We have audited the accompanying balance sheets of Clean Coal Technologies, Inc. (the “Company”) as of December 31, 2016 and 2015 and the related statements of operations, changes in stockholders’ deficit, and cash flows for the years then ended. 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 an 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 Clean Coal Technologies, Inc. as of December 31, 2016 and 2015 and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 3 to the financial statements, the Company has a working capital deficit, has generated net losses since its inception and further losses are anticipated. The Company requires additional funds to meet its obligations and the costs of its operations. These factors raise substantial doubt about its ability to continue as a going concern. Management’s plans regarding those matters also are described in Note 3. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Notes to Financial Statements
NOTE 1: NATURE OF BUSINESS
Clean Coal Technologies, Inc. (“CCTI”, the “Company”, “Clean Coal”, “we”, “our”), a Nevada corporation, is developing a patented multi-stage process that transforms coal with high levels of impurities, contaminants and other polluting elements into an exceptionally efficient, clean and inexpensive source of high energy, low polluting fuel.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Accounting Methods
The Company’s financial statements are prepared using the accrual method in accordance with Generally Accepted Accounting Principles in the United State of America (“GAAP”).
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure on contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Revenue Recognition
The Company applies the provisions of Accounting Standards Codification (“ASC”) 605
Revenue Recognition
(ASC 605) which provides guidance on the recognition, presentation, and disclosure of revenue in financial statements filed with the SEC. ASC 605 outlines the basic criteria that must be met to recognize revenue and provides guidance for disclosure related to revenue recognition policies. In general, the Company recognizes revenue when (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred or services have been rendered, (iii) the fee is fixed or determinable, and (iv) collectability is reasonably assured.
The Company generated revenue in 2012 related to license fees received for the use of its technology. The license fee revenue requires no continuing performance on the Company’s part and is recognized upon receipt of the licensing fee and grant of the license.
During 2012, the Company granted a 25-year technology license agreement for a one-time license fee of $750,000. The first installment of the license fee of $375,000 has been collected pursuant to the signing of a coal testing plant construction contract and the balance of $375,000 will be due upon the successful testing of the coal testing plant, estimated to be in the third quarter of 2017. In addition, under the technology license agreement, the Company will receive an on-going royalty fee of $1 per metric ton on all coal processed using the technology, up to $4,000,000 per annum. No revenue has been earned in 2016 or 2015.
Net Loss per Common Share
Basic net loss per share is computed on the basis of the weighted average number of common shares outstanding during each year. Diluted net loss per share is computed similar to basic net loss 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. The Company uses the "if-converted" method for calculating the earnings per share impact of outstanding convertible debentures, whereby the securities are assumed converted and an earnings per incremental share is computed. Options, warrants and their equivalents are included in EPS calculations through the treasury stock method. In periods where losses are reported, the weighted-average number of common stock outstanding excludes common stock equivalents, because their inclusion would be anti-dilutive.
The total number of potential additional dilutive instruments outstanding for the year ended December 31, 2015 was none since the Company had a net loss. As of December 31, 2016, the Company had 27,731,475 underlying shares related to unexercised warrants and 80,575,297 potential common shares under convertible debentures which were included in the calculation of diluted income per common share.
Cash and Cash Equivalents
Clean Coal considers all highly liquid investments with an original maturity of three months or less to be cash equivalents for purposes of preparing its Statements of Cash Flows.
Fair Value of Financial Instruments
The fair values of the Company’s financial instruments including cash, accounts payable, accrued expenses, convertible debt and notes payable approximate their carrying amounts because of the short maturities of these instruments.
Federal Income Tax
Clean Coal files income tax returns in the U.S. federal jurisdiction, and the state of Nevada. Clean Coal’s policy is to recognize interest accrued related to unrecognized tax benefits in interest expense and penalties in operating expenses.
Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carry forwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences 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.
Net deferred tax assets consist of the following components as of December 31, 2016 and 2015:
|
|
2016
|
|
|
2015
|
|
Deferred tax assets:
|
|
|
|
|
|
|
Net operating loss carryforward
|
|
$
|
9,785,760
|
|
|
$
|
7,880,283
|
|
Valuation allowance
|
|
|
(9,785,760
|
)
|
|
|
(7,880,283
|
)
|
|
|
$
|
-
|
|
|
$
|
-
|
|
The federal income tax provision differs from the amount of income tax determined by applying the U.S. federal income tax rate of 35% to pretax income from continuing operations for the years ended December 31, 2016 and 2015 due to the following:
|
|
2016
|
|
|
2015
|
|
Pre-tax book income (loss)
|
|
$
|
12,794,609
|
|
|
$
|
(28,116,194
|
)
|
Meals and entertainment
|
|
|
1,225
|
|
|
|
1,140
|
|
Common stock, options and warrants issued for services and debt discount
|
|
|
2,889,665
|
|
|
|
1,063,207
|
|
Debt settlement and extinguishment expense
|
|
|
-
|
|
|
|
2,114,862
|
|
Asset impairment expense
|
|
|
-
|
|
|
|
2,089,611
|
|
Debt discount amortization
|
|
|
604,046
|
|
|
|
473,413
|
|
Gain (loss) on derivative liability
|
|
|
(18,195,022
|
)
|
|
|
21,379,413
|
|
Valuation allowance
|
|
|
1,905,477
|
|
|
|
994,548
|
|
|
|
$
|
-
|
|
|
$
|
-
|
|
The Company had net operating losses of approximately $28,000,000 that begin to expire in 2026. Due to the change in ownership provisions of the Tax Reform Act of 1986, net operating loss carryforwards 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. In accordance with the statute of limitations for federal tax returns, the Company’s federal tax returns for the years 2013 through 2016 are subject to examination.
Property and Equipment
Property and equipment consists of furniture and fixtures and computer equipment, recorded at cost, depreciated upon placement in service over estimated useful lives ranging from three to five years on a straight-line basis. As of December 31, 2016 and 2015, Clean Coal had property and equipment with no net book value. Expenditures for normal repairs and maintenance are charged to expense as incurred.
Construction in Process
Construction in progress is stated at cost, which includes the costs of construction and other direct costs attributable to the construction. No provision for depreciation is made on construction in progress until such time as the relevant assets are completed and put into use. Interest on the borrowings related to construction is capitalized in accordance with ASC 835-20
Capitalization of Interest
. During the years ended December 31, 2016 and 2015, $0 and $172,203 of interest was capitalized, respectively. The construction in progress asset was fully impaired during 2015 resulting in a loss of $5,970,319.
Impairment of Long Lived Assets
In the event facts and circumstances indicate the carrying value of a long-lived asset, including associated intangibles, may be impaired, an evaluation of recoverability is performed by comparing the estimated future undiscounted cash flows associated with the asset to the asset’s carrying amount to determine if a write-down to market value or discounted cash flow is required.
During the year ended December 31, 2015, the Company recognized a full impairment expense of $5,970,319 on the development of its test facility due to the lack of revenue generation and uncertainty as to future revenue generation.
Research and Development Costs
Research and development expenses include salaries, related employee expenses, research expenses and consulting fees. All costs for research and development activities are expensed as incurred. Clean Coal expenses the costs of licenses of patents and the prosecution of patents until the issuance of such patents and the commercialization of related products is reasonably assured. During the years ended December 31, 2016 and 2015, the Company recognized $1,674,823 and $0 of research and development costs, respectively.
Stock-based Compensation
FASB ASC 718 established financial accounting and reporting standards for stock-based employee compensation plans. It defines a fair value based method of accounting for an employee stock option or similar equity instrument. Clean Coal accounts for stock-based compensation to employees in accordance with FASB ASC 718. Clean Coal accounts for share based payments to non-employees in accordance with FASB ASC 505-50.
Fair Value of Financial Instruments
ASC 820,
Fair Value Measurements
(ASC 820) and ASC 825,
Financial Instruments
(ASC 825)
,
requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. It establishes a fair value hierarchy based on the level of independent, objective evidence surrounding the inputs used to measure fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. It prioritizes the inputs into three levels that may be used to measure fair value:
Level 1 -
Level 1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.
Level 2 -
Level 2 applies to assets or liabilities for which there are inputs other than quoted prices that are observable for the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.
Level 3
- Level 3 applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.
The carrying values of cash, accounts payable, and accrued liabilities approximate fair value. Pursuant to ASC 820 and 825, the fair value of cash is determined based on “Level 1” inputs, which consist of quoted prices in active markets for identical assets. The recorded values of all other financial instruments approximate their current fair values because of their nature and respective maturity dates or durations.
The following table sets forth by level within the fair value hierarchy the Company’s financial assets and liabilities that are measured at fair value on a recurring basis at December 31, 2016 and 2015:
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Derivative financial instruments
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
18,028,611
|
|
|
$
|
18,028,611
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative financial instruments
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
70,004,318
|
|
|
$
|
70,004,318
|
|
Derivative Instruments
The Company accounts for derivative instruments in accordance with ASC Topic 815,
Derivatives and Hedging
(ASC 815) and all derivative instruments are reflected as either assets or liabilities at fair value in the consolidated balance sheet.
The Company uses estimates of fair value to value its derivative instruments. Fair value is defined as the price to sell an asset or transfer a liability in an orderly transaction between willing and able market participants. In general, The Company’s policy in estimating fair values is to first look at observable market prices for identical assets and liabilities in active markets, where available. When these are not available, other inputs are used to model fair value such as prices of similar instruments, yield curves, volatilities, prepayment speeds, default rates and credit spreads (including for The Company’s liabilities), relying first on observable data from active markets. Additional adjustments may be made for factors including liquidity, credit, bid/offer spreads, etc., depending on current market conditions. Transaction costs are not included in the determination of fair value. When possible, The Company seeks to validate the model’s output to market transactions. Depending on the availability of observable inputs and prices, different valuation models could produce materially different fair value estimates. The values presented may not represent future fair values and may not be realizable. The Company categorizes its fair value estimates in accordance with ASC 820 based on the hierarchical framework associated with the three levels of price transparency utilized in measuring financial instruments at fair value as discussed above. As of December 31, 2016 and 2015, the Company had $18,028,611 and $70,004,318 in derivative liabilities, respectively.
Recently Issued Accounting Pronouncements
The Company has implemented all new accounting pronouncements that are in effect and that may impact its financial statements. During the year ended December 31, 2016, the Company adopted FASB Accounting Standards Update (ASU) 2015-03 “Interest – Imputation of Interest (Subtopic 835-30)”, which was issued April 2015 and adopted by the Company for the year ended December 31, 2015. In accordance with ASU 2015-03, the Company presents debt issuance costs related to a recognized debt liability in the balance sheet as a direct deduction from the carrying amount of that debt liability.
NOTE 3: GOING CONCERN
The accompanying financial statements have been prepared on a going concern basis of accounting which contemplates continuity of operations, realization of assets, liabilities, and commitments in the normal course of business. The accompanying financial statements do not reflect any adjustments that might result if Clean Coal is unable to continue as a going concern. Clean Coal has a working capital deficit as of December 31, 2016 and has generated recurring net losses since inception. Management believes Clean Coal will need to raise capital in order to operate over the next 12 months. Clean Coal’s continuation as a going concern is dependent upon its ability to generate sufficient cash flow to meet its obligations on a timely basis and ultimately to attain profitability. Clean Coal has limited capital with which to pursue its business plan. There can be no assurance that Clean Coal’s future operations will be significant and profitable, or that Clean Coal will have sufficient resources to meet its objectives. These conditions raise substantial doubt as to Clean Coal’s ability to continue as a going concern. Management may pursue either debt or equity financing or a combination of both, in order to raise sufficient capital to meet Clean Coal’s financial requirements over the next twelve months and to fund its business plan. There is no assurance that management will be successful in raising additional funds.
NOTE 4: RELATED PARTY TRANSACTIONS
Wages and bonus payable to related parties
Accruals for salary and bonuses to officers and directors are included in accrued liabilities in the balance sheets and totaled $2,660,697 and $3,047,459 as of December 31, 2016 and 2015, respectively. As part of the separation agreement with Mr. Ponce de Leon, the Company agreed to pay him all his accrued salary within two years but agreed to pay him $200,000 by November 2015 out of revenues earned. As the Company did not earn revenue in 2015 and as at December 2016 has still not earned revenue, the obligation to Mr. Ponce de Leon is currently in default. It is the Company’s intention to pay Mr. Ponce de Leon immediately upon receiving revenue.
Debt and convertible debt owed to related parties
During the year ended December 31, 2015, the Company borrowed $50,000 from its Chief Financial Officer. The loan was unsecured, bore no interest and was due on demand. The Company repaid the loan in full during 2015.
During the year ended December 31, 2016, the Company borrowed an aggregate of $37,500 from Officers and Directors. As of December 31, 2016, the aggregate outstanding balance of note payable to Officers and Directors was $18,050. The Company made payments totaling $19,450 on related party debt during the year ended December 31, 2016. The notes are all unsecured, do not accrue interest and are due on demand.
Common Stock issued to related parties
During the year ended December 31, 2016, the Company issued a total of 1,785,714 common shares for the conversion of $500,000 of salary due to an officer and additional compensation expense of $616,071.
During the year ended December 31, 2016, the Company issued 17,528,492 shares of common stock for bonuses to officers and directors valued at $7,118,140, which was recorded as compensation expense.
During the year ended December 31, 2016, an officer of the Company transferred 434,244 common shares of the Company to a note holder on behalf of the Company for debt settlement. The transaction was accounted for as a cancellation of the 434,244 shares at par value and a new issuance of 434,244 to the note holder. As a result, $ 19,371 was recognized as loss on debt extinguishment. .
NOTE 5: DEBT
Convertible Debt
2015
During the year ended December 31, 2015, the Company borrowed an aggregate of $5,308,680, net of original issue discounts and fees of $493,860, under convertible notes payable and issued an aggregate of 1,270,325 common shares for the conversion of $50,000 in convertible debt and accrued interest. During the year ended December 31 2015, the Company repaid ten convertible notes at a cost of $1,425,397. As of December 31, 2015, the Company had outstanding convertible notes payable of $6,747,528, net of unamortized discounts of $1,142,241. The outstanding convertible notes of the Company are unsecured, bear interest between 8% and 12% per annum, mature between October 2014 and December 2018 and are convertible at variable rates between 58% and 75% of the quoted market price of the Company’s common stock. All notes that were convertible during the year ended December 31, 2015 were accounted for as derivative liabilities (see Note 6). Aggregate amortization of the debt discounts on convertible debt for the year ended December 31, 2015 was $1,408,955 of which $56,347 was capitalized as construction in progress. In 2015, the Company defaulted on and entered into standstill agreements on certain of its convertible notes resulting in an aggregate increase to the outstanding principal balance on its convertible debt of $466,890 which was recognized as loan default and standstill expense during 2015.
In November 2015, the Company signed an umbrella financing agreement with Black Diamond Financial Group for up to an aggregate of $7,591,472 in face value of notes. Financing advanced represents 91% of face value and attracts interest at 12%. A 5% financing fee was also accrued totaling $255,512 and recognized as a discount to the debt. The duration of the notes is three years. There are three separate categories of funding, Series A which can be converted into units consisting of one common share and one warrant (exercisable at $0.10 per share with a term of 3 years) at a fixed price of $0.08 per unit, Series B which can be converted into common shares at $0.12 per share and Series C which can be converted into common shares at $0.15 per share. As part of the financing agreement, previously issued convertible notes to the lender with an aggregate outstanding principal amount of $4,669,430 were converted into the three new series of notes. The Company evaluated the modification under ASC 470-50 and determined that it qualified as an extinguishment of debt. In connection with the modification, the lender received an aggregate of 170,237 shares of common stock valued at $139,594 and 2,093,860 common stock warrants valued at $1,674,821. The warrants are exercisable at rates between $0.10 and $0.15 per share and have a term of 5 years. The aggregate loss on extinguishment of debt recognized in 2015 was $6,042,463.
2016
During the year ended December 31, 2016, the Company borrowed an aggregate of $3,038,101, net of original issue discounts and fees of $303,312, under convertible notes payable and issued an aggregate of 18,018,838 common shares for the conversion of $1,231,250 in convertible debt and $56,723 in accrued interest. During the year ended December 31 2016, the Company repaid partial balances of five convertible notes at a cost of $905,644. As of December 31, 2016, the Company had outstanding convertible notes payable of $6,650,484, net of unamortized discounts of $1,920,571. The outstanding convertible notes of the Company are unsecured, bear interest between 8% and 12% per annum, mature between October 2014 and December 2019 and are convertible at variable rates between 58% and 75% of the quoted market price of the Company’s common stock. All notes that were convertible during the year ended December 31, 2016 were accounted for as derivative liabilities (see Note 6). Aggregate amortization of the debt discounts on convertible debt for the years ended December 31, 2016 and 2015 was $1,774,565 and $1,352,608, respectively, of which $56,347 was capitalized as construction in progress during the year ended December 31, 2015. During the years ended December 31, 2016 and 2015, the Company defaulted on and entered into standstill agreements on certain of its convertible notes resulting in an aggregate increase to the outstanding principal balance on its convertible debt of $132,871 and $466,890, respectively. In 2016, one of our convertible notes was in default. The note carried as collateral the company IP and assets. In March 2017 this note was bought out and the remainder of the note was converted into equity. As such the collateral was returned to the company.
During
the year ended December 31, 2016
, the Company entered into a Debt Settlement Agreement with a convertible note holder of two past due notes with outstanding principal balances of $100,000 each. The settlement agreement provides for the payment of $250,000 to settle the notes, payable in four monthly installments of $62,500 beginning September 16, 2016. In connection with this settlement agreement, the Company transferred $50,000 accrued interest into principal of the note. As of December 31, 2016, all payments have been made and the debt has been repaid in full.
During
the year ended December 31, 2016
, the Company entered into a Debt Settlement Agreement with a convertible note holder of a past due note with an outstanding principal balance of $100,000. The settlement agreement provides for the payment of $125,000 to settle the note, payable in three monthly installments of $31,250 beginning September 20, 2016. In connection with this settlement agreement, the Company transferred $25,000 accrued interest into principal of the note. As of December 31, 2016, all payments have been made and the debt has been repaid in full.
During
the year ended December 31, 2016
, the Company incurred loan standstill expenses added to debt principal of $604,688. Also during
the year ended December 31, 2016
, the Company issued an aggregate of 3,057,693 shares to note holders to suspend the conversion of certain outstanding convertible notes. The fair value of these shares of $1,537,308 was recognized as a debt standstill expense.
Nonconvertible Debt
During the year ended December 31, 2016, the Company borrowed $100,000, net of original debt discount of $2,000 under a note payable. The note payable bears interest at 12% per annum, was due in one month and was unsecured. During 2016, the Company entered into a settlement agreement with the note holder, whereby, the Company’s CEO pledged 434,244 shares as security for repayment of the note. As of December 31, 2016, these shares were transferred to the note holder to settlement the debt in a total of $102,000 principal amount. As a result, $19,371 was recognized as loss on debt extinguishment.
During the year ended December 31, 2016, the Company borrowed $50,000 under a note payable. The note payable bears no interest, is unsecured and due upon demand.
As of December 31, 2016 and 2015, the Company had outstanding notes payable to third parties of $565,185 and $413,185, respectively.
As of December 31, 2015, a total of $714,667 note payable was in default. Outstanding notes payable and convertible notes payable consisted of the following as of December 31, 2016 and 2015:
|
|
December 31,
|
|
Name
|
|
2016
|
|
|
2015
|
|
Convertible Debt:
|
|
|
|
|
|
|
Note 1
|
|
$
|
-
|
|
|
$
|
100,000
|
|
Note 2
|
|
|
-
|
|
|
|
100,000
|
|
Note 3
|
|
|
634,541
|
|
|
|
756,873
|
|
Note 5
|
|
|
-
|
|
|
|
100,000
|
|
Note 6
|
|
|
-
|
|
|
|
50,000
|
|
Note 7
|
|
|
-
|
|
|
|
25,000
|
|
Note 8
|
|
|
3,741,473
|
|
|
|
3,741,473
|
|
Note 9
|
|
|
1,630,073
|
|
|
|
1,366,336
|
|
Note 10
|
|
|
1,577,742
|
|
|
|
507,846
|
|
Note 19
|
|
|
-
|
|
|
|
-
|
|
Note 20
|
|
|
-
|
|
|
|
-
|
|
Note 21
|
|
|
80,126
|
|
|
|
-
|
|
Note 22
|
|
|
355,000
|
|
|
|
-
|
|
Note 23
|
|
|
100,000
|
|
|
|
-
|
|
Note 24
|
|
|
347,100
|
|
|
|
-
|
|
Note 25
|
|
|
105,000
|
|
|
|
-
|
|
Total
|
|
|
8,571,055
|
|
|
|
6,747,528
|
|
Less: current portion
|
|
|
(1,436,641
|
)
|
|
|
(1,131,873
|
)
|
Total long-term debt
|
|
|
7,134,414
|
|
|
|
5,615,655
|
|
Less: Unamortized discount
|
|
|
(1,881,152
|
)
|
|
|
(1,142,241
|
)
|
Net
|
|
$
|
5,253,262
|
|
|
$
|
4,473,414
|
|
|
|
|
|
|
|
|
|
|
Nonconvertible Debt:
|
|
|
|
|
|
|
|
|
Note 17
|
|
$
|
35,000
|
|
|
$
|
35,000
|
|
Note 18
|
|
|
378,185
|
|
|
|
378,185
|
|
Note 26
|
|
|
-
|
|
|
|
-
|
|
Note 27
|
|
|
50,000
|
|
|
|
-
|
|
Total
|
|
$
|
463,185
|
|
|
$
|
413,185
|
|
NOTE 6: DERIVATIVE LIABILITIES
The Company analyzed the conversion options embedded in the convertible debt for derivative accounting consideration under ASC 815 and determined that the instruments embedded in the above referenced convertible promissory notes should be classified as liabilities and recorded at fair value due to their being no explicit limit to the number of shares to be delivered upon settlement of the conversion options. Additionally, the above referenced convertible promissory notes contain dilutive issuance clauses. Under these clauses, based on future issuances of the Company’s common stock or other convertible instruments, the conversion price of the above referenced convertible promissory notes can be adjusted downward. Because the number of shares to be issued upon settlement of the above referenced convertible promissory notes cannot be determined under this instrument, the Company cannot determine whether it will have sufficient authorized shares at a given date to settle any other future share instruments. The fair values of the instruments were determined using a Black-Scholes option-pricing model.
As a result of the above, an aggregate of 142,857 previously issued nonemployee common stock options became tainted under ASC 815 and were reclassed from equity to derivative liability. On December 31, 2016 and 2015, the fair value of these tainted options was determined to be $9,193 and $10,374, respectively.
During November 2013, the Company issued 310,863 common stock warrants in connection with a note payable. The common stock warrants are required to be accounted for as derivative liabilities under ASC 815. On December 31, 2016 and 2015, the fair value of these warrants was determined to be $603,787 and $2,677,717, respectively.
During the year ended December 31, 2015, additional convertible notes with an aggregate principal amount of $6,149,511 became convertible. The fair value of the conversion options associated with these notes was determined to be $53,119,865, of which $5,479,767 was recorded as a discount to the notes, $45,965,278 was expensed as a loss on derivative liabilities and $1,674,821 was recognized as loss on debt extinguishment. The aggregate fair value of the outstanding derivative liabilities on the conversion option is $67,316,227 as December 31, 2015.
During the year ended December 31, 2016, additional convertible notes with an aggregate principal amount of $2,478,635 became convertible. The fair value of the conversion options associated with these notes was determined to be $5,473,082 of which $2,249,583 was recorded as a discount to the notes and $3,223,499 was expensed as a loss on derivative liabilities. Also during the year ended December 31, 2016, convertible notes with an aggregate principal amount of $1,231,250 and accrued interest of $56,723 were converted into common shares. The fair value of the derivative liabilities associated with these converted notes was determined to be $2,239,513 on the dates of conversion. This amount was reclassified from derivative liabilities to additional paid-in capital as resolution of derivative liabilities. As of December 31, 2016, the aggregate fair value of the outstanding derivative liabilities associated with convertible notes was $17,415,631. For the year ended December 31, 2016, the net gain on derivative liabilities was $51,985,777.
The Company estimated the fair value of the derivative liabilities using the Black-Scholes option pricing model and the following key assumptions during the years ended December 31:
|
|
2015
|
|
|
2014
|
|
Expected dividends
|
|
|
-
|
%
|
|
|
-
|
%
|
Expected term (years)
|
|
|
0.17 – 5.00
|
|
|
|
0.12 – 3.00
|
|
Volatility
|
|
|
79% - 272
|
%
|
|
|
155% - 237
|
%
|
Risk-free rate
|
|
|
0.16% - 1.57
|
%
|
|
|
0.09% - 1.76
|
%
|
The below table presents the change in the fair value of the derivative liabilities during the years ended December 31, 2016 and 2015:
Fair value as of December 31, 2014
|
|
$
|
1,765,695
|
|
Fair value on the date of issuance recorded as debt discounts
|
|
|
5,479,767
|
|
Fair value on the date of issuance recognized as loss on derivatives
|
|
|
45,965,278
|
|
Loss on extinguishment of debt
|
|
|
1,674,820
|
|
Resolution of derivatives
|
|
|
(1,685,616
|
)
|
Loss on change in fair value of derivatives
|
|
|
15,118,758
|
|
Fair value as of December 31, 2015
|
|
|
70,004,318
|
|
Fair value on the date of issuance recorded as debt discounts
|
|
|
2,249,583
|
|
Fair value on the date of issuance recognized as loss on derivatives
|
|
|
3,223,499
|
|
Resolution of derivatives
|
|
|
(2,239,513
|
)
|
Gain on change in fair value of derivatives
|
|
|
(55,209,276
|
)
|
Fair value as of December 31, 2015
|
|
$
|
18,028,611
|
|
NOTE 7: EQUITY TRANSACTIONS
Common Stock
2015
During the year ended December 31, 2015, the Company issued an aggregate of 18,196,153 common shares for services rendered valued at $3,037,735.
In February 2015, the Company issued a total of 1,270,325 shares upon the conversion of convertible debt of $50,000.
In June 2015, the Company issued a total of 550,000 shares to 802 Investments in connection with the issuance of a convertible note of $250,000. The relative fair value of the stock was determined to be $97,375 and was recognized as a discount to the debt.
On November 25, 2015, the Company issued 170,237 shares to Black Diamond Financial Series A note holder in connection with the modification of previously issued convertible notes (see Note 6). The fair value of the shares of $139,594 was recognized as a loss on debt extinguishment.
During 2015, 2,752 common shares were cancelled to correct for a rounding adjustment resulting from the reverse stock split.
2016
During the year ended December 31, 2016, the Company issued an aggregate of 17,628,492 common shares for services rendered valued at $7,140,115.
During the year ended December 31, 2016, the Company issued an aggregate of 3,491,937 common shares for debt modification and standstill fees valued at $1,658,679.
During the year ended December 31, 2016, the Company issued 1,785,714 common shares for accrued wages of $500,000 and additional compensation expense of $616,071.
During the year ended December 31, 2016, the Company issued an aggregate of 18,018,838 common shares to eight different note holders for conversion of $1,231,250 convertible debt principal and of $56,723 accrued interest.
Options
There were no common stock options issued and no unamortized options expense during the years ended and as of December 31, 2016 and 2015.
The following table presents the stock option activity during the years ended December 31, 2016 and 2015:
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
Options
|
|
|
Exercise Price
|
|
Outstanding - December 31, 2014
|
|
|
714,286
|
|
|
$
|
4.68
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Forfeited/canceled
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Outstanding - December 31, 2015
|
|
|
714,286
|
|
|
$
|
4.68
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Forfeited/canceled/expired
|
|
|
28,573
|
|
|
|
8.40
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Outstanding - December 31, 2016
|
|
|
685,713
|
|
|
$
|
4.52
|
|
|
|
|
|
|
|
|
|
|
Exercisable – December 31, 2015
|
|
|
714,286
|
|
|
$
|
4.68
|
|
Exercisable – December 31, 2016
|
|
|
685,713
|
|
|
$
|
4.52
|
|
The weighted average remaining life of the outstanding options as of December 31, 2016 and 2015 was 2.62 and 3.48 years and the intrinsic value of the exercisable options was $0 and $0, respectively.
Warrants
In November 2013, the Company issued a lender an aggregate of 310,863 common stock warrants in connection with a note payable. The warrants are exercisable immediately at $1.75 per share and expire on November 30, 2018. These warrants were accounted for as derivative liabilities under ASC 815 (see Note 6). The fair value of the warrants of $292,148 was recorded as a debt discount which is being amortized to interest expense over the life of the note. The fair value was determined using the Black-Scholes Option Pricing Model. The significant assumptions used in the model include (1) discount rate of 1.34%, (2) expected term of 5.01 years (3) expected volatility of 154% and (4) zero expected dividends.
During the year ended December 31, 2016 and 2015, the Company granted 424,535 and 2,360,457 warrants with convertible debt, respectively. These warrants are tainted under ASC 815. The fair value of these warrants associated with the notes was determined to be $187,359 and $1,855,368 as of December 2016 and 2015, respectively, of which $187,359 and $0 was recorded as a discount to the notes and $0 and $1,855,368 was expensed as a loss on derivative liabilities (see Note 6) during the years ended December 31, 2016 and 2015, respectively.
The following table presents the stock warrant activity during the years ended December 31, 2016 and 2015:
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
Warrants
|
|
|
Exercise Price
|
|
Outstanding - December 31, 2014
|
|
|
4,529,434
|
|
|
$
|
0.60
|
|
Granted
|
|
|
2,360,457
|
|
|
|
0.11
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Outstanding - December 31, 2015
|
|
|
6,889,891
|
|
|
|
0.43
|
|
Granted
|
|
|
424,532
|
|
|
|
0.14
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Outstanding – December 31, 2016
|
|
|
7,314,423
|
|
|
|
0.41
|
|
|
|
|
|
|
|
|
|
|
Exercisable – December 31, 2015
|
|
|
6,889,891
|
|
|
$
|
0.60
|
|
Exercisable – December 31, 2016
|
|
|
7,314,423
|
|
|
$
|
0.41
|
|
The weighted average remaining life of the outstanding warrants as of December 31, 2016 and 2015 was 3.12 and 4.05 years, respectively. The intrinsic value of the exercisable warrants as of December 31, 2015 and 2014 was $169,873 and $752,400, respectively.
NOTE 8: OPERATING LEASES
Clean Coal has one operating lease for its executive offices in Manhattan, New York. Effective February 1, 2014, the lease is month to month, at a monthly rate of $200 per month.
NOTE 9: COMMITMENTS AND CONTINGENCIES
Litigation
We were named as a defendant in a lawsuit filed by a shareholder in the 15th Judicial Circuit Court in and for West Palm Beach County, Florida, Case No. 50 2010CA 028706XXXX MB on or about November 24, 2010. The Company has vigorously defended this action that the Company and its litigation counsel regard as absolutely frivolous, baseless and without merit. In August 2013, attorneys for the plaintiff filed a Fourth Amended Complaint. In December 2013, the Court dismissed one count of the amended complaint but plaintiff’s attorneys filed a request to file a fifth amendment. In January 2014, our attorneys filed a memorandum objecting to the motion to amend. We will continue to vigorously defend the action and we do not believe that the action will be materially adverse to the company. Our attorneys have put the plaintiff’s counsel on notice of our intent to seek sanctions against both the plaintiff, and the plaintiff’s counsel pursuant to Florida Statute Sec.57.105. Further, we have moved to dismiss the action on the basis that the Plaintiff has procedurally, factually, and legally failed to state a cause of action up which relief can be granted.
The Company is currently contesting a charge from a vendor claiming $320,000 in charges for work provided on its test facility. It is the Company’s contention that they have been overcharged by $205,000 based on evidence submitted by third parties and is seeking remediation for this overcharge. As at December 31, 2016 the full charge of $320,000 has been recognized in the company’s books and records.
As part of the separation agreement with Mr. Ponce de Leon, the ex COO of the Company, the Company agreed to pay him his accrued salary of $1,226,711 within two years but agreed to pay him $200,000 by November 2015 out of revenues earned. As the Company did not earn revenue in 2015 and as at December 2016 has still not earned revenue, the obligation to Mr. Ponce de Leon is currently in default. It is the Company’s intention to pay Mr. Ponce de Leon immediately upon receiving revenue.
NOTE 10: SUBSEQUENT EVENTS
Equity
In January 2017 the company issued a total of 1,677,295 common shares as part of debt conversions for a total of $150,000.
In February 2017, the Company issued a total of 1,592,095 common shares as part of convertible debt reduction of $150,000.
In March 2017, the company converted debt of $385,389 into 5,507,142 common shares.
In March 2017, the company issued an additional total of 1,769,712 common shares comprising of convertible note debt reduction of $75,000 for 1,050,546 common shares true-up conversion of 719,166 common shares.
Debt
In February 2017, the Company was advanced $130,000 by management as a 0% loan repayable on demand.
In March 2017, the company assigned the remaining balance of a convertible note from Typenex to James Besser for a total of $385,389.