Notes
to Financial Statements
March
31, 2018
(All
amounts rounded to thousands of dollars)
(Unaudited)
1.
THE COMPANY AND BASIS OF PRESENTATION
Nature
of Organization
Coates
International, Ltd. (the “Company” or “CIL”) has acquired the exclusive licensing rights to the patented
Coates spherical rotary valve (“CSRV
®
”) system technology in North America, Central America and South
America (the “CSRV
®
License”). The CSRV
®
system technology has been developed over a
period of more than 20 years by the Company’s founder George J. Coates, President and Chief Executive Officer, and his son
Gregory G. Coates. The CSRV
®
system technology is adaptable for use in piston-driven internal combustion engines
of many types and has been patented in the United States and numerous countries throughout the world. The Company is endeavoring
to raise working capital to commence production of hydrogen gas and natural gas powered CSRV
®
industrial electric
power generator sets (“Gen Sets)” and is also seeking to enter into sublicense agreements with third party, original
equipment manufacturers (“OEM’s”) which provide for licensing fees. The Company is also continuing with research
and development of a hydrogen reactor to harvest Hydroxy-Gas from water with the intent to power the Company’s products,
including large industrial Gen Sets. George J. Coates, owner of the hydrogen reactor technology, has committed to license this
technology to the Company once the related patent protection is in place.
Management
believes that the CSRV
®
engines provide the following advantages as compared to conventional internal combustion
engines designed with “poppet valves”:
|
●
|
Improved
fuel efficiency
|
|
●
|
Lower
levels of harmful emissions
|
|
|
|
|
●
|
Adaptability
to numerous types of engine fuels
|
|
|
|
|
●
|
Longer
intervals between engine servicing
|
The
CSRV
®
system technology is designed to replace the intake and exhaust conventional “poppet valves”
currently used in almost all piston-driven, automotive, truck, motorcycle, marine and electric power generator engines, among
others. Unlike conventional valves which protrude into the engine combustion chamber, the CSRV
®
system technology
utilizes spherical valves that rotate in a cavity formed between a two-piece cylinder head. The CSRV
®
system technology
utilizes significantly fewer moving parts than conventional poppet valve assemblies. As a result of these design improvements,
management believes that engines incorporating the CSRV
®
system technology (“CSRV
®
Engines”)
will last significantly longer and will require less lubrication over the life of the engine, as compared to conventional engines.
In addition, CSRV
®
Engines can be designed with larger openings into the engine cylinder than with conventional
valves so that more fuel and air can be inducted into, and expelled from the cylinder in a shorter period of time. Larger valve
openings permit higher revolutions-per-minute (RPM’s) and permit higher compression ratios with lower combustion chamber
temperatures, allowing the Coates Engine
®
to produce more power than equivalent conventional engines. The extent
to which CSRV
®
Engines operating with the CSRV
®
system technology achieve (i) higher RPM’s,
(ii) greater volumetric efficiency and (iii) thermal efficiency than conventional engines, is a function of the engine design
and application.
Coates International, Ltd.
Notes to Financial Statements - (Continued)
Basis
of Presentation
The
accompanying condensed financial statements include the accounts of the Company. In the opinion of the Company’s management,
the condensed consolidated financial statements reflect all adjustments, which are normal and recurring in nature, necessary for
fair financial statement presentation. The preparation of these condensed consolidated financial statements in conformity with
U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that
affect the amounts reported in these condensed consolidated financial statements and accompanying notes. Actual results could
differ materially from those estimates. Certain prior period amounts in the condensed financial statements have been reclassified
to conform to the current period’s presentation.
These
condensed financial statements and accompanying notes should be read in conjunction with the Company’s annual financial
statements and the notes thereto included in its Annual Report on Form 10-K for the year ended December 31, 2017 and the Company’s
quarterly financial statements and the notes thereto included in its Quarterly Reports.
Since
the Company’s inception, the Company has been responsible for the development costs of the CSRV
®
technology
in order to optimize the value of the licensing rights and has incurred related operational costs, the bulk of which have been
funded primarily through cash generated from licensing fees, sales of stock, short term convertible promissory notes, capital
contributions, loans made by George J. Coates, Bernadette Coates, his spouse, Gregory G. Coates and certain directors, fees received
from research and development of prototype models and a small number of CSRV
®
engine generator sales. The Company
has incurred substantial cumulative losses from operations since its inception. Losses from operations are expected to continue
until the CSRV
®
Engines
®
are successfully introduced into the marketplace enabling the Company to
generate substantial sales and/or receive substantial licensing revenues. These losses from operations were primarily related
to research and development of the Company’s intellectual property rights, patent filing and maintenance costs and general
and administrative expenses. The Company has also reported substantial non-cash expenses for stock-based compensation, remeasurement
of the estimated fair value of embedded derivative liabilities related to convertible promissory notes issued and interest expense
and losses on conversion of convertible promissory notes.
As
shown in the accompanying financial statements, the Company has incurred recurring losses from operations and, as of March 31,
2018, had a stockholders’ deficiency of ($6,376,000). In addition, our mortgage loan which had a principal balance of $1,258,000
at March 31, 2018, matures in July 2018. The Company will be required to renegotiate the terms of an extension of the mortgage
loan or successfully refinance the property with another mortgage lender, if possible. Failure to do so could adversely affect
the Company’s financial position and results of operations. In addition, the recent trading price range of the Company’s
common stock has introduced additional difficulty to the Company’s challenge to secure needed additional working capital.
These factors raise substantial doubt about the Company’s ability to continue as a going concern. Management has instituted
a cost control program intended to restrict variable costs to only those expenses that are necessary to complete its activities
related to entering the production phase of operations, develop additional commercially feasible applications of the CSRV
®
system technology, seek additional sources of working capital and cover general and administrative costs in support of such
activities. The Company has been actively undertaking efforts to secure new sources of working capital. At March 31, 2018, the
Company had negative working capital of ($7,786,000) compared with negative working capital of ($7,467,000) at the end of 2017.
The
Company continues to actively seek out new sources of working capital; however, there can be no assurance that it will be successful
in these efforts. The accompanying financial statements do not include any adjustments that might be necessary if the Company
is unable to continue as a going concern.
Coates International, Ltd.
Notes to Financial Statements - (Continued)
Reverse
Stock Split
The
Company effected a one-for-200 reverse stock split of all of its outstanding shares of common stock, Series A Preferred Stock,
Series B Convertible Preferred Stock, common stock warrants and stock options as of the close of trading on December 1, 2017.
All prior year balances of shares of capital stock, warrants and stock options outstanding and all presentations and disclosures
of transactions in shares of capital stock, warrants and stock options have been restated on a pro forma basis as if the reverse
stock split had occurred prior to January 1, 2017. Such restatements include calculations regarding the Company’s weighted
average shares outstanding and loss per share.
Inventory
Inventory
consists of raw materials and work-in-process, including overhead. Inventory is stated at the lower of cost or net realizable
value. Inventory is accounted for on the first-in, first-out method.
Use
of Estimates
The
preparation of the Company’s financial statements in conformity with GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during the reporting period. These significant estimates
include determining the fair value of convertible promissory notes containing embedded derivatives and variable conversion rates,
determining a value for shares of Series A Preferred Stock and Series B Convertible Preferred Stock issued, assigning useful lives
to the Company’s property, plant and equipment, determining an appropriate amount to reserve for obsolete and slow moving
inventory, estimating a valuation allowance for deferred tax assets, assigning expected lives to, and estimating the rate of forfeitures
of, stock options granted and selecting a trading price volatility factor for the Company’s common stock in order to estimate
the fair value of the Company’s stock options on the date of grant or other appropriate measurement date. Actual results
could differ from those estimates.
2.
CONCENTRATIONS OF CREDIT AND BUSINESS RISK
The
Company maintains cash balances with one financial institution. Monies on deposit are fully insured by the Federal Deposit Insurance
Corporation.
The
Company’s operations are devoted to the development, application, licensing and marketing of the CSRV
®
system
technology which was invented by George J. Coates, the Company’s founder, Chairman, Chief Executive Officer, President and
controlling stockholder. Development efforts have been conducted continuously during this time. From July 1982 through May 1993,
seven U.S. patents as well as a number of foreign patents were issued with respect to the CSRV
®
system technology.
Since inception of the Company in 1988, all aspects of the business have been completely dependent upon the activities of George
J. Coates. The loss of George J. Coates’ availability or service due to death, incapacity or otherwise would have a material
adverse effect on the Company's business and operations. The Company does not presently have any key-man life insurance in force
for Mr. Coates.
Coates International, Ltd.
Notes to Financial Statements - (Continued)
3.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash,
Other Assets, Accounts Payable and Accrued Liabilities and Other Liabilities
With
the exception of convertible promissory notes, the carrying amount of these items approximates their fair value because of the
short term maturity of these instruments. The convertible promissory notes are reported at their estimated fair value, determined
as described in more detail in Note 15.
Limitations
Fair
value estimates are made at a specific point in time, based on relevant market information and information about the financial
instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore
cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
4.
LICENSING AGREEMENT AND DEFERRED LICENSING COSTS
The
Company holds a manufacturing, use, lease and sale license from George J. Coates and Gregory G. Coates for the CSRV
®
system technology in the territory defined as the Western Hemisphere (the “License Agreement”). Under the License
Agreement, George J. Coates and Gregory G. Coates granted to the Company an exclusive, perpetual, royalty-free, fully paid-up
license to the patented intellectual property that specifically relates to an internal combustion engine that incorporates the
CSRV
®
system technology (the “CSRV
®
Engine”) and that is currently owned or controlled
by them (the “CSRV
®
Intellectual Property”), plus any CSRV
®
Intellectual Property that
is developed by them during their employment with the Company. In the event of insolvency or bankruptcy of the Company, the licensed
rights would terminate and ownership would revert back to George J. Coates and Gregory G. Coates.
Under
the License Agreement, George J. Coates and Gregory G. Coates agreed that they will not grant any Western Hemisphere licenses
to any other party with respect to the CSRV
®
Intellectual Property.
At
March 31, 2018 and December 31, 2017, deferred licensing costs, comprised of expenditures for patent costs incurred pursuant to
the CSRV
®
licensing agreement, net of accumulated amortization, amounted to $33,000 and $34,000, respectively.
Amortization expense for the three months ended March 31, 2018 and 2017 amounted to $1,000 and $1,000, respectively.
5.
AGREEMENT ASSIGNED TO ALMONT ENERGY, INC.
In
2010, Almont Energy Inc. (“Almont”), a privately held, independent third-party entity based in Alberta, Canada became
the assignee of a sublicense which covers the use of the CSRV
®
system technology in the territory of Canada in
the oil and gas industry (the “Canadian License”). This sublicense is currently inactive because the parties have
not fulfilled their obligations thereunder due to the Company’s delay in starting up production and delivery of CSRV
®
products to Almont. The parties mutually agreed to consider the basis on which the license could be reactivated at such
time that the Company is successful in starting up its manufacturing operations.
Coates International, Ltd.
Notes to Financial Statements - (Continued)
In
prior years, the Company received a non-refundable $300,000 deposit on the Canadian License. As the Company continues to be desirous
of commencing shipments of its CSRV® products to Almont under the sublicense at such time that it is able to start up production
operations, it has continued to amortize this deposit into income over the period until expiration of the last CSRV
®
system technology patent in force. At March 31, 2018, amortization of the unamortized balance is as follows:
Year Ending
|
|
Amount
|
|
2018
|
|
|
14,000
|
|
2019
|
|
|
19,000
|
|
2020
|
|
|
19,000
|
|
2021
|
|
|
19,000
|
|
Thereafter
|
|
|
94,000
|
|
|
|
$
|
165,000
|
|
At
March 31, 2018 and December 31, 2017, the unamortized balance of this license deposit was $165,000 and $170,000, respectively.
The current portion of $19,000 is included in sublicense deposits under current assets and the remainder of the balance is included
in non-current sublicense deposits on the accompanying balance sheets at March 31, 2018 and December 31, 2017, respectively.
6.
NON-EXCLUSIVE DISTRIBUTION SUBLICENSE WITH RENOWN POWER DEVELOPMENT, LTD.
In
February 2015, the Company granted a non-exclusive distribution sublicense to Renown Power Development, Ltd., a China-based sales
and distribution company (“Renown”) covering the territory defined as the Western Hemisphere. Under this sublicense,
Renown will be permitted to sell, lease and distribute CSRV
®
products. Renown intends to source CSRV
®
products from Coates Power, Ltd., a China-based company formed for the purpose of manufacturing CSRV
®
products
(“Coates Power”). Coates Power has not been able to commence operations due to ongoing delays in obtaining necessary
support and approval from the Chinese government in spite of continuing efforts by Renown to do so on its behalf. This has been
and continues to be a long, arduous process because the government is addressing this at a very slow pace. As of March 31, 2018,
the Company has only received an initial non-refundable deposit of $500,000. Until Coates Power can begin production of CSRV
®
products for Renown, the Company will not receive any further monies from its sublicense with Renown.
At
this time, as the Company’s intellectual property rights only cover the territory of North America, it does not have any
rights to enter into a manufacturing and sale license agreement with Coates Power. These rights are currently held by George J.
Coates, Gregory G. Coates and The Coates Trust, a trust controlled by George J. Coates. Coates Power and Renown are controlled
and managed by Mr. James Pang, the Company’s liaison agent in China.
The
Company received a $131,000 cash deposit with an order from Coates Power to produce two Gen Sets. This amount is included in Deposits
in the accompanying balance sheets at March 31, 2018 and December 31, 2017. The Company intends to build and ship these two generators
at such time that Coates Power is able to commence production in accordance with the manufacturing license agreement and there
is sufficient working capital for this purpose.
7.
OTHER CURRENT ASSETS
Other
current assets at March 31, 2018 and December 31, 2017 amounted to $50,000 and $1,000, respectively. The balance at March 31,
2018 included $48,000 for inventory billed, but not received.
8.
INVENTORY
Inventory
consisted of the following:
|
|
March 31,
2018
|
|
|
December 31,
2017
|
|
Raw materials
|
|
$
|
102,000
|
|
|
$
|
104,000
|
|
Coates International, Ltd.
Notes to Financial Statements - (Continued)
9.
LICENSE DEPOSITS
Sublicensing
fee revenue for the three months ended March 31, 2018 and 2017 amounted to $5,000 and $5,000, respectively.
10.
PROPERTY, PLANT AND EQUIPMENT
Property,
plant and equipment at cost, less accumulated depreciation, consists of the following:
|
|
March 31,
2018
|
|
|
December 31,
2016
|
|
Land
|
|
$
|
1,235,000
|
|
|
$
|
1,235,000
|
|
Building
|
|
|
964,000
|
|
|
|
964,000
|
|
Building improvements
|
|
|
83,000
|
|
|
|
83,000
|
|
Machinery and equipment
|
|
|
689,000
|
|
|
|
689,000
|
|
Furniture and fixtures
|
|
|
57,000
|
|
|
|
57,000
|
|
|
|
|
3,028,000
|
|
|
|
3.028,000
|
|
Less: Accumulated depreciation
|
|
|
(1,006,000
|
)
|
|
|
(996,000
|
)
|
Total
|
|
$
|
2,022,000
|
|
|
$
|
2,032,000
|
|
Depreciation
expense amounted to $10,000 and $11,000 for the three months ended March 31, 2018 and 2017, respectively.
11.
MORTGAGE LOAN PAYABLE
The
Company has a mortgage loan on the land and building that serves as its headquarters and research and development facility which
bears interest at the rate of 7.5% per annum and matures in July 2018. Interest expense for the three months ended March 31, 2018
and 2017 amounted to $24,000 and $25,000, respectively. The loan requires monthly payments of interest, plus $5,000 which is being
applied to the principal balance. The remaining principal balance at March 31, 2018 and December 31, 2017 was $1,258,000 and $1,273,000,
respectively. The mortgage loan may be prepaid in whole, or, in part, at any time without penalty. The Company will be required
to renegotiate the terms of a further extension of the mortgage loan or successfully refinance the property with another mortgage
lender, if possible. Failure to do so, could adversely affect the Company’s financial position and results of operations.
The
loan is collateralized by a security interest in all of the Company’s assets, the pledge of 25,000 shares of common stock
of the Company owned by George J. Coates, which were deposited into escrow for the benefit of the lender and the personal guarantee
of George J. Coates. The Company is not permitted to create or permit any secondary mortgage or similar liens on the property
or improvements thereon without prior consent of the lender.
Coates International, Ltd.
Notes to Financial Statements - (Continued)
12.
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts
payable and accrued liabilities are as follows:
|
|
March 31,
2018
|
|
|
December 31,
2017
|
|
Legal and professional fees
|
|
$
|
1,396,000
|
|
|
$
|
1,427,000
|
|
Accrued interest expense
|
|
|
622,000
|
|
|
|
582,000
|
|
General and administrative expenses
|
|
|
528,000
|
|
|
|
420,000
|
|
Research and development costs
|
|
|
115,000
|
|
|
|
115,000
|
|
Total
|
|
$
|
2,661,000
|
|
|
$
|
2,544,000
|
|
13.
PROMISSORY NOTES TO RELATED PARTIES
Promissory
Notes Issued to George J. Coates
During
the three months ended March 31, 2018 and 2017, the Company issued, in a series of transactions, promissory notes to George J.
Coates and received cash proceeds of $-0- and $4,000, respectively and repaid promissory notes to George J. Coates in the aggregate
principal amount of $20,000 and $4,000, respectively. Interest expense for the three months ended March 31, 2018 and 2017 amounted
to $13,000 and $13,000, respectively.
The
promissory notes are payable on demand and provide for interest at the rate of 17% per annum, compounded monthly. At March 31,
2018, the outstanding principal balance was $-0- and the balance of unpaid accrued interest was $331,000.
Promissory
Note Issued to Gregory G. Coates
The
Company has a non-interest bearing promissory note due to Gregory G. Coates which is payable on demand. Interest is being imputed
on this promissory note at the rate of 10% per annum. During the three months ended March 31, 2018 and 2017, the Company, partially
repaid $15,000 and $-0-, respectively of this promissory note. Imputed interest expense for the three months ended March 31, 2018
and 2017, amounted to $35,000 and $35,000, respectively. At March 31, 2018, the outstanding principal balance was $1,403,000.
Promissory
Notes Issued to Bernadette Coates
During
the three months ended March 31, 2018 and 2017, the Company issued promissory notes to Bernadette Coates, spouse of George J.
Coates and received cash proceeds of $-0- and $1,000, respectively. The Company repaid promissory notes to Bernadette Coates in
the principal amount of $15,000 and $6,000, respectively. The promissory notes are payable on demand and provide for interest
at the rate of 17% per annum, compounded monthly. Interest expense for the three months ended March 31, 2018 and 2017, amounted
to $7,000 and $3,000, respectively. At March 31, 2018, the outstanding principal balance was $14,000.
Promissory
Note Issued to Employee
The
Company issued a promissory note to an employee which was payable on demand and provided for interest at the rate of 17% per annum,
compounded monthly. In February 2018, this note was repaid in full along with accrued interest thereon of $1,400.
The
aggregate amount of unpaid accrued interest on all promissory notes amounting to $432,000 is included in accounts payable and
accrued liabilities in the accompanying balance sheet at March 31, 2018.
14. PROMISSORY
NOTE
In
March 2017, the Company issued a $25,000 promissory note with a maturity date of May 13, 2017. Interest was payable upon maturity
in the form of 10,000,000 shares of unregistered, restricted shares of the Company's common stock. In addition, the Company agreed
to extend warrants held by the lender to purchase 10,839,752 shares of common stock that were scheduled to expire in 2017 for
an additional five years and modify the exercise price to $0.03 per share. On May 5, 2017, the Company prepaid the note in full
and issued 8,688,525 shares of its common stock representing the prorated number of shares for interest on the note, as a result
of the prepayment. Interest expense of $4,000 was recorded for issuance of these shares based on the closing trading price on
the date of issuance.
Coates International, Ltd.
Notes to Financial Statements - (Continued)
15. CONVERTIBLE
PROMISSORY NOTES AND EMBEDDED DERIVATIVE LIABILITY
From
time to time, the Company issues convertible promissory notes, the proceeds of which are used for general working capital purposes.
At March 31, 2018, there was $385,000 principal amount of convertible promissory notes outstanding. During the three months ended
March 31, 2018 and 2017, $287,000 and $93,000 of convertible promissory notes were issued, respectively. Outstanding notes may
be converted into unregistered shares of the Company’s common stock at a discount ranging from 30% to 39% of the defined
trading price of the common stock on the date of conversion. The defined trading prices are based on the trading price of the
stock during a defined period ranging from ten to twenty-five trading days immediately preceding the date of conversion. The conversion
rate discount establishes a beneficial conversion feature (“BCF”) or unamortized discount, which is required to be
valued and accreted to interest expense over the six-month period until the conversion of the notes into restricted shares of
common stock is permitted. In addition, the conversion formula meets the conditions that require accounting for convertible notes
as derivative liability instruments. The effective interest rate on the outstanding convertible notes at March 31, 2018 ranged
from 107% to 147%. The unamortized discount on the outstanding convertible notes at March 31, 2018 and December 31, 2017 amounted
to $116,000 and $52,000, respectively.
The
convertible notes generally become convertible, in whole, or in part, beginning on the six month anniversary of the issuance date
and may be prepaid at the option of the Company, with a prepayment penalty ranging from 15% to 50% of the principal amount of
the convertible note at any time prior to becoming eligible for conversion.
One
convertible promissory note with an aggregate outstanding balance of $53,000 is convertible in monthly installments in an amount
determined by the noteholder, plus accrued interest. The Company may elect, at its option to repay each monthly installment in
whole, or in part, in cash, without penalty. The amount of each installment not paid in cash is converted into shares of the Company’s
common stock. This convertible note also requires that the conversion price be re-measured 23 trading days after the conversion
shares are originally delivered. If the re-measured conversion price is lower, then the Company is required to issue additional
conversion shares to the noteholder.
In
accordance with GAAP, the estimated fair value of the embedded derivative liability related to the convertible notes is required
to be remeasured at each balance sheet date. The fair value measurement accounting standard establishes a valuation hierarchy
for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs
by requiring that the most observable inputs be used, when available. Observable inputs are inputs market participants would use
in valuing the asset or liability developed based on independent market data sources. Unobservable inputs are inputs that reflect
the Company’s assumptions about the factors market participants would use in valuing the asset or liability developed based
upon the best information available. The valuation hierarchy is composed of three categories, which are as follows:
|
●
|
Level
1 – Inputs are quoted prices (unadjusted) in active markets for identical assets
or liabilities.
|
|
●
|
Level
2 – Inputs include quoted prices in active markets for similar assets or liabilities,
quoted prices for identical or similar assets or liabilities in markets that are not
active, and inputs other than quoted prices that are observable for the asset or liability,
either directly or indirectly.
|
|
●
|
Level
3 – Inputs to the fair value measurement are unobservable inputs or valuation techniques.
|
Coates International, Ltd.
Notes to Financial Statements - (Continued)
The
estimated fair value of the embedded derivative liabilities related to promissory notes outstanding was measured as the aggregate
estimated fair value, based on Level 2 inputs, which included quoted daily yield curve rates of treasury securities with comparable
maturities and, because the actual volatility rate on the Company’s common stock is not available, a conservative estimated
volatility rate of 200%.
The
embedded derivative liability arises because, based on historical trading patterns of the Company’s stock, the formula for
determining the Conversion Rate is expected to result in a different Conversion Rate than the closing price of the stock on the
actual date of conversion (hereinafter referred to as the “Variable Conversion Rate Differential”). The estimated
fair values of the derivative liabilities have been calculated based on a Black-Scholes option pricing model.
The
following table presents the Company's fair value hierarchy of financial assets and liabilities measured at fair value at:
|
|
March 31,
2018
|
|
|
December 31,
2017
|
|
|
|
|
|
|
|
|
Level 1 Inputs
|
|
$
|
-
|
|
|
$
|
-
|
|
Level 2 Inputs
|
|
|
497,000
|
|
|
|
359,000
|
|
Level 3 Inputs
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
497,000
|
|
|
$
|
359,000
|
|
In
a series of transactions, during the three months ended March 31, 2018, convertible promissory notes with an aggregate principal
balance of $82,000, including accrued interest thereon were converted into 8,357,452 unregistered shares of common stock. The
Company incurred a loss on these conversions amounting to $21,000 for the three months ended March 31, 2018.
In
a series of transactions, during the three months ended March 31, 2017, convertible promissory notes with an aggregate principal
balance of $56,000, including accrued interest thereon were converted into 854,365 unregistered shares of common stock. The Company
incurred a loss on these conversions amounting to $12,000 for the three months ended March 31, 2017.
At March 31, 2018, the Company did not have enough unissued, authorized shares of its common stock to meet the
160,748,286-share aggregate contractual reserve requirements of its outstanding convertible debt. This was due to the filing
of a Certificate of Validation with the Secretary of State of Delaware on April 2, 2018, as more fully discussed in Note 24,
which reduced the number of authorized shares of common stock from 12,000,000,000 to 120,000,000. This reduction was
retroactive to the close of trading in the Company's common stock on December 1, 2017. The Company has obtained 90-day
waivers of this default from each of the convertible noteholders. As discussed in more detail in Note 24, on May 7, 2018, the
Company filed a Notice of Conversion with the Secretary of State of Nevada, which increased the number of authorized shares
of the Company's common stock from 120,000,000 to 2,400,000,000, thereby automatically curing this default condition for all
convertible notes. At March 31, 2018, $149,000 of the Company’s outstanding convertible notes were eligible for
conversion.
The
Company made the private placement of these securities in reliance upon Section 4(2) of the Securities Act of 1933, as amended
(the “Act”), Rule 506 of Regulation D, and the rules and regulations promulgated thereunder, and/or upon any other
exemption from the registration requirements of the Act, as applicable.
16.
CAPITAL STOCK
Common
Stock
The
Company’s common stock is traded on OTC Pink Sheets. Investors can find real-time quotes and market information for the
Company at
www.otcmarkets.com
market system under the ticker symbol COTE. The Company is authorized to issue up to 120,000,000
shares of common stock, par value, $0.0001 per share (the “Common Stock”).
At
the close of trading in the Company’s common stock on December 1, 2017, a 1:200 reverse stock split of all of the Company’s
shares of common stock, shares of preferred stock, common stock warrants and stock options became effective. Shareholders were
paid cash-in-lieu of any fractional shares that would have resulted in connection with the reverse stock split. The reverse stock
split was approved by the board of directors and George J. Coates, the majority stockholder by means of a written consent. For
purposes of presenting the accompanying financial statements as of March 31, 2018 and December 31, 2017 and for the three months
ended March 31, 2018, all balances, transactions and calculations were restated on a pro forma basis as if the reverse stock split
occurred prior to the beginning of the year ended December 31, 2017.
Coates International, Ltd.
Notes to Financial Statements - (Continued)
The
following common stock transactions occurred during the three months ended March 31, 2018:
|
●
|
In
a series of transactions, convertible promissory notes with an aggregate principal balance
of $82,000, including accrued interest thereon were converted into 8,375,452 unregistered
shares of common stock.
|
The
following common stock transactions occurred during the nine months ended September 30, 2017:
|
●
|
In
a series of transactions during the three months ended March 31, 2017, convertible promissory notes with an aggregate principal
balance of $56,000, including accrued interest thereon were converted into 854,365 unregistered shares of common stock.
|
|
●
|
During
the three months ended March 31, 2017, Barry C. Kaye converted 6.86 shares of Series B into 6,860 unregistered, restricted shares
of the Company’s common stock.
|
Preferred
Stock and anti-dilution rights
The
Company is authorized to issue 350,000 shares of preferred stock, par value, $0.001 per share (the “Preferred Stock”).
The Company may issue any class of the Preferred Stock in any series. The board is authorized to establish and designate series,
and to fix the number of shares included in each such series and the relative rights, preferences and limitations as between series,
provided that, if the stated dividends and amounts payable on liquidation are not paid in full, the shares of all series of the
same class shall share ratably in the payment of dividends including accumulations, if any, in accordance with the sums which
would be payable on such shares if all dividends were declared and paid in full and in any distribution of assets other than by
way of dividends in accordance with the sums which would be payable on such distribution if all sums payable were discharged in
full. Shares of each such series when issued, shall be designated to distinguish the shares of each series from shares of all
other series.
There
are two series of Preferred Stock that have been designated to date from the total 100,000,000 authorized shares of Preferred
Stock. These are as follows:
|
●
|
Series
A Preferred Stock, par value $0.001 per share (“Series A”), 5,000 shares designated, 3,601 shares issued and
outstanding as of March 31, 2018 and December 31, 2017, respectively. Shares of Series A entitle the holder to 10,000 votes per
share on all matters brought before the shareholders for a vote. These shares are not entitled to receive dividends or share in
distributions of capital and have no liquidation preference. All outstanding shares of Series A are owned by George J. Coates,
which entitle him to 36,010,000 million votes in addition to his voting rights from the shares of common stock and the shares of
Series B he holds.
|
The
Company may issue additional shares of Series A Preferred Stock to Mr. Coates if deemed necessary to provide anti-dilution protection
and maintain his ownership percentage of eligible votes.
Issuances
of shares of Series A to George J. Coates do not have any effect on the share of dividends or liquidation value of the holders
of the Company’s common stock. However, the voting rights of the holders of the Company’s common stock are diluted
with each issuance.
During
the three months ended March 31, 2017, the Company issued 3,351 shares of Series A Preferred Stock to George J. Coates representing
anti-dilution shares to restore Mr. Coates’ percentage of eligible votes to 85.7%. This percentage increased as a result
of Mr. Coates’ acquisition of additional shares of common stock in 2016.
Coates International, Ltd.
Notes to Financial Statements - (Continued)
|
●
|
Series
B Convertible Preferred Stock, par value $0.001 per share, 345,000 shares designated and 281,378 and 228,471 shares issued and
outstanding at March 31, 2018 and December 31, 2017, respectively. Shares of Series B do not earn any dividends and may be converted
at the option of the holder at any time beginning on the second annual anniversary date after the date of issuance into 1,000
unregistered shares of the Company’s common stock. Holders of the Series B are entitled to one thousand votes per share
held on all matters brought before the shareholders for a vote.
|
In
the event that either (i) the Company enters into an underwriting agreement for a secondary public offering of securities, or
(ii) a change in control of the Company is consummated representing 50% more of the then outstanding shares of Company’s
common stock, plus the number of shares of common stock into which any convertible preferred stock is convertible, regardless
of whether or not such shares are otherwise eligible for conversion, then the Series B may be immediately converted at the option
of the holder into restricted shares of the Company’s common stock.
The
Company provides anti-dilution protection for certain of its key employees. For each new share of common stock issued by the Company
to non-Coates family members in the future, additional shares of Series B will be issued to maintain their fixed ownership percentage
of the Company. The fixed ownership percentage is adjusted for acquisitions and dispositions of common stock, not related to conversions
of Series B Convertible Preferred Stock, by these key employees. At March 31, 2018, the fixed ownership percentages were as follows:
|
1.
|
George J. Coates
– 80.63%
|
|
2.
|
Gregory G. Coates
– 6.10%
|
|
3.
|
Barry C. Kaye –
0.048%
|
These
anti-dilution provisions do not apply to new shares of common stock issued in connection with exercises of employee stock options,
a secondary public offering of the Company’s securities or a merger or acquisition.
The
following presents by year, the number of shares of Series B held and the year that they become eligible for conversion into shares
of common stock, as of March 31, 2018.
|
|
Total
|
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
George J. Coates
|
|
|
260,020
|
|
|
|
74,506
|
|
|
|
136,599
|
|
|
|
48,915
|
|
Gregory G. Coates
|
|
|
19,832
|
|
|
|
5,484
|
|
|
|
10,646
|
|
|
|
3,702
|
|
Barry C. Kaye
|
|
|
1,526
|
|
|
|
413
|
|
|
|
823
|
|
|
|
290
|
|
Total
|
|
|
281,378
|
|
|
|
80,403
|
|
|
|
148,068
|
|
|
|
52,907
|
|
For
the three months ended March 31, 2018, 48,915, 3,702 and 290 shares of Series B were issued to George J. Coates, Gregory G. Coates
and Barry C. Kaye, respectively, having an estimated fair value of $545,000, $41,000 and $3,000, respectively. These amounts were
included in stock-based compensation expense in the accompanying statement of operations for the three months ended March 31,
2018.
For
the three months ended March 31, 2017, 3,861, 597 and 47 shares of Series B were issued to George J. Coates, Gregory G.
Coates and Barry C. Kaye, respectively, having an estimated fair value of $132,000, $39,000 and $3,000, respectively. These
amounts were included in stock-based compensation expense in the accompanying statement of operations for the nine months
ended March 31, 2017.
Coates International, Ltd.
Notes to Financial Statements - (Continued)
During
the three months ended March 31, 2017, Barry C. Kaye converted 6.86 shares of Series B into 6,868 unregistered, restricted shares
of the Company’s common stock.
In
the event that all of the 281,378 shares of Series B outstanding at March 31, 2018 were converted, once the conversion restrictions
lapse, an additional 281,378,000 new restricted shares of common stock would be issued. On a pro forma basis, based on the number
of shares of common stock outstanding at March 31, 2018, this would dilute the ownership percentage of non-affiliated stockholders
from 85.4% to 12.8%.
To
the extent that additional shares of Series B are issued under the anti-dilution plan, the non-affiliated stockholders’
percentage ownership of the Company would be further diluted.
17.
LOSS PER SHARE
At
March 31, 2018, there were stock warrants outstanding to purchase 741,725 shares of common stock at exercise prices ranging from
$0.10 to $13.50 per share, vested stock options outstanding to acquire 62,350 shares of common stock at exercise prices ranging
from $5.60 to $88.00 per share and $385,000 of convertible promissory notes outstanding, which on a pro forma basis assuming all
such promissory notes were converted into shares of common stock using the contractual conversion price determined as of the close
of trading on the last trading in March 2018, would have been convertible into 33,314,645 shares of common stock.
At
March 31, 2017, there were stock warrants outstanding to purchase 751,725 shares of common stock at exercise prices ranging from
$0.10 to $13.50 per share, vested stock options outstanding to acquire 62,350 shares of common stock at exercise prices ranging
from $5.60 to $88.00 per share and $140,000 of convertible promissory notes outstanding, which on a pro forma basis assuming all
such promissory notes were converted into shares of common stock using the contractual conversion price determined as of the close
of trading on the last trading in March 2017, would have been convertible into 3,257,093 shares of common stock.
For
the three months ended March 31, 2018 and 2017, none of the potentially issuable shares of common stock were assumed to be converted
because the Company incurred a net loss in those periods and the effect of including them in the calculation of earnings per share
would have been anti-dilutive.
18.
STOCK OPTIONS
The
Company’s 2006 Stock Option and Incentive Plan (the “Stock Plan”) was adopted by the Company’s board in
October 2006. In September 2007, the Stock Plan, by consent of George J. Coates, majority shareholder, was adopted by our shareholders.
The Stock Plan provides for the grant of stock-based awards to employees, officers and directors of, and consultants or advisors
to, the Company and its subsidiaries, if any. Under the Stock Plan, the Company may grant options that are intended to qualify
as incentive stock options within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (“ISO’s”),
options not intended to qualify as incentive stock options (“non-statutory options”), restricted stock and other stock-based
awards. ISO’s may be granted only to employees of the Company. All of the shares of common stock authorized under the Stock
Plan have been granted and no further grants may be awarded thereunder.
The
Company established a 2014 Stock Option and Incentive Plan (the “2014 Stock Plan”) which was adopted by the Company’s
board on May 30, 2014. On March 2, 2015, the 2014 Stock Plan, by consent of George J. Coates, majority shareholder, was adopted
by our shareholders. The 2014 Stock Plan provides for the grant of stock-based awards to employees, officers and directors of,
and consultants or advisors to, the Company and its subsidiaries, if any. Under the 2014 Stock Plan, the Company may grant ISO’s,
non-statutory options, restricted stock and other stock-based awards. ISO’s may be granted only to employees of the Company.
A total of 50,000,000 shares of common stock may be issued upon the exercise of options or other awards granted under the 2014
Stock Plan. The maximum number of shares with respect to which awards may be granted during any one year to any employee under
the 2014 Stock Plan shall not exceed 25% of the 50,000,000 shares of common stock covered by the 2014 Stock Plan. At June 30,
2017, none of the shares of common stock authorized under the 2014 Stock Plan had been granted as stock options or awards.
Coates International, Ltd.
Notes to Financial Statements - (Continued)
The
Stock Plan and the 2014 Stock Plan (the “Stock Plans”) are administered by the board and the Compensation Committee.
Subject to the provisions of the Stock Plans, the board and the Compensation Committee each has the authority to select the persons
to whom awards are granted and determine the terms of each award, including the number of shares of common stock subject to the
award. Payment of the exercise price of an award may be made in cash, in a “cashless exercise” through a broker, or
if the applicable stock option agreement permits, shares of common stock, or by any other method approved by the board or Compensation
Committee. Unless otherwise permitted by the Company, awards are not assignable or transferable except by will or the laws of
descent and distribution.
Upon
the consummation of an acquisition of the business of the Company, by merger or otherwise, the board shall, as to outstanding
awards (on the same basis or on different bases as the board shall specify), make appropriate provision for the continuation
of such awards by the Company or the assumption of such awards by the surviving or acquiring entity and by substituting on an
equitable basis for the shares then subject to such awards either (a) the consideration payable with respect to the outstanding
shares of common stock in connection with the acquisition, (b) shares of stock of the surviving or acquiring corporation,
or (c) such other securities or other consideration as the board deems appropriate, the fair market value of which (as determined
by the board in its sole discretion) shall not materially differ from the fair market value of the shares of common stock subject
to such awards immediately preceding the acquisition. In addition to, or in lieu of the foregoing, with respect to outstanding
stock options, the board may, on the same basis or on different bases as the board shall specify, upon written notice to the affected
optionees, provide that one or more options then outstanding must be exercised, in whole or in part, within a specified number
of days of the date of such notice, at the end of which period such options shall terminate, or provide that one or more options
then outstanding, in whole or in part, shall be terminated in exchange for a cash payment equal to the excess of the fair market
value (as determined by the board in its sole discretion) for the shares subject to such stock options over the exercise price
thereof. Unless otherwise determined by the board (on the same basis or on different bases as the board shall specify), any
repurchase rights or other rights of the Company that relate to a stock option or other award shall continue to apply to consideration,
including cash, that has been substituted, assumed or amended for a stock option or other award pursuant to these provisions.
The Company may hold in escrow all or any portion of any such consideration in order to effectuate any continuing restrictions.
The
board may at any time provide that any stock options shall become immediately exercisable in full or in part, that any restricted
stock awards shall be free of some or all restrictions, or that any other stock-based awards may become exercisable in full or
in part or free of some or all restrictions or conditions, or otherwise realizable in full or in part, as the case may be.
The
board or Compensation Committee may, in its sole discretion, amend, modify or terminate any award granted or made under the Stock
Plan, so long as such amendment, modification or termination would not materially and adversely affect the participant.
During
the three months ended March 31, 2018 and 2017, no stock options were granted. There were no unvested stock options outstanding
at March 31, 2018.
During
the three months ended March 31, 2018 and 2017, the Company did not incur any stock-based compensation expense related to employee
stock options. At March 31, 2018, all stock-based compensation expense related to outstanding stock options had been fully
recognized.
Coates International, Ltd.
Notes to Financial Statements - (Continued)
Details
of the stock options outstanding under the Company’s Stock Option Plans are as follows:
|
|
Exercise Price Per Share
|
|
|
Number Outstanding
|
|
|
Weighted Average Remaining Contractual Life
|
|
|
Number Exercisable
|
|
|
Weighted Average Exercise Price
|
|
|
Weighted Average Fair Value Per Stock Option at Date of Grant
|
|
Balance, 3/31/18
|
|
$
|
5.60 – $88.00
|
|
|
|
62,500
|
|
|
|
9
|
|
|
|
62,500
|
|
|
$
|
36.34
|
|
|
$
|
33.84
|
|
No
stock options were exercised, forfeited or expired during the three months ended March 31, 2018 and 2017.
The
weighted average fair value of the Company's stock options was estimated using the Black-Scholes option pricing model which requires
highly subjective assumptions including the expected stock price volatility. These assumptions were as follows:
|
●
|
Historical stock price volatility
|
|
139% - 325%
|
|
●
|
Risk-free interest rate
|
|
0.21% - 4.64%
|
|
●
|
Expected life (in years)
|
|
4
|
|
●
|
Dividend yield
|
|
$0.00
|
The
valuation assumptions were determined as follows:
|
●
|
Historical
stock price volatility: The Company utilized the volatility in the trading of its common stock computed for the 12 months of trading
immediately preceding the date of grant.
|
|
|
|
|
●
|
Risk-free
interest rate: The Company bases the risk-free interest rate on the interest rate payable on U.S. Treasury securities in effect
at the time of the grant for a period that is commensurate with the assumed expected option life.
|
|
|
|
|
●
|
Expected
life: The expected life of the options represents the period of time options are expected to be outstanding. The Company has very
limited historical data on which to base this estimate. Accordingly, the Company estimated the expected life based on its assumption
that the executives will be subject to frequent blackout periods during the time that the stock options will be exercisable
and based on the Company’s expectation that it will complete its research and development phase and commence its initial
production phase. The vesting period of these options was also considered in the determination of the expected life of each stock
option grant.
|
|
|
|
|
●
|
No
expected dividends.
|
19.
INCOME TAXES
Deferred
income taxes are determined using the liability method for the temporary differences between the financial reporting basis and
income tax basis of the Company’s assets and liabilities. Deferred income taxes are measured based on the tax rates expected
to be in effect when the temporary differences are included in the Company’s tax return. Deferred tax assets and liabilities
are recognized based on anticipated future tax consequences attributable to differences between financial statement carrying amounts
of assets and liabilities and their respective tax bases.
Deferred
tax assets increased by $247,000 and $833,000 for the three months ended March 31, 2018 and 2017, respectively. These amounts
were fully offset by a corresponding increase in the tax valuation allowance resulting in no net change in deferred tax assets,
respectively, during these periods.
No
liability for unrecognized tax benefits was required to be reported at March 31, 2018 and December 31, 2017. Based
on the Company's evaluation, it has concluded that there are no significant uncertain tax positions requiring recognition in the
Company's financial statements. The Company's evaluation was performed for tax years ended 2014 through 2016, the only periods
subject to examination. The Company believes that its income tax positions and deductions will be sustained on audit and
does not anticipate that adjustments, if any, will result in a material change to its financial position. For the three months
ended March 31, 2018 and 2017, there were no penalties or interest related to the Company’s income tax returns.
Coates International, Ltd.
Notes to Financial Statements - (Continued)
At
March 31, 2018, the Company had available, $20,908,000 of net operating loss carryforwards which may be used to reduce future
federal taxable income, expiring between 2018 and 2038 and $10,504,000 of net operating loss carryforwards which may be used to
reduce future state taxable income, expiring between 2029 and 2038.
20.
RELATED PARTY TRANSACTIONS
Licensing
Agreement for CSRV
®
System Technology
The
Company’s intellectual property rights for the CSRV
®
System Technology are derived from the licensing agreement
with George J. Coates and Gregory G. Coates, as more fully discussed in Note 4. The Company pays for all costs of new patent filings
and patent maintenance on intellectual properties licensed to it by George J. Coates and Gregory G. Coates. For the three months
ended March 31, 2018 and 2017, these costs amounted to $4,000 and $4,000, respectively.
Non-Exclusive
distribution sublicense to Renown Power Development, Ltd.
The
Company has granted a non-exclusive distribution sublicense to Renown, as more fully discussed in Note 6. Renown is controlled
by James Pang, the Company’s exclusive liaison agent in China.
Issuances
of Promissory Notes to Related Parties
Issuances
of promissory notes to related parties during the three months ended March 31, 2018 and 2017, are discussed in detail in Note
15.
Promissory
notes issued to George J. Coates, Bernadette Coates and an employee are payable on demand and provide for interest at the rate
of 17% per annum, compounded monthly. The promissory note issued to Gregory G. Coates is non-interest bearing, however, the Company
imputes interest at a rate of 10% per annum, which has been charged to interest expense in the accompanying statements of operations.
Stock
Options
Stock
options previously granted to related parties, all of which are fully vested are more fully discussed in Note 18.
Issuances
and Conversions of Preferred Stock
Shares
of Series A Preferred Stock awarded to George J. Coates during the three months ended March 31, 2018 and 2017 are discussed in
detail in Note 16.
Shares
of Series B Convertible Preferred Stock awarded to George J. Coates, Gregory G. Coates and Barry C. Kaye and shares converted
during the three months ended March 31, 2018 and 2017, are discussed in detail in Note 16.
Personal
Guaranty and Stock Pledge
In
connection with the Company’s mortgage loan on the Company’s headquarters facility, George J. Coates has pledged certain
of his shares of common stock of the Company to the extent required by the lender and provided a personal guaranty as additional
collateral.
Coates International, Ltd.
Notes to Financial Statements - (Continued)
Compensation
and Benefits Paid
The
approximate amount of compensation and benefits, all of which were approved by the board, paid to George J. Coates, Gregory G.
Coates and Bernadette Coates, exclusive of stock-based compensation for unregistered, restricted shares of Preferred Stock awarded
to George J. Coates and Gregory G. Coates is summarized as follows:
|
|
|
For the three months ended
March 31,
|
|
|
|
|
2018
|
|
|
2017
|
|
|
George J. Coates (a) (b)
|
|
$
|
4,000
|
|
|
$
|
14,000
|
|
|
Gregory G. Coates (c) (d)
|
|
|
24,000
|
|
|
|
3,000
|
|
|
Bernadette Coates (e)
|
|
|
-
|
|
|
|
-
|
|
|
(a)
|
For
the three months ended March 31, 2018 and 2017, George J. Coates earned additional base
compensation of $63,000 and $53,000, respectively, payment of which is being deferred
until the Company has sufficient working capital. The total amount of deferred compensation
included in the accompanying balance sheets at March 31, 2018 and December 31, 2017,
was $1,283,000 and $1,221,000, respectively.
|
|
(b)
|
During
the three months ended March 31, 2018 and 2017, George J. Coates was awarded Series A
Preferred Stock and Series B Converted Preferred Stock for anti-dilution. The details
are presented in Note 16.
|
|
(c)
|
For
the three months ended March 31, 2018 and 2017, Gregory G. Coates earned additional base
compensation of $19,000 and $38,000, respectively, payment of which is being deferred
until the Company has sufficient working capital. The total amount of deferred compensation
included in the accompanying balance sheets at March 31, 2018 and December 31, 2017,
was $161,000 and $143,000, respectively.
|
|
(d)
|
During
the three months ended March 31, 2018 and 2017, Gregory G. Coates was awarded Series
B Converted Preferred Stock for anti-dilution. The details are presented in Note 16.
|
|
(e)
|
The
Company had been deferring base compensation for Bernadette Coates, who retired in 2016,
until it has sufficient working capital. The total amount of deferred compensation included
in the accompanying balance sheets at March 31, 2018 and December 31, 2017, was $242,000.
|
During
the three months ended March 31, 2018 and 2017, Barry C. Kaye, Treasurer and Chief Financial Officer was paid compensation of
$35,000 and $10,000, respectively. For the three months ended March 31, 2018 and 2017, Mr. Kaye earned compensation of $33,000
and $32,000, respectively, which was not paid and is being deferred until the Company has sufficient working capital to remit
payment to him. During the three months ended March 31, 2018 and 2017, interest accrued on Mr. Kaye’s deferred compensation
amounted to $18,000 and $13,000, respectively. At March 31, 2018, the total amount of Mr. Kaye’s unpaid, deferred compensation,
including accrued interest thereon, was $434,000. This amount is included in accounts payable and accrued liabilities in the accompanying
balance sheet at March 31, 2018. During the three months ended March 31, 2018 and 2017, Barry C. Kaye was awarded Series B Converted
Preferred Stock for anti-dilution. The details are presented in Note 16.
At
March 31, 2018 the Company owed deferred compensation to an employee in the amount of $22,000, payment of which is being deferred
until the Company has sufficient working capital. This amount is included in deferred compensation in the accompanying balance
sheet at March 31, 2018.
Coates International, Ltd.
Notes to Financial Statements - (Continued)
21.
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
The
following table summarizes the Company’s contractual obligations and commitments at March 31, 2018:
|
|
Total
|
|
|
2018
|
|
|
2019
|
|
Deferred compensation
|
|
$
|
1,708,000
|
|
|
$
|
1,708,000
|
|
|
$
|
-
|
|
Promissory notes to related parties
|
|
|
1,418,000
|
|
|
|
1,418,000
|
|
|
|
-
|
|
Mortgage loan payable
|
|
|
1,258,000
|
|
|
|
1,258,000
|
|
|
|
-
|
|
Convertible promissory notes
|
|
|
392,000
|
|
|
|
340,000
|
|
|
|
52,000
|
|
Total
|
|
$
|
4,776,000
|
|
|
$
|
4,724,000
|
|
|
$
|
52,000
|
|
22.
LITIGATION AND CONTINGENCIES
The
Company is not a party to any litigation that is material to its business.
23.
RECENTLY ISSUED ACCOUNTING STANDARDS
Revenue
Recognition
In
May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”), which amends the existing accounting
standards for revenue recognition. ASU 2014-09 is based on principles that govern the recognition of revenue at an amount an entity
expects to be entitled to when products are transferred to customers. In August 2015, the FASB issued ASU No. 2015-14, Revenue
from Contracts with Customers (Topic 606) – Deferral of the Effective Date, which defers the effective date of ASU 2014-09
for one year and permits early adoption. The Company intends to adopt this standard in its first quarter of 2019.
In
April 2016, the FASB issued ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606) – Identifying Performance
Obligations and Licensing (“ASU 2016-10”), which amends the guidance in ASU 2014-09 related to identifying performance
obligations and accounting for licenses of intellectual property. The Company will adopt ASU 2016-10 with ASU 2014-09. The Company
is currently evaluating the impact of adopting the new revenue recognition standard, as amended, but does not expect it to have
a material impact on its financial statements.
Stock
Compensation
In
March 2016, the FASB issued ASU No. 2016-09, Compensation – Stock Compensation (Topic 718), which simplified certain
aspects of the accounting for share-based payment transactions, including income taxes, classification of awards and classification
in the statement of cash flows. ASU 2016-09 will be effective for the Company beginning in its first quarter of 2018. The Company
is currently evaluating the impact of adopting the new stock compensation standard, but does not expect it to have a material
impact on its financial statements.
Financial
Instruments
In
January 2016, the FASB issued ASU No. 2016-01, Financial Instruments – Overall (Subtopic 825-10) (“ASU 2016-01”),
which updates certain aspects of recognition, measurement, presentation and disclosure of financial instruments. ASU 2016-01 will
be effective for the Company beginning in its first quarter of 2019. The Company does not believe the adoption of the new financial
instruments standard will have a material impact on its financial statements.
Coates International, Ltd.
Notes to Financial Statements - (Continued)
24.
SUBSEQUENT EVENTS
Certificate
of Validation
On
April 2, 2018, the Company filed a certificate of validation with the state of Delaware which had retroactive effect to the close
of trading in the Corporation’s common stock on December 1, 2017, in order to:
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(i)
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cure
certain technical, procedural defects related to the 1:200 reverse stock split, which
became effective at the close of trading on December 31, 2017,
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(ii)
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clarify
that the reverse stock split effected a 1:200 reduction in the number of the Corporation’s
authorized shares of common stock, from 12,000,000,000 to 60,000,000, with retroactive
effect to the close of trading on December 1, 2017,
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(iii)
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clarify
that the reverse stock split effected 1:200 reduction in the number of authorized shares
of the Corporation’s preferred stock, from 100,000,000 to 500,000 with retroactive
effect to the close of trading on December 1, 2017; and,
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(iv)
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concurrently
therewith, further amend the Corporation’s Amended Certificate of Articles of Incorporation
with the State of Delaware to increase the number of the Corporation’s authorized
shares of common stock, par value $0.0001 from 60,000,000 to 120,000,000 and reduce the
number of authorized shares of the Corporation’s preferred stock, par value $0.001
from 500,000 to 350,000.
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The
above corporate action was authorized by the board of directors on February 28, 2018, and by means of obtaining the written consent
of George J. Coates, the sole majority stockholder, was approved by the shareholders on March 1, 2018.
Certificate
of Conversion and Certificate of Designation
On
May 9, 2018, the Company filed a Certificate of Conversion and a Certificate of Designation which caused the following
corporate actions to become effective:
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(i)
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The
Corporation’s State of Domicile was converted from the State of Delaware to the
State of Nevada.
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(ii)
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The
number of authorized shares of capital stock of the Company was increased to:
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a.
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2,400,000,000
shares of common stock, par value $0.0001 per share
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b.
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100,000,000
shares of preferred stock, par value $0.001 per share
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(iii)
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The
series and number of shares of preferred stock designated from the 100,000,000 shares
of preferred stock authorized, was increased to:
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a.
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1,000,000
shares of Series A Preferred Stock, $0.001 per share
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b.
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10,000,000
shares of Series B Convertible Preferred Stock, $0.001 per share
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Section
3(a)10 Exempt Securities Transaction
On
March 19, 2018, the Company entered into a Settlement Agreement and Stipulation (the “Settlement Agreement”) with
Livingston Asset Management LLC, a Florida limited liability company (“LAM”), pursuant to which the Company agreed
to issue common stock to LAM in exchange for the settlement of $69,000 (the “Settlement Amount”) of past-due obligations
and accounts payable of the Company. LAM purchased the obligations and accounts payable from certain vendors of the Company as
described below.
Coates International, Ltd.
Notes to Financial Statements - (Continued)
On
April 2, 2018, the Circuit Court of Baltimore County, Maryland (the “Court”), entered an order (the “LAM Order”)
approving, among other things, the fairness of the terms and conditions of an exchange in reliance upon an exemption from registration
provided for in Section 3(a)(10) of the Securities Act of 1933, as amended (the “Securities Act”), in accordance with
a stipulation of settlement, pursuant to the Settlement Agreement between the Company and LAM. Pursuant to the court order, LAM
commenced an action against the Company to recover an aggregate of $69,000 of past-due obligations and accounts payable of the
Company, which LAM had purchased from certain vendors of the Company pursuant to the terms of separate claim purchase agreements
between LAM and each of such vendors (the “LAM Assigned Accounts”). The LAM Assigned Accounts relate to certain accounting
services provided to the Company and a supplier invoice. The Settlement Agreement became effective and binding upon the Company
and LAM upon execution of the Order by the Court on April 2, 2018.
Pursuant
to the terms of the Settlement Agreement approved by the LAM Order, on April 2, 2018, the Registrant agreed to issue shares to
LAM (the “LAM Settlement Shares”) of the Registrant’s common stock at a 30% discount from the selling price
of the settlement shares sold by LAM, as defined in the settlement agreement. The Settlement Agreement provides that the LAM Settlement
Shares will be issued in one or more tranches, as necessary, sufficient to satisfy the settlement amount through the issuance
of freely trading securities issued in reliance upon an exemption provided for in Section 3(a)(10) of the Securities Act. The
parties reasonably estimate that the fair market value of the LAM Settlement Shares to be received by LAM is equal to approximately
$99,000. Additional tranche requests shall be made as requested by LAM until the LAM Settlement Amount is paid in full.
The
Settlement Agreement provides that in no event shall the number of shares of Common Stock issued to LAM or its designee in connection
with the Settlement Agreement, when aggregated with all other shares of Common Stock then beneficially owned by LAM and its affiliates
(as calculated pursuant to Section 13(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”),
and the rules and regulations thereunder), result in the beneficial ownership by LAM and its affiliates (as calculated pursuant
to Section 13(d) of the Exchange Act and the rules and regulations thereunder) at any time of more than 9.99% of the Common Stock.
The
Company is required to reserve a sufficient number of shares of its Common Stock to provide for issuances thereof, upon full satisfaction
of the Settlement Amount.
During
the period from April 6, 2018 through May 14, 2018, the Company issued 8,970,000 shares of Common Stock to LAM to be sold in the
open market in reliance upon an exemption provided for in Section 3(a)(10) of the Securities Act. Proceeds from the sales are
to be used to satisfy past-due obligations of the Company previously assigned to LAM. During the period from April 6, 2018 through
May 14, 2018, Lam has paid $40,000 of the Settlement Amount of the Company's past due obligations in accordance with the Settlement
Agreement.
Conversion
of Convertible Promissory Notes
During
the period from April 1, 2018 to May 14, 2018, $29,000 principal amount of convertible promissory notes, including accrued interest,
was converted into 5,068,261 unregistered, restricted shares of the Company’s common stock.
Issuances
of Promissory Notes to Related Parties
During the period from April 1, 2018 to May 14, 2018, the Company issued promissory notes to George J. Coates and received
aggregate cash proceeds of $1,000. During
the period from April 1, 2018 to May 14, 2018, the Company issued promissory notes to Bernadette Coates and received aggregate
cash proceeds of $11,000. The promissory notes are payable on demand and provide for interest at the rate of 17% per annum, compounded
monthly.
Deferred
Compensation
During
the period from April 1, 2018 to May 14, 2018, George J. Coates, Gregory G. Coates, Barry C. Kaye and one employee agreed to additional
deferral of their compensation amounting to $34,000, $10,000, $22,000 and $4,000, respectively.