10-Q 1 carbon10q05172013.htm 10-Q carbon10q05172013.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q
(Mark One)

x QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2013
 
¨ TRANSITION REPORT UNDER SECTION13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
FOR THE TRANSITION PERIOD FROM __________ TO __________
COMMISSION FILE NUMBER: 000-54817

CARBON SCIENCES, INC.
(Name of registrant in its charter)

Nevada
  
20-5451302
(State or other jurisdiction of incorporation or
organization)
  
(I.R.S. Employer Identification No.)
 
5511C Ekwill Street, Santa Barbara, California 93111
(Address of principal executive offices) (Zip Code)

Issuer’s telephone Number: (805) 456-7000


Indicate by check mark whether the registrant (1) has filed all reports required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  x   No  o

 Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  x    No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o
  
Accelerated filer o
Non-accelerated filer o
  
Smaller reporting company x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  o   No  x
 
The number of shares of registrant’s common stock outstanding, as of May 17, 2013 was 11,576,680.
 
 
 
 

 
 
INDEX

3
3
   
        Balance Sheets
 3
 
        Statements of Operations
 4
  5
 
        Statements of Cash Flows
 6
  7
12
15
15
15
15
15
15
15
15
16
16
        SIGNATURES
 17
 
 

 

 
 
ITEM 1. FINANCIAL STATEMENTS

CARBON SCIENCES, INC.
(A Development Stage Company)
 
Balance Sheets
 
   
March 31, 2013
    
December 31, 2012
  
   
(Unaudited)
        
ASSETS
            
             
CURRENT ASSETS
            
  Cash
   $ 913     $ 14,257  
  Prepaid expenses
     21,257       12,888  
                 
                        TOTAL CURRENT ASSETS
     22,170       27,145  
                 
PROPERTY & EQUIPMENT, at cost
                
   Computer equipment
     9,740       9,740  
   Furniture & fixtures
     1,459       1,459  
      11,199       11,199  
   Less accumulated depreciation
     (8,527 )     (7,663 )
                 
                        NET PROPERTY AND EQUIPMENT
     2,672       3,536  
                 
OTHER ASSETS
                
   Patents
     1,784       1,584  
                 
                       TOTAL ASSETS
   $ 26,626     $ 32,265  
                 
                 
LIABILITIES AND SHAREHOLDERS' DEFICIT
                
                 
CURRENT LIABILITIES
                
    Accounts payable
   $ 307,369     $ 274,485  
    Accrued expenses
     16,311       16,244  
    Accrued interest, notes payable
     38,599       22,408  
    Rent deposit
     1,500       -  
    Unearned income
     2,250       -  
    Promissory notes payable, shareholders
     5,000       5,000  
    Derivative liability
     767,907       753,971  
    Convertible promissory notes, net of beneficial conversion feature of $8,986
     1,014       -  
    Convertible promissory notes, net of discount of $523,949
     244,669       86,182  
                 
                       TOTAL CURRENT LIABILITIES
     1,384,619       1,158,290  
                 
SHAREHOLDERS' DEFICIT
                
   Preferred Stock, $0.001 par value,
                
    20,000,000 authorized common shares
     -       -  
   Common Stock, $0.001 par value;
                
    100,000,000 authorized common shares
                
    11,576,680 and 11,576,680 shares issued and outstanding, respectively
     11,578       11,578  
   Additional paid in capital
     9,895,157       9,814,227  
   Accumulated deficit during the development stage
     (11,264,728 )     (10,951,830 )
                 
                      TOTAL SHAREHOLDERS' DEFICIT
     (1,357,993 )     (1,126,025 )
                 
    TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT
   $ 26,626     $ 32,265  


 
(A Development Stage Company)
 
 
Statements of Operations
(Unaudited)
 
               
From Inception on
  
               
August 25,2006
  
   
Three Months Ended
    
through
  
   
March 31, 2013
    
March 31, 2012
    
March 31, 2013
  
                   
                   
REVENUE
   $ -     $ -     $ -  
                         
OPERATING EXPENSES
                        
  General and administrative expenses
     155,619       521,742       8,503,540  
  Research and development
     2,439       98,746       1,247,808  
  Depreciation and amortization expense
     864       6,026       110,284  
                         
TOTAL OPERATING EXPENSES
     158,922       626,514       9,861,632  
                         
LOSS FROM OPERATIONS BEFORE  OTHER INCOME/(EXPENSES)
     (158,922 )     (626,514 )     (9,861,632 )
                         
OTHER INCOME/(EXPENSE)
                        
  Interest income
     -       -       39,521  
  Rental income
     2,250       -       2,250  
  Loss on sale of asset
     -       -       (69,033 )
  Loss on foreign exchange
     -       -       (2,327 )
  Impairment of intangible assets
     -       -       (88,147 )
  Loss on shares issued for debt
     -       -       (705 )
  Gain on forgiveness of debt
     -       -       102,000  
  Common stock issued for incentive fees
     -       (258,400 )     (1,079,800 )
  Gain/(loss) on change in derivative liability
     8,550       -       (64,709 )
  Penalties
     -       -       (382 )
  Interest expense
     (164,776 )     (2,275 )     (241,764 )
                         
TOTAL OTHER INCOME/(EXPENSES)
     (153,976 )     (260,675 )     (1,403,096 )
                         
NET LOSS
   $ (312,898 )   $ (887,189 )   $ (11,264,728 )
                         
BASIC AND DILUTED LOSS PER SHARE
   $ (0.03 )   $ (0.09 )        
                         
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING
                  
      BASIC AND DILUTED
     11,576,680       9,644,818          
 


 
(A Development Stage Company)
 
Statement of Shareholders' Equity/(Deficit)
(Unaudited)
                                 
Deficit
        
                                  Accumulated        
                           
Additional
    
during the
        
   
Preferred stock
    
Common stock
    
Paid-in
     Development    
 
  
   
Shares
    
Amount
    
Shares
    
Amount
    
Capital
    
Stage
    
Total
  
                                           
Balance at December 31, 2012    (Audited)
     -     $ -       11,576,680     $ 11,578     $ 9,814,227     $ (10,951,830 )   $ (1,126,025 )
                                                         
                                                         
Beneficial conversion feature
     -       -       -       -       10,000       -       10,000  
                                                         
Stock compensation cost
     -       -       -       -       70,930       -       70,930  
                                                         
Net Loss for the three months ended March 31, 2013
     -       -       -       -       -       (312,898 )     (312,898 )
                                                         
Balance at March 31, 2013
     -     $ -       11,576,680     $ 11,578     $ 9,895,157     $ (11,264,728 )   $ (1,357,993 )

 
 
 
(A Development Stage Company)
 
Statements of Cash Flows
(Unaudited)
 
               
From Inception on
  
               
August 25, 2006
  
   
Years Ended
    
through
  
   
March 31, 2013
    
March 31, 2012
    
March 31, 2013
  
CASH FLOWS FROM OPERATING ACTIVITIES:
                  
   Net loss
   $ (312,898 )   $ (887,189 )   $ (11,264,728 )
   Adjustment to reconcile net loss to net cash
                        
     used in operating activities
                        
   Depreciation expense
     864       6,026       110,284  
   Common stock issuance for services
     -       76,000       417,038  
   Common stock issuance for incentive fees
     -       258,400       1,079,800  
   Stock compensation cost
     70,930       155,959       2,210,505  
   Impairment of intangible assets
     -       -       88,147  
   Loss on sale of asset
     -       -       69,033  
   Loss on shares issued for debt
     -       -       705  
   Gain on forgiveness of debt
     -       -       (102,000 )
   Amortization of debt discount and beneficial conversion feature recorded as interest expense
     146,988       -       191,930  
   Loss on change in derivative liability
     (8,550 )     -       64,709  
  Changes in Assets and Liabilities
                        
   (Increase) Decrease in:
                        
   Prepaid expenses
     (8,369 )     (30,723 )     (21,257 )
   Increase (Decrease) in:
                        
   Accounts payable
     32,883       159,091       424,368  
   Accrued expenses
     16,258       91,134       299,362  
   Rent deposit
     1,500       -       1,500  
   Unearned income
     2,250       -       2,250  
                      .  
NET CASH USED IN OPERATING ACTIVITIES
     (58,144 )     (171,302 )     (6,428,354 )
                         
CASH FLOWS USED IN INVESTING ACTIVITIES:
                        
   Proceeds from sale of vehicle
     -       -       24,500  
   Patent expenditures
     (200 )     -       (89,931 )
   Purchase of equipment
     -       -       (206,489 )
                         
NET CASH USED IN INVESTING ACTIVITIES
     (200 )     -       (271,920 )
                         
CASH FLOWS IN FINANCING ACTIVITIES:
                        
   Advances from officer
     -       -       113,000  
   Loans from investors
     -       120,000       625,000  
   Proceeds received for convertible promissory notes
     45,000       -       437,500  
   Repayment of advances and loans
     -       -       (383,000 )
   Proceeds from subscriptions payable
     -       -       362,775  
   Proceeds from issuance of common stock, net
     -       55,000       5,545,912  
                         
NET CASH PROVIDED BY FINANCING  ACTIVITIES
     45,000       175,000       6,701,187  
                         
NET INCREASE/(DECREASE) IN CASH
     (13,344 )     3,698       913  
                         
CASH, BEGINNING OF PERIOD
     14,257       7,265       -  
                         
CASH, END OF PERIOD
   $ 913     $ 10,963     $ 913  
                         
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
                        
   Interest paid
   $ 1,535     $ 491     $ 11,065  
   Taxes paid
   $ -     $ -     $ -  
                      .  
SUPPLEMENTAL DISCLOSURES OF NON CASH ACTIVITIES
                        
During the three month period ended March 31, 2012, the Company issued 69,737 shares of common stock for converted debt in the amount of $265,000, at fair
  
   value of $3.80 per share.
                        
 

 
6
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS-UNAUDITED
MARCH 31, 2013



1.      Basis of Presentation
The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all normal recurring adjustments considered necessary for a fair presentation have been included.  Operating results for the three months ended March 31, 2013 are not necessarily indicative of the results that may be expected for the year ending December 31, 2013.  For further information refer to the financial statements and footnotes thereto included in the Company's Form 10-K for the year ended December 31, 2012.

Going Concern
The accompanying financial statements have been prepared on a going concern basis of accounting, which contemplates continuity of operations, realization of assets and liabilities and commitments in the normal course of business.  The accompanying financial statements do not reflect any adjustments that might result if the Company is unable to continue as a going concern.  The Company has not generated any revenue, and has negative cash flows from operations, which raise substantial doubt about the Company’s ability to continue as a going concern.  The ability of the Company to continue as a going concern and appropriateness of using the going concern basis is dependent upon, among other things, additional cash infusion.  The Company has obtained funds from its shareholders since its inception , and believes this funding will continue, and is also actively seeking new investors.  Management believes the existing shareholders and the prospective new investors will provide the additional cash needed to meet the Company’s obligations as they become due, and will allow the development of its core of business.

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

This summary of significant accounting policies of Carbon Sciences, Inc. is presented to assist in understanding the Company’s financial statements. The financial statements and notes are representations of the Company’s management, which is responsible for their integrity and objectivity. These accounting policies conform to accounting principles generally accepted in the United States of America and have been consistently applied in the preparation of the financial statements.

Development Stage Activities and Operations
The Company is in its initial stages of formation and has no revenues. A development stage activity is one in which all efforts are devoted substantially to establishing a new business and even if planned principal operations have commenced, revenues are insignificant.

Revenue Recognition
The Company will recognize revenue when services are performed, and at the time of shipment of products, provided that evidence of an arrangement exists, title and risk of loss have passed to the customer, fees are fixed or determinable, and collection of the related receivable is reasonably assured. To date, the Company has had no revenues and is in the development stage.

Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.
 
Loss per Share Calculations
The Company adopted the accounting pronouncement for loss per share, which dictates the calculation of basic earnings per share and diluted earnings per share. Basic earnings per share are computed by dividing income available to common shareholders by the weighted-average number of common shares available. Diluted earnings per share is computed similar to basic earnings per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. The Company’s diluted loss per share is the same as the basic loss per share for the three months ended March 31, 2013 as the inclusion of any potential shares would have had an anti-dilutive effect due to the Company generating a loss.

Stock-Based Compensation
Share based payments applies to transactions in which an entity exchanges its equity instruments for goods or services, and also applies to liabilities an entity may incur for goods or services that are to follow a fair value of those equity instruments. We will be required to follow a fair value approach using an option-pricing model, such as the Black Scholes option valuation model, at the date of a stock option grant. The deferred compensation calculated under the fair value method would then be amortized over the respective vesting period of the stock option. The adoption of share based compensation has no material impact on our results of operations.

 
7
CARBON SCIENCES, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS-UNAUDITED
MARCH 31, 2013


2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Fair Value of Financial Instruments
Disclosures about fair value of financial instruments, requires disclosure of the fair value information, whether or not recognized in the balance sheet, where it is practicable to estimate that value. As of December 31, 2012, the amounts reported for cash, accrued interest and other expenses, and notes payable approximate the fair value because of their short maturities.

We adopted ASC Topic 820 (originally issued as SFAS 157, “Fair Value Measurements”) as of January 1, 2008 for financial instruments measured as fair value on a recurring basis. ASC Topic 820 defines fair value, established a framework for measuring fair value in accordance with accounting principles generally accepted in the United States and expands disclosures about fair value measurements.

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC Topic 820 established a three-tier fair value hierarchy which prioritizes the inputs used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1measurements) and the lowest priority to unobservable inputs (level 3 measurements). These tiers include:
 
·
Level 1, defined as observable inputs such as quoted prices for identical instruments in active markets;
 
·
Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable such as quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active; and
 
·
Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions, such as valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.

We measure certain financial instruments at fair value on a recurring basis. Assets and liabilities measured at fair value on a recurring basis are as follows at March 31, 2013:
 
   
Total
    
(Level 1)
    
(Level 2)
    
(Level 3)
  
                         
Assets
   $ -     $ -     $ -     $ -  
                                 
Total assets measured at fair value
   $ -     $ -     $ -     $ -  
                                 
Liabilities
                                
                                 
Derivative liability
     767,907       -       -       767,907  
Convertible promissory note
     245,683       -       -       245,683  
Total liabilities measured at fair value
   $ 1,013,590     $ -     $ -     $ 1,013,590  
 
Recently Issued Accounting Pronouncements
Management reviewed accounting pronouncements issued during the three months ended March 31, 2013, and no pronouncements were adopted during the period.
 
3.      CAPITAL STOCK

At March 31, 2013, the Company’s authorized stock consisted of 100,000,000 shares of common stock, with $0.001 par value.  The Company is also authorized to issue 20,000,000 shares of preferred stock with a par value of $0.001 per share.  The rights, preferences and privileges of the holders of the preferred stock will be determined by the Board of Directors prior to issuance of such shares.

4.      STOCK OPTIONS

As of March 31, 2013, the Company had non-qualified stock options outstanding of 1,137,500 shares of common stock which were granted to its employees. Each Option shall be exercisable to the nearest whole share, in installments or otherwise, as the respective Option agreements may provide. Notwithstanding any other provisions of the Option agreement, each Option expires on the date specified in the Option agreement, which date shall not be later than the seventh (7th) anniversary from the grant date of the options. The stock options vested immediately, and are exercisable for a period of seven  to ten years from the date of grant at exercise prices between $0.95 and $4.31 per share, which represented the market price of the Company’s common stock on the date of grant.
 

 
8
CARBON SCIENCES, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS-UNAUDITED
MARCH 31, 2013

 
4.      STOCK OPTIONS AND WARRANTS (Continued)

A summary of the Company’s stock option activity and related information as follows:


 
3/31/2013
  
     
Weighted
  
 
Number
  
average
  
 
of
  
exercise
  
 
Options
  
price
  
Outstanding, beginning of period
     1,137,500     $ 2.39  
Granted
     -       -  
Exercised
     -       -  
Expired
     -       -  
Outstanding, end of period
     1,137,500     $ 2.39  
Exercisable at the end of period
     759,000     $ 2.22  
Weighted average fair value of
                
  options granted during the period
           $ -  
 
Stock-based compensation expense recognized during the period is based on the value of the portion of stock-based payment awards that is ultimately expected to vest. Stock-based compensation expense recognized in the financial statements of operations during the three months ended March 31, 2013, included compensation expense for the stock-based payment awards granted prior to, but not yet vested, as of March 31,2013 based on the grant date fair value estimated, and compensation expense for the stock-based payment awards granted subsequent to March 31, 2013, based on the grant date fair value estimated. We account for forfeitures as they occur. The stock-based compensation expense recognized in the statement of income during the three months ended March 31, 2013 and 2012 is $70,930 and $155,959, respectively.

Warrants
As of March 31, 2013, the Company had 460,000 common stock purchase warrants outstanding.

5.   RELATED PARTY TRANSACTION

During the three months ended March 31, 2013, the Company signed a promissory note for funds received on January 17, 2013 in the amount of $10,000 for operating expenses from an existing shareholder. The note bears interest at 5% per annum, and is due within one year from the effective date.
 
6.   CONVERTIBLE PROMISSORY NOTES
 
The Company received funds for two (2) securities purchase agreement entered into on September 19, 2012 and December 21, 2012, for the sale of two (2) 8% convertible promissory notes in the aggregate principal amount of $75,000. The notes are convertible into shares of common stock of the Company at a price equal to a variable conversion price of 58% multiplied by the market price representing a discount of 42%. The market price means the average of the lowest three (3) trading prices for the common stock during a ten (10) trading day period ending on the latest complete trading day prior to the conversion date. The notes mature on June 21, 2013, and September 14, 2013. The Company recorded a debt discount of $60,382 related to the conversion feature of the note, along with a derivative liability at inception.  During the three months ended March 31, 2013, total amortization was recorded in amount of $20,636 resulting in a debt discount of $26,386 at March 31, 2013.
 
On December 12, 2012, the Company exchanged certain promissory notes in the aggregate amount of $327,500 to convertible promissory notes. The Company entered into securities purchase agreements for the sale of 10% convertible promissory notes in the aggregate principal amount of $327,500, which are convertible into shares of common stock of the Company at a conversion price equal to (a) the lesser of $0.54 per share or (b) 50% of the lowest trade price recorded on any trade date after the effective date, or (c) the lowest effective price per share granted to any person after the effective date. The notes mature one (1) year from the effective date of each of the notes. The Company recorded a debt discount of $327,500 related to the conversion feature of the notes, along with a derivative liability at inception.  During the three months ended March 31, 2013, total amortization was recorded in amount of $80,753 resulting in a debt discount of $228,648 at March 31, 2013.
 

 
9
CARBON SCIENCES, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS-UNAUDITED
MARCH 31, 2013


6.     CONVERTIBLE PROMISSORY NOTES (Continued)
 
On December 31, 2012, the Company entered into promissory notes in exchange for services rendered in the aggregate amount of $244,452 for   convertible promissory notes. The Company entered into securities purchase agreements for the sale of 5% convertible promissory notes in the principal amount of $244,452, which are convertible into shares of common stock of the Company at a conversion price equal to the lesser of $0.20 per share or the closing price per share of common stock recorded on the trading day immediately preceding the date of conversion. The notes mature two (2) years from their effective dates. The Company recorded a debt discount of $237,742 related to the conversion feature of the note, along with a derivative liability at inception.  During the three months ended March 31, 2013, total amortization was recorded in amount of $29,341 resulting in a debt discount of $208,075 at March 31, 2013.
 
On February 22, 2013, the Company received in consideration upon execution of a note in the sum of $10,000 on a securities purchase agreement for the sale of a 10% convertible promissory note in the aggregate principal amount of $100,000. The Company received an advance in the amount of $10,000 on February 25, 2013. The note is convertible into shares of common stock of the Company at a price equal to a variable conversion price of the lesser of $0.09 per share or fifty percent (50%) of the lowest trade price recorded after the effective date. The note matures one (1) year from the effective date. The Company recorded a debt discount of $10,000 related to the beneficial conversion feature of the note.  As of March 31, 2013, total amortization was recorded in the amount of $1,014 resulting in a discount of $8,986 at March 31, 2013.
 
On October 8, 2012, the Company received in consideration upon execution of a note in the sum of $75,000 on a securities purchase agreement for the sale of 10% convertible promissory notes in aggregate principal amount of $335,000 with a 10% Original Issue Discount (OID) of $35,000.  The principal amount of $81,784 outstanding on the note as of December 31, 2012 included the payment of $75,000 plus the unamortized original issue discount of $6,784.  The Company recorded a debt discount of $54,843 related to the conversion feature of the note and $6,784 related to the original issue discount, along with a derivative liability at inception.  During the three months ended March 31, 2013, total amortization was recorded in the amount of $15,680 resulting in a discount of $28,999 at March 31, 2013.  On February 27, 2013, the Company received additional proceeds of $25,000 on this securities purchase agreement, with an original issue discount of $2,917 for total principal owed of $27,917.  The Company recorded a debt discount of $22,487 related to the conversion feature of the note and $2,917 related to the original issue discount, along with a derivative liability at inception.  During the three months ended March 31, 2013, total amortization was recorded in the amount of $2,227 resulting in a discount of $23,176 at March 31, 2013.If the notes are repaid before 90 days, the interest rate will be zero percent (0%), otherwise a one-time interest rate of five percent (5%) will be applied to the principal sums outstanding. The note is convertible into shares of common stock of the Company at a price equal to the lesser of $0.72 or 70% of the lowest trade price in the 25 trading days previous to the conversion. The notes mature one (1) year from the effective date of each advance.

For purpose of determining the fair market value of the derivative liability, the Company used Black Scholes option valuation model. The significant assumptions used in the Black Scholes valuation of the derivative are as follows:
 
       
Stock price on the valuation dates
   $ 0.14 - $0.77  
Conversion price for the debt
   $ 0.06 - $0.50  
Dividend yield
     0.00 %
Years to Maturity
     1 - 2  
Risk free rate
     .11% - .25 %
Expected volatility
     90.93% - 313.78 %
 
The value of the derivative liability balance at March 31, 2013 was $767,907.

 
10
CARBON SCIENCES, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS-UNAUDITED
MARCH 31, 2013


7.    SUBSEQUENT EVENTS
 
Management has evaluated subsequent events according to the requirements of ASC TOPIC 855, and has reported the following:
 
On April 23, 2013, the Company signed a promissory note for funds received in the amount of $10,000 for operating expenses from an existing shareholder. The note bears interest at 5% per annum, and is due with one year from the effective date.
 
On May 1, 2013, the Company signed a promissory note for funds received in the amount of $10,000 for operating expenses from an existing shareholder. The note bears interest at 5% per annum, and is due with one year from the effective date.
 

 
 
ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
The following discussion and analysis should be read together with our financial statements and the related notes appearing elsewhere in this filing. This discussion contains forward-looking statements reflecting our current expectations that involve risks and uncertainties. See “Forward-Looking Statements” for a discussion of the uncertainties, risks and assumptions associated with these statements. Actual results and the timing of events could differ materially from those discussed in our forward-looking statements as a result of many factors, including those set forth under “Risk Factors” in our annual report on Form 10-K filed with the SEC on April 2, 2013 and other filings made with the SEC.
 
OVERVIEW
 
Carbon Sciences is in the early stages of developing a complete small-scale natural gas-to-liquids (“GTL”) fuel production plant (the “miniGTL plant” or the “Plant”). The miniGTL plant will be based on integrating and optimizing existing GTL technology components and processes into a modular diesel or gasoline production facility. Developing the Plant will require bringing together natural gas resource holders, engineering firms, and technology firms. Based on our internal economic analysis and conversations with prospective partners, we believe that the miniGTL A modular Plant producing approximately 1,000 barrels per day of diesel or gasoline may be economically viable in the United States, given the low price and abundance of natural gas. A modular Plant would be mobile and could be moved from one gas field to another, amortizing the capital cost of the plant over several small gas fields, which are more plentiful than large gas fields.

With respect to catalyst development activities, Carbon Sciences is developing a proprietary catalyst technology to facilitate the production of cleaner and greener transportation fuels, hydrogen and other valuable, large volume products from natural gas. We believe our clean-tech process will enable the world to reduce its dependence on petroleum by transforming abundant and affordable natural gas into gasoline, diesel and jet fuel, and other products, such as hydrogen, methanol, ammonia, solvents, plastics and detergent alcohols. The key to our process is a chemical catalyst that can reduce the cost of reforming natural gas into synthetic gas (syngas), the most costly step in making liquid fuel and other products from natural gas.

Our patented catalyst has been proven in laboratory conditions to be very robust with over 2,000 hours of uninterrupted run time with high efficiency in converting natural gas to syngas.  Initial testing of the catalyst under industrial conditions, such as high temperature and high pressure, confirmed our belief that some variation of our base catalyst may be developed to outperform existing natural gas reforming catalysts by (a) lowering the amount of steam required in the reaction chamber, which decreases the energy required and increases the natural gas throughput rate, and (b) consuming carbon dioxide, which reduces the carbon footprint of the process.  Our research and development efforts are based on developing a commercial form of this catalyst for use in existing natural gas reforming processes. Our development activities are primarily performed by outside catalyst development firms and we are also seeking a strategic partner to help accelerate the commercial development of our catalyst.
 
We have not yet generated revenues. We currently have negative working capital and, in connection with our December 31, 2012 financial statements, we received an opinion from our auditors that expressed substantial doubt about our ability to continue as a going concern without additional financing. Subsequent to December 31, 2012, we obtained $65,000 in funding through private placement offerings. We believe that the financings received by us after December 31, 2012 will fully address such concern and enable us to implement our business plan through such time as revenues support our operations. If additional funds are required because our plans, expectations or assumptions change, we may also seek funding through additional equity or debt financing. There can be no assurance that such financing will be available or upon such terms that are acceptable to us, if at all.
 
Corporate Overview
 
We were incorporated in the State of Nevada on August 25, 2006, as Zingerang, Inc. Our name was changed to Carbon Sciences, Inc. on April 9, 2007. Our principal executive offices are located at 5511-C Ekwill Street, Santa Barbara, California 93111, and our telephone number is (805) 456-7000. Our fiscal year end is December 31.
 
 
 
Critical Accounting Policies
 
Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America or GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to impairment of property, plant and equipment, intangible assets, deferred tax assets and fair value computation using the Black Scholes option pricing model. We base our estimates on historical experience and on various other assumptions, such as the trading value of our common stock and estimated future undiscounted cash flows, that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions; however, we believe that our estimates, including those for the above-described items, are reasonable. 
  
Use of Estimates

In accordance with GAAP, management utilizes estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. These estimates and assumptions relate to recording net revenue, collectability of accounts receivable, useful lives and impairment of tangible and intangible assets, accruals, income taxes, inventory realization, stock-based compensation expense and other factors. Management believes it has exercised reasonable judgment in deriving these estimates. Consequently, a change in conditions could affect these estimates.

Fair Value of Financial Instruments

The Company's cash, cash equivalents, investments, accounts receivable and accounts payable are stated at cost which approximates fair value due to the short-term nature of these instruments.
 
Recently Issued Accounting Pronouncements

Management reviewed accounting pronouncements issued during the three months ended March 31, 2013 and no pronouncements were adopted during the period which could have a material impact on the Company's financial statements.
 
RESULTS OF OPERATIONS – THREE MONTHS ENDED MARCH 31, 2013 COMPARED TO THE THREE MONTHS ENDED MARCH 31, 2012
 
General and Administrative Expenses
G&A expenses decreased by $(366,123) to $155,619 for the three months ended March 31, 2013, compared to $521,742 for the three months ended March 31, 2012. This decrease in G&A expenses was primarily due to the decrease in non-cash stock compensation of $(85,029), a decrease in salaries of $(99,071), investor relations of $(98,500), professional fees of $(50,026), this was partially offset by the decrease in other G&A expenses of $(33,497) compared to the prior year.

Research and Development
R&D costs decreased by $(96,307) to $2,439 for the three months ended March 31, 2013, compared to $98,746 for the three months ended March 31, 2012. This decrease in R&D costs was the result of a decrease in outside consulting and lab fees, supplies for testing, and research and product development.
 

 
 
Net Loss
Net loss decreased by $(574,291) to $(312,898) for the three months ended March 31, 2013, compared to $(887,189) for the three months ended March 31, 2012.  This decrease in net loss was the result of a net decrease in other expenses of $(106,699), which consisted of an increase in interest of $(15,514), an increase in amortization of debt discount and original issue discount of $(146,988), gain on change in derivative liability of $8550, an increase in rental income of $2,250, and a decrease in common stock issued for incentive fees of $258,400, with an overall decrease in operating expenses of $(377,401), a decrease in non-cash stock compensation expense of $(85,029), and depreciation of $(5,162) . Currently the Company is in its development stage and  have not generated any revenues.
 
Liquidity and Capital Resources

 As of March 31, 2013, we had a working capital deficit of $(1,362,449) compared to $(1,131,145) for the year ended December 31, 2012. The increase of $(231,304) in working capital deficit was due primarily to the non-cash derivative liability, plus an increase in accounts payable and issuance of convertible promissory notes.

During the three months ended March 31, 2013, we used $(58,144) of cash for operating activities, as compared to $(171,302) for the prior period March 31, 2012. The decrease of $(113,158) in the use of cash for operating activities was primarily due to a decrease in operating net loss associated with an increase in non-cash expenses, and a decrease in prepaid expenses, accounts payable, and accrued expenses.

Cash used by investing activities was $(200) for the three months ended March 31, 2013, as compared to no patent expenditures in the prior period ended March 31, 2012.

Cash provided from financing activities during the March 31, 2013 was $45,000 as compared to $175,000 for the prior period ended March 31, 2012. Our capital needs have primarily been met from the proceeds of equity financings, and investor loans, as we are currently in the development stage and have not generated any revenues.

We do not have any material commitments for capital expenditures during the next twelve months.  Although proceeds received from the sale of our securities are currently sufficient to fund our current operating expenses, we will need to raise additional funds in the future to continue our operations. Therefore, our future operations are dependent on our ability to secure additional financing.  Financing transactions may include the issuance of equity or debt securities, obtaining credit facilities, or other financing mechanisms. However, the trading price of our common stock and a downturn in the U.S. equity and debt markets could make it more difficult to obtain financing through the issuance of equity or debt securities. Even if we are able to raise the funds required, it is possible that we could incur unexpected costs and expenses, or experience unexpected cash requirements that would force us to seek alternative financing. Furthermore, if we issue additional equity or debt securities, stockholders may experience additional dilution or the new equity securities may have rights, preferences or privileges senior to those of existing holders of our common stock. The inability to obtain additional capital may restrict our ability to grow and may reduce our ability to continue to conduct business operations. If we are unable to obtain additional financing, we may have to curtail our marketing and development plans and possibly cease our operations.
 
We believe that we have assets to ensure that we can continue to operate without liquidation over the next twelve months, due to our cash on hand, and our experience in the past in being able to raise money from our investor base.  Based on the aforesaid, we believe we have the ability to continue our operations for the foreseeable future and will be able to realize assets and discharge liabilities in the normal course of our operations.

Our financial statements as of March 31, 2013 have been prepared under the assumption that we would continue as a going concern. Our independent registered public accounting firm issued their report dated March 30, 2013 that included an explanatory paragraph expressing substantial doubt in our ability to continue as a going concern  as the Company does not generate significant revenue and has negative cash flows from operations. Our ability to continue as a going concern ultimately is dependent on our ability to generate a profit which is dependent upon our ability to obtain additional equity or debt financing, attain further operating efficiencies and, ultimately, to achieve profitable operations. Our financial statements do not include any adjustments that might result from the outcome of this uncertainty.
 
 

  
n/a
 

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this report, we conducted an evaluation, under the supervision and with the participation of our chief executive officer and chief financial officer of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act). Based upon this evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is: (i) recorded, processed, summarized and reported, within the time periods specified in the Commission's rules and forms, and (ii) accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting
 
There was no change to our internal controls or in other factors that could affect these controls during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.





We are not a party to any pending legal proceeding, nor is our property the subject of a pending legal proceeding, that is not in the ordinary course of business or otherwise material to the financial condition of our business. None of our directors, officers or affiliates is involved in a proceeding adverse to our business or has a material interest adverse to our business.
 
 
There are no material changes from the risk factors previously disclosed in the Registrant’s Form 10-K filed April 2, 2013.
 
 
During the three months ended March 31, 2013 the Company entered into securities purchase agreements and convertible promissory notes for funds received in the amount of $45,000. The funds were used for operating expenses.

The Company relied on an exemption pursuant to Rule 506 of Regulation D and/or Section 4(2) of the Securities Act of 1933, as amended in connection with the sale of the shares.
 
 
None
 
 
 
ITEM 4. MINE SAFETY DISCLOSURES

None
 
 
None
 
 
31.1
  
Certification of the Chief Executive Officer and Chief Financial Officer., pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
32.1
  
Certification of the Chief Executive Officer and Chief Financial Officer., furnished pursuant to Section 1350 of Chapter 63 of 18 U.S.C. as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
EX-101.INS
  
XBRL INSTANCE DOCUMENT
     
EX-101.SCH
  
XBRL TAXONOMY EXTENSION SCHEMA DOCUMENT
     
EX-101.CAL
  
XBRL TAXONOMY EXTENSION CALCULATION LINKBASE
     
EX-101.DEF
  
XBRL TAXONOMY EXTENSION DEFINITION LINKBASE
     
EX-101.LAB
  
XBRL TAXONOMY EXTENSION LABELS LINKBASE
     
EX-101.PRE
  
XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE

 
 


In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Los Angeles, State of California, on May 20, 2013.

 
CARBON SCIENCES, INC.
     
 
By:
/s/ William Beifuss
  
   
Chief Executive Officer (Principal Executive
Officer ) and Acting Chief Financial Officer
(Principal Financial Officer and Principal
Accounting Officer)
 

 
17