings per share are computed by dividing income available to common shareholders by the weighted-average number of common shares available. Diluted earnings per share is computed similar to basic earnings per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. No shares for employee options or warrants were used in the calculation of the loss per share as they were all anti-dilutive. The Company’s diluted loss per share is the same as the basic loss per share for the years ended December 31, 2011 and 2010, as the inclusion of any potential shares would have had an anti-dilutive effect due to the Company generating a loss.
Income Taxes
The Company uses the liability method of accounting for income taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to financial statements carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry-forwards. The measurement of deferred tax assets and liabilities is based on provisions of applicable tax law. The measurement of deferred tax assets is reduced, if necessary, by a valuation allowance based on the amount of tax benefits that, based on available evidence, is not expected to be realized.
CARBON SCIENCES, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2011 and 2010
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Research and Development
Research and development costs are expensed as incurred. Total research and development costs were $402,160 and $192,511 for the years ended December 31, 2011 and 2010, respectively.
Advertising Costs
The Company expenses the cost of advertising and promotional materials when incurred. Total advertising costs were $50,807 and $4,386 for the years ended December 31, 2011 and 2010, respectively.
Stock-Based Compensation
Share based payments applies to transactions in which an entity exchanges its equity instruments for goods or services, and also applies to liabilities an entity may incur for goods or services that are to follow a fair value of those equity instruments. We will be required to follow a fair value approach using an option-pricing model, such as the Black Scholes option valuation model, at the date of a stock option grant. The deferred compensation calculated under the fair value method would then be amortized over the respective vesting period of the stock option. The adoption of share based compensation has no material impact on our results of operations.
Recently Issued Accounting Pronouncements
Management reviewed accounting pronouncements issued during the three months ended December 31, 2011, and no pronouncements were adopted during the period.
3.
CAPITAL STOCK
As of April 29, 2011, the Company authorized a one-for-forty (1:40) reverse split. All share amounts have been retroactively restated reflecting this reverse split.
During the year ended December 31, 2011, the Company issued:
·
800,000 shares of common stock at a price of $1.00 per share for cash of $800,000, with warrants attached with the option to purchase 3,200,000 shares of common stock over a period of five years;
·
341,000 shares of common stock at a price of $2.00 for cash of $682,000;
·
3,333,338 shares of common stock upon cashless exercise of warrants to purchases 4,000,000 shares of common stock.
During the year ended December 31, 2010, the Company issued;
·
357,143 shares of common stock at a price of $1.40 per share for cash;
·
150,000 shares of common stock were issued at a price of $1.04 for cash;
·
200,000 shares of common stock issued at $10.00 per share for cash.
4. STOCK OPTIONS AND WARRANTS
On April 23, 2010, the Board of Directors of the Company granted non qualified stock options for 512,500 shares of common stock to its employees, agreements may provide. Notwithstanding any other provisions of the Option agreement, each Option expires on the date specified in the Option agreement, which date shall not be later than the seventh (7th) anniversary from the grant date of the options. The stock options vested immediately, and are exercisable for a period of seven years from the date of grant at an exercise price of $2.92 per share, the market value of the Company’s common stock on the date of grant.
CARBON SCIENCES, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2011 and 2010
4. STOCK OPTIONS AND WARRANTS
A summary of the Company’s stock option activity and related information follows:
The weighted average remaining contractual life of options outstanding as of December 31, 2011 was as follows:
The stock-based compensation expense recognized in the statement of operations during the years ended December 31, 2011 and 2010, related to the granting of these options is $217,761 and $1,230,000, respectively.
Warrants
During the years ended December 31, 2011 and 2010, the Company granted 3,200,000 and 800,000 warrants, respectively, determined using the Black Scholes pricing model.
CARBON SCIENCES, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2011 and 2010
4. STOCK OPTIONS AND WARRANTS (Continued)
During the years ended December 31, 2011 and 2010, the Company issued warrants for services. A summary of the Company’s warrant activity and related information follows:
5.
RENTAL LEASE
The Company extended its facility lease for a period of two years expiring on September 30, 2012. The base rent is $2,800 per month. The rent paid for the years ended December 31, 2011 and 2010 were $44,424 and $45,101.
6.
COMMITMENTS
On December 23, 2010, we entered in to a License Agreement with the University of Saskatchewan or UOS, pursuant to which we have an exclusive, worldwide, sub-licensable, royalty-bearing right and license to make, have made, use, offer for sale, sell, reproduce, distribute, incorporate into other technology, or otherwise exploit certain patent-pending technology and relevant improvements from UOS, for a high performance catalyst for the dry reforming of methane with carbon dioxide for the production of synthesis gas. This License Agreement commenced on December 23, 2010, and will continue until the expiration date of the last of the licensed patents. In consideration for the grant of the patents, we are required to pay license fee of $20,000 a year for the term of the license Agreement. In addition, we are obligated to pay UOS $50,000 upon the first application of a licensed product in a pilot-scale or commercial facility and $50,000 upon the first sale of a licensed product. We are also required to pay royalties ranging from 0.9% to 3.6% of the sales revenue from a customer that uses a tangible licensed product or system made by us. In the event that we sublicense the licensed patents, we shall pay UOS sublicense compensation ranging from 6.25% to 12.5% of the sublicense fees that we receive. Under the License Agreement, we are also required to maintain general liability insurance with policy limits of no less than $2,000,000 during the term of the License Agreement and products liability insurance coverage with policy limits of no less than $5,000,000 to protect against our activities in relation to the license agreement.
The License Agreement may be terminated upon the party’s mutual consent or upon the expiration of six months after notice of termination to the UOS. In addition, the License Agreement may be terminated upon the occurrence of an event of default under the agreement.
7.
INCOME TAXES
The Company files income tax returns in the U.S. Federal jurisdiction, and the state of California. With few exceptions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 2009.
Deferred income taxes have been provided by temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for tax purposes. To the extent allowed by GAAP, we provide valuation allowances against the deferred tax assets for amounts when the realization is uncertain.Included in the balances at December 31, 2011 and 2010, are no tax positions for which the ultimate deductibility is highly certain, but for which there is uncertainty about the timing of such deductibility. Because of the impact of deferred tax accounting, other than interest and penalties, the disallowance of the shorter deductibility period would not affect the annual effective tax rate but would accelerate the payment of cash to the taxing authority to an earlier period.
The Company's policy is to recognize interest accrued related to unrecognized tax benefits in interest expense and penalties in operating expenses. During the periods ended December 31, 2011 and 2010, the Company did not recognize interest and penalties.
8.
DEFERRED TAX BENEFIT
At December 31, 2011, the Company had net operating loss carry-forwards of approximately $6,035,500, which begins to expire at dates that have not been determined. No tax benefit has been reported in the December 31, 2011 financial statements since the potential tax benefit is offset by a valuation allowance of the same amount.
A reconciliation of income tax expense that would result from applying the U.S. Federal and State rate of 40% to pretax income from continuing operations for the period ended December 31, 2011 and 2010, with federal income tax expense presented in the financial statements is as follows:
CARBON SCIENCES, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2011 and 2010
8.
DEFERRED TAX BENEFIT (Continued)
Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible differences and operating loss and tax credit carry-forwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the difference between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
The items as of December 31, 2011 and 2010, which comprise a significant portion of deferred tax assets and liabilities are approximately as follows:
Due to the change in ownership provisions of the Tax Reform Act of 1986, net operating loss carry-forwards for Federal income tax reporting purposes are subject to annual limitations. Should a change in ownership occur, net operating loss carryforwards may be limited as to use in future years.
CARBON SCIENCES, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2011 and 2010
9.
RELATED PARTY TRANSACTION
During the fourth quarter ending December 31, 2011, the Company signed promissory notes for funds received in the amount of $100,000 for operating expenses from an investor. The notes bear interest at 5% per annum, and are due within one year.
On April 9, 2010, the Company signed a promissory note for funds received from an investor in the amount of $25,000 for operating expenses. The note bears interest at 5% per annum, and is due April 9, 2011.
10.
SUBSEQUENT EVENT
Management evaluated subsequent events as of the date of the financial statements pursuant to ASC TOPIC 855.
During the first quarter of 2012, the Company signed promissory notes for funds received from two investors in the amount of $85,000 for operating expenses. The notes bear interest at 5% per annum, and are due with one year.
On February 27, 2012, the Company issued 78,571 shares of common stock at a price of $0.70 per share for $55,000 cash.
On March 27, 2012, the Company issued 170,000 of common stock pursuant to an agreement with an existing shareholder.
On March 27, 2012, the Company issued 50,000 shares of common stock for services rendered to the Company.